STUMP » Articles » Public Pensions and Blacklists: Harmful to the Pensions » 8 April 2014, 05:43

Everybody has been reacting to the Mozilla and Brendan Eich saga, and I will link to what I think is the best commentary on the situation, by Richard Fernandez

Perceptive gays understand now, if they hadn’t noticed before, that a whole mechanism now exists for persecuting people whose views are deemed unacceptable. Today it is directed against Eich; once it was directed against Summers; on other occasions it was employed against Clarence Thomas. But sooner or later, probably sooner, they understand it will be directed against them — or us — or someone. And if it can get a corporate CEO who is widely regarded as the father of Javascript it can get pretty darned anyone.

It’s not just the manner in which an individual was singled out — it’s also that Mozilla may have been ruined by its “friends”, in order to make a political point. The Mozilla people made their decision, and whatever negative impact that comes out is their own problem. But it wasn’t about making Mozilla better.

Now, you may wonder why this post has a heading about public pensions: it’s because a similar tactic has already been used with regards to public pension fund investing.

I will link directly to the source: the teachers union AFT has their own little report on asset managers to avoid: Ranking Asset Managers

Note that this is the second such report.

Now, one would think that there would be stuff in there about transparency, governance, performance, etc. Oh, there’s some boilerplate to give some fiduciary ass-covering, but no.

It’s all about going after those who seek public pension reform. And sometimes it’s not even that — people who support charter schools is enough.

Oh, and did I mention that they targeted Bruce Rauner by name? Right before the Republican primary for Illinois governor? (Rauner won, by the way).

In some of the cases of the “watch list” of asset managers, the specifically named person merely founded the company and is no longer involved with it. That was Rauner’s case – he was no longer involved in running the asset manager they targeted under his name.

In some cases, it seems the AFT blacklist did have some impact

WASHINGTON— The American Federation of Teachers recently published the second edition of its report “Ranking Asset Managers,” which documents asset fund management companies that work with defined benefit funds while also supporting organizations trying to eliminate defined benefit pensions. We are pleased to announce that today the AFT has removed Aon from the report based on the company’s history of strong support for defined benefit pensions and assurances of continued strong support in the future.

“Aon joins the ranks of several companies—including KKR & Co., AQR Capital Management and Dimensional Fund Advisors—that have made positive commitments to support retirement security for public sector workers. We gladly remove Aon from our report and hope the partnership we are forging with them inspires other companies to follow suit,” said AFT President Randi Weingarten.

“Aon is a strong advocate for improving the retirement security of public employees, particularly teachers, and we fully support the role that defined benefit plans play in their financial future,” said Aon Hewitt CEO Kristi Savacool. “We look forward to working with the AFT in the days ahead to find new ways to broaden retirement security for all workers.”

Isn’t that sweet.

If Aon was in such strong support of public pensions, how did they get on the list in the first place? Let’s take a look at the report:

The Aon Foundation, the U.S. philanthropic arm of the Aon Corp., has contributed to the Commercial Club of Chicago, the parent of Illinois Is Broke. Aon Corp. is the parent company of Hewitt EnnisKnupp.

Let’s check out this nefarious organization, the Commercial Club of Chicago — look, they’ve got projects like employment for veterans, “New Schools for Chicago” (charter schools), and some other civic-improvement projects. For all we know, the Aon donation was intended for the veterans program. But it doesn’t seem all that untoward.

But let us not cry for the poor asset managers. They knew the dangers of having government-related entities as clients.

My point is that the people who do not call for public pension reform are not necessarily the public pension funds’ friends. In fact, they can do a lot of damage when it comes to the investments.

One particular episode stands out for me, when the Calpers CIO made a dismissive remark about the amount of money Calpers had lost on “green” investments. Hundreds of millions lost. Oh, but that wouldn’t come up in a ranking of asset managers – after all, he lost money on a good cause.

Here’s a little bit about the situation

CalPERS has also steered billions of dollars into politically connected firms. And it has ventured into “socially responsible” investment strategies, making bad bets that have lost hundreds of millions of dollars. Such dubious practices have piled up a crushing amount of pension debt, which California residents—and their children—will somehow have to repay.

…..
Leading the charge after becoming state treasurer in 1999 was Phil Angelides, who announced that he wanted to “mobilize the power of the capital markets for public purpose.” During Angelides’ tenure, according to a Sacramento Bee analysis, a third of his office’s press releases concerned his actions on the boards of CalPERS and of CalPERS’s sister fund, the California State Teachers’ Retirement System (CalSTRS). For example, soon after Angelides took his board seats, he persuaded CalPERS and CalSTRS to divest shares in tobacco companies. Depressed at the time, those shares soon began to rise; a 2008 CalSTRS report estimated that the funds missed $1 billion in profits because of the divestiture. CalPERS also banned investments in developing countries like India, Thailand, and China because they didn’t meet Angelides’ labor or ethical standards. A 2007 CalPERS report calculated that its investments in developing markets underperformed an international emerging-markets index by 2.6 percent. Cost to the fund: $400 million.

…..
CalPERS leaped into “social investing” at exactly the wrong time. That trend had gained currency in the 1990s with an emphasis on buying into environmentally “clean” companies. Tech firms were high on the list, so the 1990s Internet start-up boom made social investing seem like a sound financial strategy. But when CalPERS debuted its Double Bottom Line initiative in 2000—so called because it would supposedly produce both good returns and good social policy—the tech bubble had already popped.

Many socially conscious investors then turned their attention to another industry that didn’t pollute: finance. One social-investing research firm named Fannie Mae the leading corporate citizen in America from 2000 through 2004. Other finance firms that attracted big cash from social investors included AIG, Citigroup, and Bank of America, according to an analysis by American Enterprise Institute adjunct fellow Jon Entine. When the market for shares of these firms imploded in 2008, so did the performance of social investors.

Oh, and here’s a puff piece about Joe Dear cleaning up Calpers. Yes, the man is now dead from cancer and nil nisi bonum and all that, but he had his chance.

Because this is what he said in 2013

A top official with California’s public employee pension system admitted this week that its holdings in green energy companies have lost hundreds of millions of dollars.

Joseph Dear, the chief investment officer of the California Public Employees’ Retirement System (CalPERS), called its green energy investments “a noble way to lose money.”

Isn’t that nice for him.

I understand that many of the politically connected see these huge pots of money and can throw a lot of fees, etc., to their favored people and causes. This is the main reason why I changed my mind about privatizing Social Security or trying to invest the SocSec Trust Fund in securities (ignoring for a moment that the Trust Fund is entirely fictional).

Similarly, from last year, Calpers shot itself in the foot by divesting from gun manufacturers.

These decisions were made on a purely political basis. And they hurt the financial performance of the pension funds.

I’m sure all these political actors think that the taxpayers (or bondholders) will make the pensions whole. That they’ll be able to guilt the people (whose money they took and played with to feel good about themselves) into having pity on the poor pensioners.

Except it’s not getting much play in Detroit. (more on that tomorrow)

So I am telling you, public employee unions, your “friends” are some of the very people who are undermining your pension security, far more than the groups explicitly lobbying for pension reform. In general, the reform groups look to attack future accruals, not past benefits earned.

But the public pension investment shenanigans?

Those threaten benefits even currently being paid.

Ask Detroit retirees.