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Public pension funds in conflict

Invest in companies that take over jobs from public workers

Rick Thorne worked as a custodian in Chelmsford, Mass., schools for 22 years, earning $20 an hour cleaning floors, cutting grass and setting up for assemblies in the city about 30 miles northwest of Boston.

In March 2011, the 5,500-student system put its custodial contract out for bid. Aramark Corp., a Philadelphia-based global food-service and facility-management company, agreed to clean the town’s seven schools for $841,000 annually – $400,000 less than the custodians’ union.

Aramark offered Thorne and other members their jobs back, at $8.25 to $8.75 an hour. They declined.

“I was like family. I knew all the kids,” said Thorne, 55, who’s still unemployed. “It’s brutal. It gets worse every day.”

But Aramark’s owners aren’t remote shareholders. Among them is the very fund that pays Thorne a $1,500 monthly pension, the $50.8 billion Massachusetts Pension Reserves Investment Trust, which manages the assets of the Middlesex County Retirement System.

The trust and 36 other state and local retirement funds have committed more than $5 billion to the four private-equity investment pools that bought Aramark in 2007, according to Preqin, a London-based research firm.

The beneficiaries of these pension systems have reaped returns of as much as 15.6 percent annually from the funds – but at least partly at the expense of those of them who have lost jobs to Aramark.

“It’s a cruel irony to think that for some workers, their pension money is being invested in a manner that could ultimately strip them of their pension or drastically reduce their pension benefit,” said a statement from Jim Durkin, a spokesman for the American Federation of State, County and Municipal Employees, Council 93. The council represents 30,000 government workers in Massachusetts.

The Indiana Public Retirement System has money allocated to private equity funds but does not have Aramark ownership through any fund it is invested in, spokesman Jeff Hutson said last week.

Private-equity firms borrow money to buy companies and then seek to maximize profit, often by reducing labor costs. A key backer of the private-equity industry is public-employee pension funds, which pour billions of dollars into corporate takeovers.

With the stock market stalled and interest-rates at record lows, private equity deals have promised relatively high returns, which public officials need to pay benefits for workers retiring in coming decades.

For the 25 years ending June 30, 2012, the Cambridge Associates LLC U.S. Private Equity Index, comprised of 986 private equity funds formed between 1986 and 2012, has returned 13.1 percent, net of fees. The Standard & Poor’s 500 has returned 8.62 percent during the same time period.

Globally, public pensions have sunk about $435 billion into private-equity firms, almost a third of total investments in the industry, according to Preqin. That’s twice the amount put in by corporate pension funds, the next biggest investors.

“The unions have been pretty quiet, and one of the reasons is there is this conflict,” said Eileen Appelbaum, an economist with the labor-backed Center for Economic and Policy Research in Washington.

“On the one hand, they represent current workers, and on the other, their pension funds are heavily invested in private equity. Private equity promises big gains.”

The reticence stands in contrast to public pension criticism of the labor and governance practices of companies such as Wal-Mart Stores, whom they accused of labor-law violations.

The California Public Employees’ Retirement System, the nation’s largest pension known as Calpers, has a policy that restricts new investments with private-equity firms that run companies involved in outsourcing government jobs, unless the investment staff recommends doing so based on potential returns.

But Calpers hasn’t withheld an investment in a private equity fund as a result of the policy, said Amy Norris, a Calpers spokeswoman.

Calpers committed to invest $300 million in Thomas H. Lee Equity Partners VI LP, one of the four funds that bought Aramark. Thomas H. Lee hasn’t sought any additional investments from Calpers since then, Norris said.

The Massachusetts Pension Reserves Investment Management Board, which manages the state fund, is ordered by the state legislature to get the highest return within an acceptable level of risk for all state taxpayers, said Michael Trotsky, executive director and chief investment officer.

The pension only avoids investing in certain companies if instructed by the legislature. Massachusetts has forbidden the fund from taking stakes in companies that do business in Iran or Sudan or sell tobacco. It doesn’t prohibit holding positions in those that eliminate government jobs.

In recent years, some private-equity firms have focused on companies like Aramark that provide services to state and local governments, which are still struggling in the aftermath of the 18-month recession that began in December 2007.

Aramark employs about 250,000 people in 22 countries, providing dining services to universities, jails and schools as well as uniforms and custodial services. Its steady cash stream attracted the private-equity firms because it could support debt to finance the takeover. More than $6 billion was borrowed for the deal.

Meanwhile, states have closed budget deficits of more than half a trillion dollars since fiscal 2009, when tax collections stumbled. By October, state- and local-government payrolls had tumbled by 605,000 since 2008.

Niki Kelly of The Journal Gazette contributed to this story.