AD: A Public Pension's Dual Privatization Policy - Arthur Bruzzone

A Public Pension's Dual Privatization Policy
By Arthur Bruzzone (10/12/03)

The $145 billion California Public Employees Retirement System (CalPers) has started to use its economic might to stop privatization of government services..domestically, that is. The pension fund has no problem supporting privatization ventures in Eastern and Central Europe. (CalPers is the nation's largest public pension fund.)

The Wall Street Journal reported that CalPers flexed its muscle recently, trying to reverse a decision by California's Lucia Mar Unified School District to turn its busing operation over to the private firm Student Transportation of America Inc. (STA). Three years ago the school district contracted out student busing to STA --saving the district $300,000 a year. STA operates over 2,300 buses in eight states across the United States, and is the second largest-private provider of school transportation in the United States. In Lucia Mar, about 50 miles north of Santa Barbara, the district's contract with School Transportation cut wages for the bus positions. Half of the laid-off school workers were hired back by the district or STA, but the company offered no retirement benefits.

The California School Employees Association represents drivers and others laid off. They approached Calpers which manages the pension investments of government workers that include the fired bus workers. The union wanted the pension fund to use its power to get the company out of Lucia Mar. And power it had. CalPers owns 6% of closely held Student Transportation through its private-equity investments in GTCR Golder Rauner LLC, of Chicago, and Houston-based Rice, Sangalis, Toole & Wilson.
The Lucia Mar School District rejected the pension's pressure and court orders to cancel the contract, citing the costs to terminate the contract with STA ($800,000.)

But the incident caused CalPers to ask its Investment Committee to survey other pension funds' policy regarding investments in companies which bid for government services contracts,

CalPers' Investment Committee in its final survey report failed to mention that the pension fund invests in privatization companies in Eastern and Central Europe, and proudly.

In August 2000 CalPers announced that it had expanded its private equity investment into Central and Eastern Europe. The pension fund's Board of Administration authorized a $50 million participation (23%) in the Polish Enterprise Fund IV, L.P. "The Polish Enterprise Fund IV, L.P., based in Warsaw, Poland, is expected to raise up to $300 million to invest in growth companies, privatization's, and buyouts in Poland." That was taken from CalPers press release.

So the CalPers has no problem investing in European companies involved in buyouts and takeovers of government-sponsored companies. No objection to receiving equity returns from companies and ventures that may enact greater market efficiencies by eliminating government employees and replacing them with private sector workers. In Europe that is. For inefficiencies like that found in the Lucia Mar Unified School District, CalPers tried to force retention of jobs costing the school district $300,000 a year.

The California public employees' pension fund isn't the only government pension fund that discriminates in its private equity fund investments. From the New York City Employees' Retirement System (NYCERS): "NYCERS will not entertain proposals that have the potential of eliminating public sector jobs.." From the Ohio Public Employees Retirement System (OPERS): "OPERS does not aim to promote privatization of public sector jobs through its private equity investment program. It is highly unlikely that OPERS private equity investments would be in partnerships that are dependent on privatization strategies..".

But there have been concerns over the new anti-privatization policies by these pensions. In an opinion for the Los Angeles County Employees Retirement Association, Ian Lanoff, former head of the U.S. Labor Department's section on pension law, warned that pension funds shouldn't consider "advancing particular political or social agendas." Trustees considering privatization investments can factor in whether loss of contributions from laid-off employees would reach a tipping point risking the health of the fund. "You can't do this just because you like the idea or because the union likes the idea," Mr. Lanoff says. (WSJ)

Not all public pension funds have shunned investments in companies that win privatization contracts. The Washington State Investment Board (WSIB) had a record of investing in private equity funds that are financing school and prison privatization, and the outsourcing of public employee jobs. Private equity funds that have received investments from WSIB have financed the leaders in the school privatization movement, including KinderCare, Channel One, Edison Schools, Nobel Learning, and Chancellor Beacon Academies.

And WSIB is connected through its private equity investments to Student Transportation of America. STA has bid on at least one public school contract in Washington State. However, the WSIB may begin to restrict its equity investments in privatization companies. A report on the pension's investments recommended "Given the potential impact that privatization could have on public employees, and the potential consequences for the funding base of WSIB, this report recommends that WSIB consider adopting a private equity privatization policy that protects state employees."

We expect that labor unions work to protect members' jobs. Collective bargaining and concession negotiations often achieve job preservation. But for union pension funds to exert control over contracts of privatization companies in which it has equity interest contradicts both the fiduciary relationship to its members and hinders market inefficiencies for local, state and federal governments. That is shown clearly in the California Public Employees pension fund investments in privatization companies in Eastern and Central Europe. There at least there the pension fund recognizes that privatization can often bring profits, jobs and equity returns by replacing inefficient government agencies and functions with private companies subject to market forces including competition.

Fortunately even if all public pensions stopped investing in privatization companies, there still will be venture capital funds that will take advantage of a investment area that should prove profitable in the years ahead. As local, state, and federal governments expand, they will feel greater pressure to experiment with contracting out, privatization, and employee buyouts. Venture capital firms are under no pressure to retain the jobs of inefficient agencies, and inefficient, unprofitable privatization firms don't last if there are competitors and competitive bidding. That's the difference between public and private entities, and the difference between public and private pension funds: The former fear competition, the latter thrive on it.

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