Pension Funds Ride to the U.S. Economy’s Rescue

By investing in the country’s crumbling infrastructure as part of a bigger effort involving governments and unions, CalPERS and other public pensions hope to get America back to work.


The two biggest U.S. pension funds aren’t the chattiest of neighbors. Separated by a river in Sacramento, the $225 billion California Public Employees’ Retirement System and the $148 billion California State Teachers’ Retirement System rarely collaborate. But this past September at a New York press conference held by the Clinton Global Initiative, former President Bill Clinton’s foundation, they jointly announced plans to commit billions of dollars to U.S. infrastructure over the next three to five years.

This pledge is part of a bigger investment push by pension funds, government officials and union executives. The objective is a triple bottom line: returns for pension beneficiaries, jobs for U.S. workers—union members in particular—and improvements to the country’s crumbling infrastructure.

CalPERS hopes to invest as much as $5 billion; CalSTRS has earmarked between $1.5 billion and $2 billion. The two funds will look at projects that include retrofitting and greening buildings; rebuilding highways, bridges, tunnels and ports; expediting access to high-speed wireless communications; and exploring clean energy sources. In the words of CalSTRS Investment Committee Chairman Harry Keiley, these are “the kinds of infrastructure projects that will make America great.” CalPERS plans to devote as much as $800 million of its $5 billion total to California-based infrastructure.
The infrastructure crisis could be a blessing in disguise for the country’s troubled economy. In 2009 the American Society of Civil Engineers estimated that the U.S. would need $2.2 trillion for roads, ports and pipelines through 2014. America’s 100 biggest public retirement systems had combined assets of $2.7 trillion in the first quarter of 2011, according to the U.S. Census Bureau. The math is tempting.
U.S. pension funds already invest in infrastructure, though during the past decade they mostly did so through private equity. And this isn’t the first time they’ve ridden to the aid of the economy. When New York City faced bankruptcy in the late 1970s, municipal pension funds invested in bonds to help it recover. But Arthur Levitt Sr., then state comptroller and sole fiduciary for the New York State Common Retirement Fund, refused to buy the paper, citing his duty to pension fund members.
Plenty of questions remain about how pension funds can invest in infrastructure for local, and often political, good and still meet their fiduciary responsibilities. Boosting the California economy is one thing, but these projects must also make sense for pension beneficiaries. Likewise, infrastructure investors are now less interested in private equity than in fixed-income-type strategies with lower fees and leverage. All of this opens the door for money managers to come up with the right funds and opportunities; those that have held talks with pensions and unions include BlackRock and Deutsche Asset Management.
For many in the defined benefit pension community, infrastructure investments provide important benefits beyond the bottom line. “This is not a new issue,” says Susan Crotty, a consultant with Chicago-based investment advisory firm Marco Consulting Group, which specializes in working with union pension funds. However, Crotty adds, “in the past year or so, it has got a lot more traction because of the unemployment situation.”
With the U.S. jobless rate still close to 9 percent, pension funds are collaborating with one another and organized labor to make infrastructure investing part of the solution. The Clinton Global Initiative project sprang out of a conversation between Richard Trumka, president of the AFL-CIO, and former President Clinton in early 2011.
The AFL-CIO had already been seeking infrastructure opportunities; in June, as part of a CGI event in Chicago, the union pledged to invest as much as $10 billion over five years, including $20 million in energy-efficient retrofitting. By the time of the September press conference with CalPERS and CalSTRS, Trumka could announce that his union had committed $200 million to retrofitting.
In 2010, at Trumka’s behest, American Federation of Teachers President Randi Weingarten arranged a meeting of AFT leaders, among them trustees of teachers’ pension funds, to find ways of making infrastructure investments work. Weingarten also serves as the AFL-CIO’s point person for the project in dealings with CGI and the White House. For its part, CalPERS is planning roundtable discussions with parties that include union representatives and officials from fellow pensions. Now is the time for the buy side to pull up a chair.