March 15, 2014 By: Mark Glennon
Conduct taken by a major teachers’ union should shock the conscience of anybody concerned about government abuse and respect for rights of free expression and association. The conduct raises serious questions about violations of constitutional rights, statutory rights and breach of fiduciary duties. The program, conducted by the American Federation of Teachers, has now expanded its list of targeted people and groups in Illinois.
Here are the facts, as reported yesterday in stories linked here from Bloomberg and Pensions & Investments, earlier stories on the topic from P&I on 5/13/23 and 4/29/13, and taken from the AFT’s own report:
– The AFT, which represents 1.5 million members around the country, has orchestrated a campaign to use state and local governments around the country in revenge against those who speak up for public pension reform the AFT doesn’t like. The campaign seeks to punish 29 money management firms the AFT says have executives who have “contributed to, or sit on the governing board of, an organization that advocates for the replacement of defined benefit plans with defined contribution or cash-balance plans” by encouraging pensions to consider that conduct when selecting money management firms.
– That campaign has now been expanded to target supporters of the “Illinois is Broke” program and its sponsor, the Commercial Club of Chicago. The list of blackballed firms has been extended to include Aon Corp., which has a large Chicago presence, and GTCR, formerly headed by Illinois gubernatorial candidate Bruce Rauner.
– The AFT, with 1.5 million members, maintains the list in a report called an “enemies list” by Bloomberg (current version linked here).
– The report earlier targeted investment firms as large as KKR because executives at those firms contributed to or sat on the boards of institutions like the Manhattan Institute and StudentsFirst, which advocate pension policies the AFT doesn’t like.
– New to the “enemies list” of investors are firms like Chicago’s Aon Corp, Highbridge Capital Management and GTCR. Why? Because, according to the AFT’s report, Aon contributed to the Commercial Club which funded Illinois is Broke, and because Highbridge’s chairman “contributed to the political activities of StudentsFirst.” The report reserves “special mention” for Bruce Rauner because of his outspoken views about pension, which earns Chicago’s GTCR a place on the list. (Never mind that he’s retired; the whole firm gets slammed.)
Can government muzzle freedom of political expression, association and speech be muzzled this way? Of course not. But this is a labor union and there’s no indication the government is doing this, right?
The express purpose of the AFT’s list is to encourage pension trustees of public unions to use the list in deciding which firms to hire, and public pensions are clearly instrumentalities of the state. If trustees do what the AFT wants, “state action” could exist — and trigger a range actionable statutory and constitutional rights and remedies.
State action occurs when a symbiotic relationship exists between private enterprise and public authorities. The April P&I article from last year suggests that at least some state officials did the AFT’s bidding to enforce the list. It says, for example, that the CEO of the California State Teachers Retirement System sent the AFT report to members of his investment committee and said he expects staff will be contacting firms on the list with which CalSTRS does business.
Finally, the AFT’s report approvingly quotes a letter written by the Illinois State Board of Investments (a governmental entity) to a fund-of-funds apparently pressuring it about its investment in one of the firms on the AFT’s list.
In Illinois, Bloomberg quotes a spokesman for the teachers’ pension who says its trustees haven’t taken any action in response to the AFT’s watch list. That may well be true, but could be claimed for any pension trustee who ever considers a firm on the list, and how will anybody know? In the old saying, “absence of evidence is not evidence of absence.” Remember that the board is dominated by teachers union representatives such as Cinda Klickna, President of another teacher’s union, the IEA and an outspoken defender of the pension system. Do you think she will be giving any consideration to the AFT list?
This is a national issue — the AFT’s effort is directed at influencing trustee decisions around the country, not just in Illinois.
Even if one couldn’t prove that a pension nixed a candidate for a political purpose, doesn’t this “chill” protected rights of free expression, which is also barred by the First Amendment? If you planned to appear before a board of trustees of teachers asking them to invest in your firm, knowing what you’ve read so far, would you feel pressured not to contribute to, for example, the Civic Committee, which is on their list? Or to curb other activities the union wants to squelch?
None of this matters, you might say, if this is all just tough talk by the AFT and nothing really comes of it. But much has come of it, reportedly. Those two P&I articles from last year include a list of fund managers who gave in to the AFT’s political demands. As P&I put it, they “caved to the AFT rather than clearly communicate their positions and prescriptions for strengthening the retirement system, including defined benefit plans.”
And that, if true, is scandalous alone: The fund managers who are being muffled are those who are closest to the pension system and who have a useful perspective about how to fix it.
The AFT’s report practically gloats about its success. It starts out:
Since the American Federation of Teachers released its first Ranking of Asset Manger is April 2013, several Wall Street Firms have cut ties with groups leading the attack on defined benefit plans – groups…. For example, according to the St. Louis Post Dispatch, Rex Sinquefield, quit the bord of Dimension Fund Advisors, an investment company he founded, after the report was released. DFT also advised AFT that, ‘As a firm we do not intend to [take positions on defined benefit plans].’ Additionally, several fund managers have reached out to trustees of defined benefit plans and pledged not to donate to organizations that undermine retirement security.
What about the duties pension trustees have to maximize returns? Isn’t that imperative being sacrificed in favor of political retribution? Pension trustees are fiduciaries for the benefit of pensioners, which is a high legal standard. The AFT’s answer is that anybody advocating replacement of defined benefit pensions with something else is a threat to that pension, so a trustee has every right to oppose that effort.
That argument is specious on its face. Authority to make that decision rests with state legislatures and other units of government, not pension trustees. Rather than letting that debate proceed where it is supposed to, the AFT encourages trustees to make it part of their investment decision.
If I were a lawyer advising a fiduciary (and I have been) I would tell him he risks huge liabilities if he contaminates his investment decision with any considerations of political retribution. With pensions being in the condition they are, no trustee should need a lawyer to tell them that.
The AFT report tries to answer this by saying trustees can look beyond the issue of who is the best manager as long as they are choosing among ones that are otherwise “equivalent.” Oh, please. These decisions never come down to a coin flip. A non-political choice on the merits can always be made. I can only imagine the comments a good plaintiff’s lawyer would find in emails among pension trustees who are teachers union representatives.
Most importantly, doesn’t the AFT’s campaign raise questions about criminal liability? If indeed pensions are compromising their investment decisions with pension reform issues, aren’t government assets being effectively used for political purposes? Why isn’t this akin to the questions about criminality now arising in New Jersey over allegations that a bridge was shut down for political revenge?
How far will the AFT take this? If they can target Rauner and his old firm, why not any political candidate who wants to scrap defined benefit plans? And any of a long list of other organizations that think so?
Pensioners should be looking hard at suing any trustees who subordinate their investment judgement to political revenge. And perhaps a gutsy fund managers who has to give up his rights to support what he wants, or been intimated out of them, will be talking to his lawyers about legal recourse.
Regardless of how all the facts on this finally shake out, it seems clear to me than an atmosphere of intimidation has been successfully created by the AFT. That’s appalling, and must be ended.
UPDATE 3/15/14: The Wall Street Journal yesterday ran this article summarizing the facts. Local media remain asleep.