Teacher pension funds have a lot of money, and they have to find productive places to invest it. The California teacher pension fund (CalSTRS) alone is valued at over $190 billion. Nationally, teacher pension funds have more than $1 trillion of combined assets.
In spite of this accumulated wealth, pension systems currently carry significant debt. In fact, in total states carry around $500 billion in unfunded liability. With such significant amounts of debt, many teacher pension funds were driven to invest with private equity. And these firms promise a great return for the teacher pension investment. And sometimes, although not always, it works out that way.
But at what cost? Do dues-paying teachers realize that their pension funds may be invested with private equity firms that destroy unions as they buy and sell companies?
The Twinkie’s Revival
The recent resuscitation of Hostess’ Twinkies suggests that private equity can help to revive a failing product and turn a significant profit. However, the long-term harm done to the company’s employees and their unions often goes overlooked. But what does this have to do with teachers and their unions?
The whole story of the Twinkie’s revival does hold consequences for teachers as it can be only a short leap from de-unionizing factories to removing them in schools as well.
Let’s take a closer look at the Hostess story. In 2012 Hostess declared bankruptcy, sold off ownership of many of its products, shuttered bakeries and fired thousands of employees. Shortly thereafter Apollo Global Management, a private equity firm that manages billions from teacher pension funds in states such as Illinois and Texas, acquired the company and four years later sold it for an incredible 1,300 percent return on its original investment. Everyone wins, right?
For Apollo and its shareholders, the takeover was indeed a sweet deal. But former Hostess employees lost out considerably. The private equity-backed Hostess rehired only 1,200 of its former employees, a fraction of the 8,000 people who had previously worked there. Furthermore, those people who were rehired joined the company without the benefit of a union and its labor protections. Apollo was not obligated to invest in the company’s pension fund or honor severance packages, leaving workers in a significant financial bind.
In a few short years, union membership, which had been common in Hostess plants, plummeted to a mere 30 percent. In fact, union membership is actively discouraged by the new holding company. When Hostess employees in Schiller Park, Illinois, voted to rejoin a union, the plant was closed shortly thereafter.
Why This Should Worry All Union Members
In short, private equity salvaged and profited from a struggling company without conveying those benefits to its employees. Instead, the company fired thousands of people, damaged their retirement savings and weakened labor protections.
With hundreds of billions of pension dollars invested with hedge funds and private equity firms, teachers should carefully consider not only whether their investments are keeping their retirement plans soluble, but also how those funds are used more generally. In particular, the effect their funds can have on labor unions in other sectors.
Private equity, unlike most hedge funds, relies principally on purchasing or buying-out private companies, such as Hostess. This should worry all union members, given the cautionary tale of the Twinkie. Private equity firms may be using billions of dollars of teachers’ retirement money to buy companies and make a profit, all while laying off workers, gutting labor unions and slashing worker protections.
By funneling billions of dollars in pension funds through private equity, teachers are, in effect, contributing to the demise of organized labor. And although private equity won’t be buying a struggling school district anytime soon (at least one hopes), the consequences of their contributing to the de-unionization of the low-wage and low-skill workforce could signal serious problems for teachers, their pensions and their unions.