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Pension Funds Investing in Infrastructure

March 22, 2012
By Marc Bussanich, LaborPress City Reporter
The creation of a federal infrastructure bank to fund a wide range of infrastructure projects failed in Washington, D.C. because fiscal austerity for domestic programs is the dominant trend in American politics today. But some cities and states, such as Chicago, are creating their own infrastructure banks.  

LaborPress reported last week on a roundtable discussion at New York University where Mike Fishman, President of SEIU 32BJ, and three other panelists discussed the virtues of using public and private sector funds to invest in infrastructure. Fishman said that his union is currently seeking partners to invest a portion of its pension fund in infrastructure, possibly based on the model used by the Ontario Municipal Employees Retirement System.

John Samuelsen, President of TWU Local 100, said he is not opposed to the idea of investing a portion of his Local’s pension fund, but that he, as a Trustee of the New York City Employees’ Retirement System, could not agree to fund infrastructure projects in the state without first investing in the MTA’s state of good repair program (part of the agency’s Capital Program) to ensure the safety of the City’s subway system.

“It’s ironic that there is support for using public pension funds to build new infrastructure without first shoring up the safety of the City’s subway system,” Samuelsen said.

He also added, assuredly, that it would be “foolish for the president of the union representing NYC Transit workers to agree to use pension funds to build infrastructure elsewhere before investing in the subway system, especially as State Senate Republicans want to cut funding substantially to the MTA’s Capital Program.”

Fishman talked last week about how infrastructure investments using public pension funds can not only provide significant overall returns to the fund, but the funded projects can provide substantial benefit for the common good of people who rely on public services like mass transit, clean water and clean energy.

Samuelsen said, “I’m willing to look at anything that improves the common good via pension fund investing, but you can’t improve the common good off the backs of public sector workers in the City, which is essentially what they [Albany legislators] did.”

The use of NYCERS pension money to fund the subway’s good state of repair didn’t gain traction with the MTA, which Samuelsen noted is unfortunate because rather than the MTA relying on $15 billion from private capital on Wall Street and $5 billion from the City and State to fund the $20 billion Capital Budget, a portion of NYCERS could be funding it.

Sonia Axter, Managing Director, Infrastructure Investments for Ullico, which has experience in managing pension fund assets in various alternative strategies, among other services, said that a shift in thinking about infrastructure investments is taking place among pension funds.

According to Axter, the previous model consisted of pension funds typically investing in higher-risk private equity-style infrastructure funds where pension funds were unhappy with high fees and didn’t meet their long-term infrastructure cash flow goals because they couldn’t overrule private equity’s decision to drop an investment after four to seven years.  

“More and more pension funds are now interested in investments that have an average life of 25 to 30 years, more cash-flow, lower fees and reduced risk,” said Axter.

Axter believes that the most immediate benefit pension funds’ infrastructure investments can provide is by investing in smaller scale, locally-based (rather than interstate projects such as high-speed rail) projects such as waste-water treatment plants or municipal bridges, “which are easier to articulate the value proposition to constituents.”

The other obvious benefit with infrastructure projects is job creation. Axter cited a Congressional Research Service Report, “Job Loss and Infrastructure Job Creation During the Recession, 2009,” that reveals that direct impacts to transport investment creates “13,962 jobs for every $1 billion of spending and 13,860 jobs is indirectly attributable to the activity for every $1 billion of spending.”

As an example, Boston’s Big Dig project, which cost $14 billion in public money, and caused controversy due to substantial overruns, Axter noted the project employed about 5,000 workers at the height of the construction. Equally important are the indirect benefits derived from the Big Dig connecting the city to its waterfront. “New businesses are relocating to the Innovation District, which prior to the Big Dig was isolated, because developers are constructing new office space,” Axter said.

Axter said that there remains “a lot of work to be done to structure these infrastructure investments with pension funds,” but she also noted that there aren’t enough capital sources available currently to fund the country’s infrastructure upgrades and that’s where the power of union pension funds can play a vital role.

The behemoth of a public pension plan, the California Public Employees Retirement System (CalPERS), invested $710 million in 2007 in infrastructure projects and has earned 21.3 percent over three years as of January, 31, 2012, according to CalPERS spokesperson, Wayne Davis.

In the fall, a three-year infrastructure plan was presented to the CalPERS Board to expand its infrastructure investments deploying 2 percent ($5 billion) of the fund’s total assets of about $248 billion. Davis noted that of the $5 billion, 80 percent ($4 billion) is targeted for U.S. infrastructure projects, and out of that, 20 percent ($800 million) is targeted for California projects.

The common good sounds good, but Davis stressed that, “The fund has a strategic role for infrastructure, and the goal is to generate steady returns from cash yields. We have a fiduciary responsibility to our members, which is to get the best risk-adjusted returns.”

The fund is currently holding workshops and meeting with government agencies and a multitude of organizations to explore the challenges of and figuring out the opportunities available with public/private partnerships because “it’s not easy for public pension funds like CalPERS to get involved in private projects per se,” noted Davis.

The fund has yet to invest in public infrastructure projects, but it did purchase 14 percent of London’s Gatwick Airport in 2010 and acquired a stake in a 65-mile submarine electric power transmission that runs from Sayreville, NJ to Hicksville, Long Island, Davis noted.

Davis emphasized that CalPERS doesn’t write checks willy-nilly for any and all infrastructure projects. Rather, “if we can find the right investments that match our strategic role and they offer risk-adjusted returns, inflation-protection and diversification, we’ll seriously consider it.”

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