IN JUNE, THE American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), a federation of 56 labour unions with about 12 million members, announced a momentous initiative: bringing together pension funds, federal, state and local governments, financial institutions and other groups to create $10 billion in new funding for infrastructure over the next five years.
The goal was announced at a meeting of the Clinton Global Initiative (CGI) in Chicago. At another
CGI meeting in September, AFL-CIO leaders announced they had marked millions of dollars for energy retrofit projects and registered 8,000 new construction industry apprenticeships since the June launch of the initiative.
At the time of the June announcement, Randi Weingarten, president of the American Federation of Teachers, one of the AFL-CIO affiliates, said prudent investment of public pension funds may be an avenue to creating jobs while rebuilding US infrastructure.
The need for the initiative, according to AFL-CIO policy director Damon Silvers, is threefold: the US needs to create jobs, US infrastructure needs costly repairs as well as new investments in order to remain competitive, and public pension funds need to find stable investments that can counteract the effects of depressed returns in their fixed income portfolios over the last decade.
Silvers says that, in addition to the $2.2 trillion in infrastructure repairs deemed necessary by the American Society of Civil Engineers, the US probably requires about $2 trillion in new investments in order to stay competitive.
The AFL-CIO initiative is a way of addressing those needs while “enhancing the health of pension funds financially”, Silvers says.
But the solution is not as simple as just putting private capital to work in public-private partnerships or having pension funds commit to Wall Street firms managing infrastructure-focused funds. Part of the problem, Silvers says, is figuring out “how to mobilise private capital to finance assets whose essential nature is that they are public assets”.
Silvers says there are flaws in using the private equity model for infrastructure investing, arguing that prior to the financial crisis, firms charged high fees while relying on deals too heavily leveraged to suit the nature of infrastructure investments.
“When you create these very highly leveraged structures…..they don’t work unless you have some ability to realise a lot of upside in the out years. And it just turns out not to be possible. And so that model failed,” Silvers says.
“What we are really working on here is models of infrastructure finance that are based on recognising
infrastructure assets for what they are, which is public goods that really should be publicly owned, and manage to deliver stable and profitable – on a risk adjusted basis – returns for the fund,” Silvers adds.
The $227 billion California Public Employees Retirement System (CalPERS) recently allocated $800 million to California infrastructure, while the $147 billion California State Teachers Retirement System (CalSTRS) made its first infrastructure investment this year with a $150 million commitment to the First Reserve Energy Infrastructure Fund. CalSTRS is also targeting an additional $300 million to $600 million in infrastructure investments in the upcoming year, according to the fund’s 2011-2012 fiscal plan.
Silvers says that if the initiative gathered momentum, “there might be other non-pension fund money that would be co-invested from other sources in the capital markets”. He says he expected to see the large public pension funds “taking the lead” and adds “that’s more or less what has happened”.
A NEW FUND
Another example of labour union investment in infrastructure is Ullico (the Union Labor Life Insurance Company), which manages labour-focused insurance and investment products.
Ullico already has a dedicated real estate investment group, which manages a $3.6 billion separate account known as ‘J for Jobs’ that has provided $12.5 billion for first mortgages and permanent financings and created about 260,000 union jobs since 1977, according to Ullico’s website. In February, Ullico launched an open-ended infrastructure fund that is looking for “community-based” infrastructure investments, according to Edward Smith, president of Ullico.
While Ullico Infrastructure Fund has not yet made any investments, it is considering sectors including transport, water and wastewater treatment, and social infrastructure with a target investment size of about $25 million to $75 million, Smith says.
The Ullico Infrastructure Fund includes a commitment from Ullico as well as investments from union pension funds.