Public funds invest in outsourcing American jobs

One of the ironies of the modern economy is that people who have good jobs with pensions, and public institutions like universities, are underwriting the off-shoring of American jobs through their pension funds.

In Ohio the planned closure of the Hugo Boss suit factory outside Cleveland has brought this phenomenon to light.

Hugo Boss, a German company that makes high end men’s suits, employs more than 300 people at the Brooklyn, Ohio plant that it’s operated since 1995. In 2007 the European private equity firm Permira bought a controlling interest in Hugo Boss.

Last year Hugo Boss proposed to cut worker wages from around $13 per hour to around $9 per hour. After workers rejected the proposal, and while negotiations with the union were still ongoing, the company announced on Dec. 29 that it would lay off all the workers and close the plant in April.

“This facility is not globally competitive,” the company said in a statement. “Hugo Boss tried in vain to find ways to make it globally competitive and when that effort failed, we acted in the best interests of shareholders and customers by deciding to close the facility.”

This move shocked workers, unions officials, and local and state officials who had been trying to broker a package of financial incentives to keep the plant in Ohio.

According to the Workers United Union (which is part of the SEIU), Hugo Boss made more than $140 million in profits in the first nine months of 2009 and the company paid shareholders more than $135 million in dividends last year. The union also pointed out that the U.S. remains a big market for Hugo Boss suits.

Unfortunately, public employees groups have a hand in this move because many state public employee pension funds are invested in Permira.

According to Capital IQ the University of Michigan is one of the many public institutions invested in the company.

The University of Michigan refused to comment on its investments. “Investments are not something UM really ever talks about.” said U-M spokesman Rick Fitzgerald.

Roland Zullo a research scientist with the University of Michigan’s Institute for Research on Labor, Employment and the Economy told Michigan Messenger that public employee pension funds have been playing a role in the closure of U.S. factories since the 1980s.

When pubic employee pension funds invest in companies that shut down factories and decrease the tax base they are undercutting their own sector, Zullo said, because reduced tax base translates into fewer public employee jobs.

“Union pension funds have amassed tremendous wealth and of course these pension funds are invested in companies,” Zullo said. “Unfortunately a lot of these companies are undermining the economy by moving jobs offshore and this comes around to haunt people it is supposed to benefit.”

Zullo says that so far there has been little success in getting those public funds to use their leverage to influence the decisions of the companies in which they have an ownership interest. “What activists have been trying to do for decades is to try to get these investment funds to consider the local employment effects. They haven’t successfully closed that loop.”

The way to use that leverage, he says, is for public employee unions to “direct their pension funds toward more locally based investments.”

The Service Employees International Union, which represents workers at the plant, is campaigning against what it calls irresponsible behavior by private equity funds in the U.S. and is urging public employee pension funds to reevaluate investments in Permira.

According to Standard and Poor’s Capital IQ, public employee pension funds from Alaska, California, Los Angeles, Colorado, Nevada, Massachusetts, New Hampshire, Missouri, Ohio, Orange County, Oregon, Pennsylvania, Texas and Illinois are invested with Permira.

(The Illinois Municipal Retirement Fund told Michigan Messenger that it has liquidated its holdings in Permira.)

The Ohio Public Employee Retirement System, which has around $150 million invested in Permira, has tried to leverage its investment to influence the firm to keep the plant open.

In a February 25 letter to Permira, OPERS stated that its board had been informed that the company terminated the bargaining agreement with its union prematurely and had failed to negotiate in good faith with state officials on a package of financial incentives that could allow it to operate profitably.

“The Board now has concerns about future involvement with your institution,” OPERS Chairman Ken Thomas and Chief Executive Chris DeRose wrote. “In the interest of improving the overall performance of Permira IV, OPERS urges you to reengage both local and state officials to evaluate profitable alternatives to the closure of this facility.”

U.S. Sen. Sherrod Brown (D-OH) has also rallied to keep the plant open.

In a Feb. 25 letter to Permira, Brown protested that Hugo Boss and Permira have failed to seriously explore alternatives that could keep company in Ohio and urged Permira to work with Hugo Boss management to reverse the decision to close the plant.

“As a member of the Banking, Housing, and Urban Affairs committee and Chairman of the Subcommittee on Economic Policy in the United States Senate, I have grave concerns when hearing stories of private equity firms such as Permira loading their portfolio companies with debt, closing U.S. production facilities, and reaping high returns — all at the expense of American workers. Such behavior has played a significant role in creating the challenging economic climate that out nation currently faces. It is even more troublesome to hear that public and private pension programs are entrusting funds to firms that engage in such behavior.”

Dan Apfel of the Responsible Endowments Coalition, which works with students on 95 campuses to promote socially responsible investments by university endowments, said that U-M should be open about its investments and should be thinking about the impact of those investments on the regional economy.

“If U-M wants people to stay in the Midwest, it is important that there are jobs not only for college graduates but that there are jobs for everybody. Clearly universities are public benefit institutions and can and should be using their endowments in a way that at least doesn’t conflict with what they are doing as an education institution.”

“[U-M] could follow Ohio’s lead and have dialog with the company very easily,“ Apfel said. “That’s not going to cost any money.”