March 11 (Bloomberg) -- The second-largest U.S. teachers union has added a firm formerly headed by Bruce Rauner, a Republican leading the race in next week’s Illinois gubernatorial primary, to its enemies list.
The American Federation of Teachers is urging public pensions to review investments with Chicago-based GTCR, a private-equity firm where Rauner was chairman before stepping down in 2012. He supports shifting government workers to 401(k)- type plans from traditional defined-benefit pensions, which give retirees a payout based on years of service and final salary.
The AFT, with 1.5 million members, is scheduled to release an updated “watch list” of 29 money managers that the union says support groups opposed to traditional pensions. GTCR has $4.9 billion of commitments from U.S. public pension funds, according to Preqin Ltd., a London-based research firm. The AFT is also adding Highbridge Capital Management and a unit of London-based insurer Aon Plc to the list.
“Trustees should actually know if someone who is trying to get you to invest with them are also trying to eliminate the pension system,” AFT President Randi Weingarten said in a telephone interview. “The centerpiece of Rauner’s campaign is the elimination of the defined-benefit plan.”
While only 10 percent of U.S. companies offer defined-benefit plans, more than three-quarters of state and government workers, including teachers, have them. States alone face an estimated $780 billion gap between what they promised retirees and what they’ve saved, leading Republicans and some Democrats to attack government retirement plans as too generous.
The moves by the AFT show that public-worker unions are using some of the $3 trillion of retiree assets to fight back, and, according to some, to silence critics.
Last year, the AFT released its first watch list, highlighting firms including KKR & Co., Third Point, AQR Capital Management, Elliott Management Corp. and Tudor Investment Corp. Executives at those companies contributed to or sat on the boards of the Manhattan Institute for Policy Research and StudentsFirst.
The Manhattan Institute, a New-York based nonprofit that promotes free markets, recommends that governments shift workers to 401(k)-type plans. StudentsFirst, founded by former District of Columbia schools Chancellor Michelle Rhee, says defined-benefits plans are draining resources from classrooms and that the local governments should move to portable plans.
The union removed six firms, including KKR and AQR, from the list after their executives pledged support to public pensions or cut ties to targeted groups. None of the money managers that remained on the list received new allocations, Weingarten said.
Highbridge Chairman Glenn Dubin contributed $150,000 to the political-action committee of the New York arm of StudentsFirst, according to New York campaign-finance records.
Kirsti McCabe, a spokeswoman for New York-based Highbridge, declined to comment. Highbridge manages at least $275 million for U.S. public pensions, according to Preqin. Mary-Sarah Kinner, a spokeswoman for StudentsFirst, didn’t respond to an e-mailed request for comment.
Aon’s philanthropic arm supported a campaign called “Illinois Is Broke,” which highlighted the state’s $100 billion pension funding gap. The insurer has been a strong advocate for improving the retirement security of American workers, MacKenzie Lucas, a spokeswoman, said in an e-mail.
GTCR has invested more than $10 billion in 200 companies since 1980, according to its website. Clients include the Illinois Teachers’ Retirement System and New York’s teachers’ pensions, according to Preqin.
Illinois, which has the lowest bond rating among U.S. states, must keep pay and benefits in line with inflation, eliminate “spiking” pay in the final years of employment to boost pensions and shift government employees to 401(k)-type plans, Rauner said.
“The victims here are both the taxpayers who cannot afford to pay for these pensions and the workers who have been misled by union bosses and career politicians into believing these unsustainable pensions will be there for them,” Rauner’s website says.
Rauner, 57, is leading his top opponent in the Illinois Republic governor’s primary race by 36 percent to 23 percent, according to a March 6 Chicago Tribune poll. Mike Schrimpf, a spokesman for the Rauner campaign, didn’t respond to an e-mail seeking comment about the list.
Illinois’s teachers pension trustees haven’t taken any action in response to the AFT’s watch list, said Dave Urbanek, a spokesman.
“Our watch list for the Teachers’ Retirement System of Illinois concerns itself with performance and management,” said Urbanek.
The pension has invested with GTCR since 2000 and firm has produced a 25 percent annualized return for the 10 years ending in 2013. Over the same period, the pension’s private-equity investments returned 14.6 percent.
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