More than two years after it promised to do so, the California State Teachers' Retirement System (CalSTRS) announced last week that it had finally stopped financing Remington Outdoor, the firearms company that makes Bushmaster rifles, including the AR-15 used by Adam Lanza to murder twenty children and six adults at the Sandy Hook Elementary School in Newton, Connecticut in 2012. California teachers praised CalSTRS' decision to liquidate its stake in Remington — held through a private equity fund managed by Cerberus Capital Management — but said it was long overdue. "This divestment will ensure that educators and their pension system are not associated with weapons that place communities, and, in rare but tragic cases, schools, at greater risk," said Dean Vogel, president of the California Teachers Association.
The decision by CalSTRS might not have happened were it not for the fact that teachers had turned up the heat with protests, including one in April outside a CalSTRS board meeting in West Sacramento, demanding that the pension fund follow through on its pledge in 2013 to unload its investment. "What we did was what CalSTRS couldn't do," said Joshua Pechthalt, president of the California Federation of Teachers. "We wanted to jump on the table and say, 'There's a problem here,' because knowing that people of goodwill were trying to do the right thing, well, sometimes it takes more than that. You have to stand up and cry out, 'Let's go!"
Why did CalSTRS wait so long to end its relationship with a gun company that was tied to the murder of teachers and students in Connecticut? A look at this question leads to sad and worrisome conclusions about CalSTRS and its ties to Wall Street greed.
First, CalSTRS claims it was contractually barred from selling its stake in guns. "In the more than two years since our decision to divest, we have exhausted every effort to urge Cerberus to sell, or to unilaterally sell our indirect interest in Remington Outdoor," stated CalSTRS CEO Jack Ehnes in a press release last week. "However, as a limited partner in a private equity investment pool controlled by Cerberus, CalSTRS possesses very limited rights."
But why would CalSTRS, a sophisticated pension fund with nearly $200 billion in assets, give money to a pool in which it had "very limited rights," especially when such investment might violate one of organization's stated "21 Risk Factors?" And, what other dodgy investments does it have that it cannot escape?
After being repeatedly questioned about why CalSTRS still owned the investment two years after the pension fund's board of directors voted to sell, a spokesman repeated the claim last week that the pension fund couldn't force Cerberus to unload the investment. However, when the Express requested a copy of the limited partnership agreement between CalSTRS and Cerberus Capital Management, CalSTRS declined to disclose it, keeping the details of the relationship shrouded in secrecy. It's also unclear if CalSTRS' investment managers and board knew that they were committing teacher pension money to firearms investments when they made the original commitment to the Cerberus fund. Records known as pitch books and prospectuses that private equity firms use to recruit pension systems as limited partners in their investment schemes can be barred from public scrutiny under California law. Cerberus and CalSTRS could make this public if they wished. Why won't they?
It's conceivable that CalSTRS staffers may not have had any intention to quickly end the gun investment. While the trustees and beneficiaries of the fund likely thought that divestment would be a quick process, the staffers, who are often the true power in the organization, appear to have delayed the sale. In December 2013, the Financial Times reported that Cerberus had offered investors a way out of the gun-maker investment. But CalSTRS chose not to take it. The possibility that staffers were frustrating the decision by the CalSTRS board to divest from guns seems in line with the position taken by a CalSTRS spokesman in an April interview with the Sacramento Bee: "CalSTRS also must respect its obligation to generate as much profit as possible for its current and future retirees. The pension fund shouldn't unload its Cerberus investment at a loss 'without thoroughly exhausting all other options first.'"
But during this process of "thorough exhaustion," there were thousands of additional guns made and put on the streets with CalSTRS's money, along with more than one hundred school shootings nationwide, according to research by the activist group Everytown for Gun Safety.
There's also another potential reason for CalSTRS inaction. High-level CalSTRS officials have very close relationships with the executives of private equity firms and others who make millions through their investments with CalSTRS. Officials from CalSTRS frequently hobnob with these executives at swanky locations around the globe, and thus may have been unwilling to pressure their financial friends.
Along with these financiers, CalSTRS has taken a leading national role in "smash-and-grab" investment, financing of hostile break-ups of US companies. CalSTRS boasts of having $5 billion invested in nine such funds — known in the industry under their Orwellian name "Corporate Governance." These "governance" funds search the landscape for companies to acquire. Upon acquisition, these companies are often stripped, Gordon Gekko-style, for profit. A revolving door exists between staffers of large pension funds and such players. For example, Ted White, a managing director of the fund, Legion Partners, which has been nurtured by CalSTRS, is a former CalPERS governance portfolio manager.
Anne Sheehan, director of Corporate Governance for CalSTRS, seems especially close to the financial elite. She has taken a leading role in praising the controversial hedge fund mogul, Daniel Loeb, when Loeb's role in attacks on teachers' unions came under scrutiny. Activists, led by leaders of the American Federation of Teachers, pointed out that Loeb's fortune came in large measure from the use of pension money from unionized public school teachers, yet Loeb is a leading backer of anti-union charter schools. In 2013, the prospect of an open discussion on the matter caused Loeb to abruptly cancel a planned speaking engagement with the Council of Institutional Investors. In response, Sheehan, the then-chair of this group, rose to his defense, expressing her deep regret that Loeb would not speak and stating that Loeb is "a highly respected asset manager with an excellent track record."
Sadly, Sheehan and CalSTRS continue to provide cover for members of the Wall Street elite in other ways, as they rampage through the industrial Midwest. For example, CalSTRS recently helped finance the destruction of middle-class jobs in central Wisconsin at Wausau Paper. In 2014, the local Gannett paper editorialized that CalSTRS's "governance" partner, Starboard Value, was "ruthless" in its destruction of the Wausau Paper's operation, with "no ties to the communities its companies have sustained.
"What those companies see as their place in a community and its history, perhaps even an obligation to their employees," the editorial continued, "Starboard is free to see as profit-dragging inefficiencies." CalSTRS staffers claim to promote "long-term value," but the folks in Wausau realized that the pension fund's actions are not consistent with "building companies to be sustained in the long term."
In December 2014, The New York Times published a much-discussed story about the financing provided by CalSTRS — led by Sheehan — that resulted in the split of the venerable company, Timken Steel, in Canton, Ohio. According to the report, an "activist" investor, Relational Investors, "happened upon" Timken Steel, one of the few successful old-line US metal companies. Relational might have worried, the paper wrote, because "Timken was a risky target for Relational's executives: They could be painted as Gordon Gekko types trying to make a fast buck by attacking a well-regarded, family-run company that had outperformed the stock market." CalSTRS and Sheehan rode to Relational's rescue, putting millions of dollars behind its efforts. The result, as The Times stated, was that "Getting CalSTRS on board helped neutralize that threat" of being likened to Gekko, the infamous greedy character from the film Wall Street.
Despite numerous requests to end their smash-and-grab investments and warnings about the effect of CalSTRS actions on the working people of an industrial Ohio town, Sheehan and her team remain proud of their role in the breakup of Timken.
In Canton, a predictable chain reaction played out, with the school board voting to close one its schools, Timken High, in a move that outraged the community. The superintendent said it was necessary to offset the city's declining population and lower tax revenue. In other words, the partnership between CalSTRS and Relational — fueled by money from California public school teachers — likely resulted in the loss of jobs for public school teachers in Ohio.
In January 2013, when the CalSTRS board voted to end its investments in gun companies, Sharon Hendricks, the board's vice chair, said: "As a board, we have a duty to our members to harmonize our financial returns with social responsibility. Our actions should uphold the values of this fund's members and the policies by which we hold ourselves accountable."
These are fine sentiments, but the pension fund's "Corporate Governance" activity has become a symbol of all that is wrong in the relationship between Wall Street and US retirement funds.
There are good people on the CalSTRS board. It's time they stand up to their staffers and respect the will of California's teachers. And it's time to restore trust in CalSTRS.