Cleveland Plain Dealer, May 19, 2010, Wednesday

Cleveland Plain Dealer

May 19, 2010, Wednesday

Cleveland Plain Dealer

Ohio's public employee pension system joined national debate when it successfully lobbied to keep Hugo Boss factory open

By Olivera Perkins

CLEVELAND, Ohio -- Ohio's public employee pension system joined a national debate when it successfully lobbied to keep the Hugo Boss factory open in Brooklyn.

Supporters say public pension funds are right to take a stance on public interest issues like job loss, especially in places like Ohio with double-digit unemployment. But others think such pursuits could jeopardize the financial obligations funds have to pensioners.

The issue arose here because the Ohio Public Employees Retirement System, the country's 12th largest public pension fund, has invested $80 million in the Permira Advisors private equity fund that owns Hugo Boss, which is based in Germany.

Hugo Boss said in December that it would close the Brooklyn suit factory April 27 because it was not "globally competitive." The plant was profitable, but the company said it could do the work more cheaply by shipping the jobs abroad.

Employees began a seemingly Herculean campaign to save the plant. Demonstrations and rallies, with speaches by actor Danny Glover, played a major role, but so did the out-of-view lobbying by OPERS and other pension funds.

OPERS officials, along with the Workers United employee union, persuaded several of the nation's largest public pension funds to lobby Permira Advisors. Combined, those pension boards have invested about $500 million in the $12.1 billion Permira fund

A few days before the plant was scheduled to close, the union won a three-year contract for its more than 300 workers. Average wages are $10 an hour, a $3 per hour cut. About 80 part-time positions will be eliminated through buyouts. The size of the new workforce won't be set for several weeks, depending on how many workers take buyouts.

OPERS trustee Hugh Quill, director of the Ohio Department of Administrative Services, believes pension funds should lobby on public issues.

"Rightfully, as a pension fund that plays in these kinds of markets, we should be setting standards about what we will invest in and what we expect of our partners," he said.

But J.W. Verret, an assistant professor at George Mason Law School in Virginia, disagrees.

"The situation puts pension funds into a distinct conflict of interest," he said. "The people who run public pension funds are public officials and political officials who want to use their shareholder leverage to get more votes. If the conflict is not managed properly, it could put pensioners at risk."

OPERS got involved at the request of the Hugo Boss union. A few weeks later the union met with OPERS trustees, urging them to lobby. In February, the pension fund sent a letter Permira voicing its "concerns about future involvement" in the fund because of the Hugo Boss uproar.

Before long, public pension funds in Maryland, Pennsylvania and New York City also were lobbing Permira. So was the nation's largest, CalPERS in California, which has a history for such activism.

"We led the way like Ohio, a heartland state, doesn't have a reputation for doing," Quill said. "I think private equity companies took notice, [saying] 'Look we can't afford to be alienating huge institutional investors by the handful or pretty soon we're not going to be able to raise the resources for our next offering.' It was an activist approach that would usually not be associated with OPERS."

Joe Costigan, treasurer of the Midwest region for Workers United, agrees. It was easier to get other funds to sign on after they reviewed Ohio's position, he said.

Experts on both sides of whether public funds should engage in activism said the lobbying most likely worked.


"At the end of the day, Permira is doing a calculation as to whether potentially lowering the value of their investment in Hugo Boss [by keeping the plant open] is worth doing for them at the expense of potentially not getting more money from those pension funds," said professor Steven Kaplan, a private equity authority at the University of Chicago's Booth School of Business.

Kaplan questions activist pension funds because he believes it could compromise a fund's fiduciary responsibility to its members.

Quill said trustees never risked the fund's financial health because its Permira investment wasn't performing well.

"If it was going gangbusters, it would have been less of a slam dunk," Quill said.

Verret, the law professor, said lobbying efforts are increasing among public pension funds, causing the intermingling of pension funds with politics. This concerns him, he says, because pension funds nationally are underfunded by about $1 trillion.

Ken Margolies, director of organizing programs at Cornell University's Industrial and Labor Relations school, said pension funds can argue that they lobby for reasons that affect their bottom lines.

For example, in a letter to Permira, New York City Comptroller John Liu said Hugo Boss' negative publicity could degrade the brand in the United States and pose a "serious and unnecessary" risk to the city's pension funds.

Margolies said such lobbying efforts are more requests than demands, so it is difficult for a company to say it was pressured.

"It is like someone saying: 'I'm one of your best customers, and I wish you would do this,' " he said. "You assume they are saying: 'I might stop shopping there, but they don't put that into words.' "