Pension money has helped firms move south, posing 'conflict' snag
Boston — As industry packs up and moves south, it seems that all Northeners can do is shiver while watching jobs, tax dollars, and income fade into the Sunbelt. The Northern workers have to some extent financed the exodus of their plants to the South through the billions of dollars they have invested in pension funds. Some of this money has financed new plants or other facilities in the South.
Randy Barber, co-director of the People's Business Commission, brought this phenomenon to the attention of the financial community a couple of years ago in his book "The North Will Rise Again." The subject remains controversial.
"Workers in the North may not immediately experience the repercussions of this investment," Mr. Barber says, "but ultimately, as friends, neighbors, and possibly fellow workers lose their jobs, as regional businesses lay off, cut back, and close shop, the worker may realize that the way his money is being used undermines his own interests. Fewer jobs means lower pension funds for the unemployed victims."
As a result, many Northeners are "supporting their own demise," he says.
The exodus south has had a number of justifications, according to relocated businesses. Labor tends to be cheaper -- much of it non- union. "Cheaper" energy, tax incentives, and genuine hospitality toward industry newcomers by state and local governments are further inducements.
Investing in the expanding South is becoming increasingly lucrative. The likelihiod of high returns at a comparably low risk is too much for some of the most faithful Northerners to resist.
According to a recent study by the Northeast-Midwest Institute, in 1970 the Northeast and Midwest had 56 percent of investment in manufacturing plants and equipment. In 1977 the share had fallen to 47 percent. At the same time, investment in Southern indsutry was up considerably.
US pension fund assets totaled an estimated $609 billion as of year-end 1979. In five years this figure will rise to $1.5 trillion. This is the largest external pool of capital investment for corporations.
Says Dr. Harold A. Hovey, A consultant with the Washington-based Urban Institute, "A company's pension plan administrator is basically the trustee for the money employees have set aside. In effect, the employee is saying, 'I have entrusted you with my money and you should get me the highest yield with the lowest risk. My money should not be used for the advancement of you social leanings.' If the yields are comparable among a variety of investment opportunities, then the planner is free to invest morally."
In short, "pension planner do not care which regions grow as a result of their investment. They want to make the most they can," Dr. Hovey says. Under the Employee Retirement Income Surety Act, managers are instructed by law to manage as effectively as they can. There is no reference to the social preferences of the employee or manager.
"We are financing our own destruction," is labor's attitude. Lawrence Smedley, associate director AFL-CIO department of social security, says pension funds are often invested "in strange ways contrary to the interests of workers."
One example, noted by Mr. Barber, was the financing by Prudential, which is one of the largest managers of union pension funds ($3 billion), of the Right to Work building in Virginia. Trade unions consider the Right to Work Association a major opponent.
A survey by Prudential of its pension administrators at their home office in New Jersey found that on administrators feel any probias toward investment in the South. Says Elizabeth Scovill, a Prudential spokeswoman, "All our managers allocate capital where it can be used most effectively t o receive the highest gains."
But in a state-by-state list of investments, $3.5 billion was invested in Texas, only $1.6 billin in Pennsylvania, and less in Ohio ($1.5 billion) and Michigan ($1.4 billion).
Raymond L. Colotti, president of Sperry Rand's Capital Management Corporation (a wholly owned subsidiary dealing in pension investments), says pension managers are obligated to invest for the highest return -- no matter where that would be.
"I don't know of anyone who's really doing that [exclusively investing in the South] as a conscious policy," Mr. Colotti says. "Investments are cyclical. Sometimes they are better in the North, or the West. But I don't believe there is any conscious strategy working to the detriment of the North. . . . I don't think any part of the country has a monopoly on good, solid companies."
Mr. Smedley maintains that the AFL-CIO as an institution "can't object to the geographic patterns of pension investments. . . . Nor can we object to the fact that union pension funds are being invested in nonunion companies. The investor must put the money where it will work to the best advantage of the employee." But, he continues, the workers as individuals "should have some say in how what is actually their money [in terms of deferred wages] should be invested."
The AFL-CIO advocates greater employee involvement in pension investment. Mr. Smedley holds that investments can be profitable and socially acceptable at the same time. The most important factor is that the investment be safe, prudent, and acceptable to the worker.
One proposal the AFL-CIO is working on which would help to revitalize Northern industry while guaranteeing a low-risk investment is a joint board of labor and government that would channel pensions into a large government fund. This money would then be allocated to deprived areas, such as Youngstown, Ohio, or Flint, Mich. The government would guarantee the money and a minimum return.
In this way, money would be funneled into the neediest areas and a definite return would mean very low risk.
Thomas Cochran, a spokesman for the Northeast-Midwest Institute, says it is difficult to look at the issue in North-South terms. "The problem should be addressed in economic instead of regional terms. There are distressed areas throughout the US -- although there seems to be unusual concentration in the North." He contends that it is impossible to put the issue in black-and-white terms.