EARLY next month President Clinton is expected to announce a $1 billion partnership between the Department of Housing and Urban Development (HUD) and the AFL-CIO.
The union federation's pension fund will ante up $500 million which will be combined with $500 million from HUD and private sources to build affordable housing in 25 American cities.
As part of his focus on America's neglected infrastructure in the presidential campaign, Mr. Clinton proposed that the nation's $4-trillion-strong employee pension funds invest in the rebuilding effort.
If the idea catches on, Clinton will be taking a page from his tenure as governor of Arkansas. There, he successfully promoted limited investments of public employees' pension funds in housing and job-generating projects. Fund managers nervous
Yet many pension fund managers have been wary of Clinton's overtures. They are legally bound to invest exclusively for the long-term benefit of their retirees. Investing for jobs and economic growth does not absolve the managers' fiduciary responsibilities to pensioners, financial analysts say.
HUD Secretary Henry Cisneros hopes that the partnership with the AFL-CIO will show how these concerns can be overcome. The Housing Investment Trust of the AFL-CIO has almost 30 years of experience in this area.
"We will not sacrifice our returns just to make a social investment," says Marcie Cohen, director of affordable housing for the AFL-CIO. "Our goal is to demonstrate that pension funds can invest in rebuilding our cities, producing affordable housing and creating new jobs without damaging funds' safety and security."
According to Gregory Dyson, marketing manager for the AFL-CIO's Housing Investment Trust, investment returns have been competitive with other fixed income indexes such as the Salomon Bros. Broad Investment-Grade Bond Index. The trust's yields for current one-year, three-year, and five-year periods have been 7.79 percent, 8.71 percent, and 9.31 percent respectively.
In addition to the Arkansas program started by Clinton, public employee pension fund managers in Pennsylvania, Connecticut, and California have made successful investments geared toward accomplishing social goals. In the 1980s, however, the Kansas Public Employees Retirement System lost $100 million it had invested directly in a number of Kansas firms. That spectacular loss still frightens many pension fund managers. Retirees' interests first
The same critics have also objected to initial ideas floated by the Clinton administration.
"There was an impression left in some of the comments [made] by the incoming administration that they might sacrifice [pension] plan participants' interest to make investments in these economically-targeted areas," says Martin Corry, director of federal affairs for the American Association of Retired Persons in Washington. "That would create a real problem. But as long as the pension plan participants' interests are kept in the primary position of importance, then investments in these areas are not inapp ropriate," he says.
Included in the package Secretary Cisneros is working out with the AFL-CIO is insurance that guarantees the safety of investments by the pension fund, says Robert Nipp, a HUD spokesman.
If similar kinds of federal guarantees can be formulated and made broadly available, policy analysts estimate that a great deal of investment could be forthcoming from pension funds. Setting up a security net
In February, a bipartisan federal commission recommended setting up the National Infrastructure Corporation that would create the four primary tools - reinsurance, political risk insurance, subordinated debt, and a possible line of credit guarantee on AAA-rated projects - that would give pension funds the security they need to pursue these investments.
"It is really a tragedy in this country that one of our largest asset bases is essentially locked out of investing in infrastructure because no one has taken the time to put together this apparatus," says Daniel Flanagan Jr., who headed the Infrastructure Investment Commission. "The tools that we are suggesting here are fairly inexpensive considering the leverage they can produce." The commission estimated that $1 billion spent on government guarantees would spur $10 billion in spending on housing and pu blic infrastructure projects.
Mr. Flanagan is quick to address concerns about investment safety. We recommended "no changes whatsoever in pension fund governance, fiduciary standards, etc.," he says. "The Employee Retirement Income Security Act is sacrosanct."
Two weeks ago, Clinton established an interagency task force to begin working on the topic.
Sen. Daniel Patrick Moynihan (D) of New York, who has long advocated the possibility of pension investment in infrastructure, has said that he will hold hearings and draft legislation.
"Pension funds don't have any problem looking at possible investments in infrastructure," Flanagan says. "They're all for it. But you need to design the investment apparatus to allow them to do so."