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Rick Thorne worked as a school custodian in Chelmsford, Mass., for more than two decades, earning $20 an hour cleaning floors, cutting grass, and setting up for assemblies. In June 2011 the 5,500-student school system fired Thorne and other staff and outsourced its custodial work.
In came Aramark, a food-service and facilities-management company based in Philadelphia, to clean the town’s seven schools for $841,000 a year. That’s about one-third less than the lowest offer from Thorne’s union, the American Federation of State, County and Municipal Employees Local 1703. Aramark, which has a long history of battles with organized labor, offered Thorne and other staff their jobs back at an average of $8.50 an hour. They declined. “I was like family. I knew all the kids,” says Thorne, 55, who’s still unemployed and living off his monthly $1,500 pension check. Aramark spokesman Thomas Sueta declined to comment.
Aramark is financially backed by the $50.8 billion Massachusetts Pension Reserves Investment Trust Fund, which funds Thorne’s pension. In 2006 the state invested $125 million in a pool run by Thomas H. Lee Partners, one of the four private equity funds that bought Aramark in 2007. The fund, Boston-based Lee’s Equity Partners VI, returned an annualized 2.8 percent as of March 31, according to the California public-employee pension CalPERS. “It’s a cruel irony to think that for some workers, their pension money is being invested in a manner that could ultimately strip them of their pension or drastically reduce their pension benefit,” Jim Durkin, a spokesman for AFSCME Council 93, also based in Boston, said in a statement. Lee spokeswoman Robin Weinberg declined to comment.
With the stock market stalled and interest rates at record lows, private equity deals have promised relatively high returns, which public officials need to pay benefits for workers retiring in coming decades. Globally, public pensions have about $435 billion sunk into private equity firms, almost a third of the total investments in the industry, according to London-based research firm Preqin. That’s twice the amount put in by corporate pension funds, the next biggest investors.
The Massachusetts Pension Reserves Investment Management Board, which manages the state fund, is directed by legislators to get the highest return within an acceptable level of risk for all state taxpayers, says Chief Investment Officer and Executive Director Michael Trotsky. The retirement fund has stakes in almost 9,000 companies. “Even if it were appropriate to dive into each of these individual companies that our managers are invested in, to do so would be impractical, if not impossible,” Trotsky says. “PRIM hires investment managers who have full discretion.” Massachusetts has forbidden the fund from taking stakes in companies that do business in Iran or Sudan or sell tobacco. It doesn’t prohibit holding positions in those that eliminate government jobs, and such bans have few advocates among labor. “The unions have been pretty quiet, and one of the reasons is there is this conflict” between workers’ job security and retirees’ pensions, says Eileen Appelbaum, an economist with the Center for Economic and Policy Research in Washington.
Aramark now employs 27 custodians in Chelmsford’s seven schools at an average wage of $12 an hour, says the schools’ business manager, Kathy McWilliams. They receive health benefits, contributing a third of the cost, and can enroll in a 401(k) retirement-savings plan, she says. Like many communities, Chelmsford struggled to keep up with rising employee-benefit costs while investing in the classroom, says School Committee Chair Janet Askenburg, and custodial outsourcing saved the town $250,000 to hire more teachers, despite $129,000 in severance and unemployment costs. The committee and the superintendent are running the system like a business, Askenburg says: “If we were to run this based on emotions and feelings, we wouldn’t have made this decision.”
The bottom line: Public pensions, which have about $435 billion invested in private equity firms, are profiting at least partly from outsourcing.