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Pension Fund Gains Mean Worker Pain as Aramark Cuts Pay

November 20, 2012

Pension Fund’s Gains Mean Worker Pain as Aramark Slashes Pay

Aramark runs concessions at Major League Baseball parks and National Football League stadiums. Source: Aramark Corp. via Bloomberg

Rick Thorne worked as a custodian in Chelmsford, Massachusetts, schools for 22 years, earning $20 an hour cleaning floors, cutting grass and setting up for assemblies in the community, about 30 miles (48 kilometers) northwest of Boston.

In March 2011, the 5,500-student system put its custodial contract out for bid. Aramark Corp., a Philadelphia-based global food-service and facility-management company, agreed to clean the town’s seven schools for $841,000 annually, $400,000 less than the custodians’ union. Aramark offered Thorne and other members their jobs back, at $8.25 to $8.75 an hour. They declined.

“I was like family. I knew all the kids,” said Thorne, 55, who’s still unemployed. “It’s brutal. It gets worse every day.”

Aramark’s owners aren’t remote shareholders. They include the $50.8 billion Massachusetts Pension Reserves Investment Trust, which manages the assets of the Middlesex County Retirement System. The system pays Thorne a $1,500 monthly pension.

Massachusetts and 36 other state and local retirement funds have committed more than $5 billion to the four private-equity investment pools that bought Aramark in 2007, according to Preqin Ltd., a London-based research firm. The beneficiaries of these pension systems have reaped returns of as much as 15.6 percent annually from the funds, at least partly at the expense of fellow public employees who’ve lost jobs to Aramark.

‘Cruel Irony’

“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 the American Federation of State, County, and Municipal Employees, Council 93, said in a statement. The council represents 30,000 government workers in Massachusetts.

“We would like to see a more thoughtful and considerate approach to future investments of public pension funds and we will be encouraging that here in Massachusetts,” Durkin said. Private-equity firms borrow money to buy companies and then seek to maximize profit, often by reducing labor costs. The investment firms drew fresh scrutiny during the presidential campaign of Mitt Romney, co-founder of Bain Capital Partners LLC, for the impact the practice can have on jobs and the tax- preferences given to executives.

Less Attention

Much less attention has been given to a key backer of the private-equity industry: public-employee pension funds, which pour billions of dollars into corporate takeovers. 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.

For the 25 years ending June 30, 2012, the Cambridge Associates LLC U.S. Private Equity Index, comprised of 986 private equity funds formed between 1986 and 2012, has returned 13.1 percent, net of fees. The Standard & Poor’s 500 has returned 8.62 during the same time period.

Yet public-employee unions have been silent about their role in fueling the rise of private equity, which made Romney a multi-millionaire and others, such as Henry Kravis of KKR & Co. LP (KKR:US) and Steve Schwarzman of Blackstone Group LP (BX:US), billionaires.

Globally, public pensions have sunk about $435 billion into private-equity firms, almost a third of total investments in the industry, according to Preqin. That’s twice the amount put in by corporate pension funds, the next biggest investors.

‘Pretty Quiet’

“The unions have been pretty quiet, and one of the reasons is there is this conflict,” said Eileen Appelbaum, an economist with the labor-backed Center for Economic and Policy Research in Washington. “On the one hand, they represent current workers, and on the other, their pension funds are heavily invested in private equity. Private equity promises big gains.”

The reticence stands in contrast to public pension criticism of the labor and governance practices of companies such as Wal-Mart Stores Inc. (WMT:US), whom they accused of labor-law violations.

The California Public Employees’ Retirement System, the nation’s largest pension, has a policy that restricts new investments with private-equity firms that run companies involved in outsourcing government jobs, unless the investment staff recommends doing so based on potential returns.

Calpers committed to invest $300 million in Thomas H. Lee Equity Partners VI LP, one of the four funds that bought Aramark. Thomas H. Lee hasn’t submitted an investment proposal to Calpers since fund VI was raised, said Amy Norris, a Calpers spokeswoman.

Calpers hasn’t withheld an investment in a private equity fund as a result of the policy, said Norris.

Highest Return

The Massachusetts Pension Reserves Investment Management Board, which manages the state fund, is directed by the Legislature to get the highest return within an acceptable level of risk for all state taxpayers, said Michael Trotsky, executive director and chief investment officer.

The fund owns positions in almost 9,000 companies, including some through its 2006 investment of $125 million in Thomas H. Lee Equity Partners VI.

“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 said. “PRIM hires investment managers who have full discretion.”

The pension only avoids investing in certain companies if directed by the Legislature. 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.

Financial Crisis

In recent years, some private-equity firms have focused on companies like Aramark that provide services to state and local governments, which are still struggling in the aftermath of the 18-month recession that began in December 2007. States have closed budget deficits of more than half a trillion dollars since fiscal 2009, when tax collections stumbled. By October, state- and local-government payrolls had tumbled 605,000 since 2008.

In May 2011, private-equity firm Clayton Dubilier & Rice LLC snapped up Emergency Medical Services Corp., which contracts with communities and government agencies to provide 911 emergency-response services.

Bus Operator

The Carlyle Group LP (CG:US), the second-largest private-equity firm by assets, bought Illinois Central School Bus LLC, the fifth-largest school bus operator in North America, in June 2010. In August, KKR, in partnership with GDF Suez SA’s (GSZ) United Water, won a 40-year contract to run Bayonne, New Jersey’s water and sewer operations in exchange for a $150 million up-front payment. Riverside County, California, and Osceola County, Florida, outsourced their libraries to Library Systems & Services LLC, owned by Massachusetts-based private-equity firm Islington Capital Partners LLC.

Thomas H. Lee Partners LP, Warburg Pincus LLC, CCMP Capital Advisors LLC and the buyout unit of Goldman Sachs Group Inc. staked a claim in the market in 2007. The group teamed up with Aramark Chairman Joseph Neubauer to buy the company for more than $8 billion.

Robin Weinberg, a spokeswoman for Boston-based Lee, declined to comment. Ed Trissel, a spokesman for Warburg Pincus, didn’t respond to messages and e-mails requesting comment. Andrew Cole, a spokesman for CCMP and Andrea Raphael, a spokeswoman for Goldman Sachs declined to comment. The three are based in New York.

Baseball Parks

Aramark employs about 250,000 people in 22 countries, providing dining services to universities, jails and schools, as well as uniforms and custodial services. It runs facilities or food service at 12 Major League Baseball parks such as Fenway in Boston and Citi Field in New York and 11 National Football League stadiums, including Heinz Field in Pittsburgh and M&T Bank Stadium in Baltimore.

The company’s steady stream of cash attracted the private- equity firms because it could support debt to finance the takeover. More than $6 billion was borrowed for the deal.

Four years later, the group rewarded itself as Aramark borrowed $600 million, helping to fund a $711 million dividend payment, a regulatory filing shows.

Goldman Sachs Capital Partners V returned 15.6 percent as of June 30, said Howard Bicker, executive director of the Minnesota State Board of Investment. CCMP Capital Investors II returned 15 percent as of March 31, according to the New York City Employees’ Retirement System.

The Warburg Pincus Private Equity IX fund returned 10.2 percent as of June 30, according to the Washington State Investment Board. Thomas H. Lee Equity Partners VI returned 2.8 percent as of March 31, according to Calpers.

Union Battles

Aramark has a long history of battles with organized labor.

The company has clashed repeatedly with UNITE-HERE, a union of hotel, food-service and gaming workers. The union has staged protests at Citizens Bank Park in Philadelphia and the Consol Energy Center in Pittsburgh, rallying in support of higher wages and access to health-care benefits. The union has also joined with students at colleges, including Pennsylvania State University and the Massachusetts Institute of Technology, to press for better pay and benefits for campus food-service workers.

Aramark’s business is part of a decades-old trend to save taxpayers money by hiring private companies to manage school cafeterias, run buses, and oversee other functions such as building and ground maintenance once handled by public employees. That has been costly to workers, said Janice Fine, a Rutgers University assistant professor of labor studies who has studied outsourcing.

‘Lower Paying’

“The evidence is incontrovertible that the jobs went from being good, full-time blue collar jobs to being lower paying, part-time jobs often with minimal or no benefits,” Fine said. Rutgers is based in New Brunswick, New Jersey.

That’s what happened to Carol Sanders when Aramark took over in New Orleans’s public schools in 2010.

Sanders, 52, began working for the Orleans Parish school board in 1982. She raised three children and purchased a home in the city on her cook’s pay. She had medical benefits, paid days off and was making $15 an hour when Aramark was hired to run food service for the Recovery School District, which took over Orleans Parish schools after the city was devastated by Hurricane Katrina.

One of the company’s owners, the Warburg Pincus IX fund, received a $100 million investment from the Teachers’ Retirement System of Louisiana, the pension system Sanders paid into.

Aramark cut Sanders’s time on the job in half, to 20 hours a week, leaving her working split shifts -- 2 hours in the morning and 2 more into the early afternoon, five days a week. Her pay dropped to $9 an hour. She went without medical insurance and began drawing $200 a month in food stamps.

‘Barely Surviving’

“I raised a family on Orleans Parish, now I can’t raise myself on it,” Sanders said. “I’m barely surviving.”

In August, she was laid off and is waiting to be called back. She’s relying on family to pay her mortgage.

“It’s just a struggle for me,” Sanders said. “By the skin of my teeth, I am still in it.”

Thomas Sueta, an Aramark spokesman, declined to comment.

In Baton Rouge, the state capital, Phil Griffith, the chief investment officer of the Teachers’ Retirement System of Louisiana, said pension managers focus on the returns from private-equity investments. They pay less attention to the effect the funds may have on jobs in companies the firms buy.

‘Fiduciary Responsibility’

“We take a kind of hands-off approach, which is from a fiduciary responsibility,” Griffith said. “We manage it for return and for our own constituents. We don’t get into, ‘Does that mean it lays off public workers?’”

“The only thing we look at is the security of the trust, not whether or not it creates jobs or takes away jobs, whether it be public employees in Louisiana or public employees throughout the country,” Griffith said.

“Our responsibility is to the trust -- the decisions of school boards to outsource those positions are outside our control,” he said. “I am not happy that folks don’t have jobs, but I don’t think it’s a direct impact of our investment.”

Like many communities, Chelmsford, Massachusetts, strained to keep up with rising employee-benefit costs while investing in the classroom, said Janet Askenburg, the School Committee head.

After considering outsourcing for years, the committee sought bids for janitorial work in March 2011 and received 10 responses. Aramark made the low bid, and the board gave the custodians represented by Council 93 an opportunity to match it. They couldn’t.

Sick Days

“We were going to give back sick days, cut pay,” said Mike Greenwood, president of the local union, who worked in the school system for 13 years and is 60 years old.

Aramark offered to hire the 24 affected workers at $8.25 to $8.75 an hour. None of the custodians, who made $19 on average, accepted.

Firing higher-paid employees in unions and outsourcing the work to Aramark’s non-union labor let the town spend $250,000 to hire more teachers, Askenburg said. The school system also had $129,000 in severance and unemployment costs.

“It was a tough decision but also a bit of a no-brainer as well,” she said, adding that the committee and the superintendent were running the system like a business. “If we were to run this based on emotions and feelings, we wouldn’t have made this decision.”

Aramark employs 27 custodians in Chelmsford’s seven schools, at an average wage of $12 an hour, said Kathleen McWilliams, business manager for the schools. They receive health benefits, contributing a third of the cost, and can enroll in a 401(k) retirement-savings plan, she said.

Seeking Jobs

Greenwood, whose wife has cancer, and Thorne still don’t have new jobs, 16 months later. Both get pensions through the Middlesex County Retirement System. The school district continues to pay two-thirds of their health insurance. Thorne has sought jobs at a local police department, a school and a hockey rink. Had he worked eight more years for Chelmsford, his monthly pension would’ve more than doubled.

“If you can hire a 30-year-old or a 55-year-old, who are you going to hire?” Thorne said.

After a choppy transition to the new custodians, “the schools have never been cleaner,” Askenburg said.

To contact the reporters on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net William Selway in Washington at wselway@bloomberg.net;

To contact the editor responsible for this story: Jeffrey Taylor at jtaylor48@bloomberg.net


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