Penalty Aside, Unions May Fund Construction

At first glance, the Labor Department’s recent decision to impose a $1.5-million penalty on Southern California pension-fund trustees for making loans at below-market rates would appear to discourage investments by such funds in construction. But the experts are saying that they expect the long-awaited decision to actually increase investments in the nation’s housing industry to help create jobs.

This is because the terms provide a guideline for investments and clearly give trustees the right to target pension-fund investments for such purposes.

The decision, reached last week after a three-year investigation, will be formalized next week when trustees for the carpenters’ and plumbers’ pension funds and Labor Department officials go before a federal judge in Los Angeles to seek expected approval of a consent decree.

Government investigators concluded that the management and fund trustees illegally made loans to developers at below-market interest rates to stimulate construction and create jobs. Although the two funds’ trustees strongly denied that they had made any illegal investments, they agreed to repay about $1.5 million to the funds. (The penalty will be paid by insurance companies that had sought to avoid a court trial.)

The consent decree also requires the trustees to hire an independent outside expert to review terms of future loans. The appointment will be subject to the Labor Department’s approval.

Nevertheless, some pension fund officials, who asked not to be identified, say they expect the settlement terms to mean more loans for job-creating construction projects. They cite these reasons:

- The settlement eliminates uncertainty about the government view of the general concept of pension-fund investments in construction projects for the secondary purpose of creating jobs for union workers. Until now, they say, many trustees around the country were unsure about the Reagan Administration’s stance and so were reluctant to use construction workers’ pension-fund money to create jobs.

- The government alleged that illegal “cut-rate” loans were made to developers, but it did not accuse the trustees of any criminal act or personal misuse of the funds. Thus, the case centered on the rate of return to the pension funds and not the propriety or legality of using the funds to create union jobs.

- The consent decree, in the words of one trustee, lifted “a cloud over our programs . . . and now we can go ahead full steam to get the best returns available for pension-fund beneficiaries and at the same time create more jobs for unemployed construction workers.”

In its case, the government said the trustees could have increased the pension-fund earnings on 20 loans to residential developers by about $9 million if they had received the same interest rates and levied the same loan-fee charges as other financial institutions. The government investigators charged that the loans were made at rates 2.4 to 5.4 percentage points below market rates, and that such a disparity was too great.

However, the government also indicated that construction industry pension funds can lend money to developers at slightly below the rates charged by financial institutions, since such loans do create jobs for workers, whose employers then pay more money into the funds on behalf of the newly hired workers.

The government implied that loans made at less than 2.4 percentage points below the market rate would be allowed. And some trustees figure that means that they can safely give loans out at about 1 percentage point below the market rate without attracting any particular government concern.

Only a fraction of pension fund money has been specifically targeted to help create construction jobs for union workers. That leaves an enormous pool from which the trustees might now draw for such projects.

In recent years, unions have advocated making profit less of a priority while pressing for an increasing use of the rapidly growing pension-fund money for socially useful projects.

Robert Georgine, president of the AFL-CIO Building Trades Department, said recently that “all too often we’ve left investment decisions to the so-called blue-chip pension-fund managers even though their record over the last 20 years has often produced zero returns or even negative returns.

“All too often we allow billions of pension dollars to be exported to Europe, to Japan, to the Middle East and Third World countries and not spent here in America.”

In recent years, Georgine said, many trustees have been timid about investing in such things as job-creating projects because the government’s “narrow approach and ominous threats have frightened trustees and their investment advisers.”

But now, he said, the government has established a “more flexible standard of the ‘prudent man,’ whereby high-risk investments may be justified in the context of a plan’s overall investment strategy.”

The Labor Department’s current view was outlined in a recent statement by Robert A. G. Monks, outgoing administrator of the department’s Office of Pension and Welfare Benefit Programs, who said:

“It is important that people in America should understand that the Labor Department and the (AFL-CIO) Building Trades speak as one when it comes to the question of the appropriateness of investing in (job-creating construction projects).”

Such investments are legal and appropriate, he said, adding that bankers and other money managers who oppose such investments by pension funds don’t know anything the fund trustees don’t know.

After all, the government official said, the “experts” have for years been following the “prudent-man” rule (investing only in companies that a prudent man would accept), and many have “been losing money for years.”

Scoffing at other investments of pension funds in companies that some bankers consider “prudent,” Monks said:

“You read about these big companies, and what do they do with their stock? They either take over other companies or they buy back their stock. Is that creating any jobs? What good is that doing? I sometimes ask myself if that is really the place where we ought to be investing people’s (pension) money.”

Monks concluded: “I applaud the entrepreneurial drive by (pension-fund managers) that has resulted in almost $500 million in pension funds being devoted to projects that are union built (without) compromising the financial returns for the fund beneficiaries in any way.” Postal Workers’ Edge

The recent arbitration award to America’s postal workers was not only the first of its kind and a significant victory for the 500,000 workers, but it also gave them a much better deal than any of the nation’s other federal employees can expect.

The unique arbitration plan had never before been tried and was the result of a rare strike by postal workers nearly 15 years ago. It is an option that is not open to any other federal workers.

For instance, when air traffic controllers were unhappy about their pay and working conditions three years ago, they went on strike. And President Reagan fired them all because strikes against the federal government are forbidden by law.

The postal workers and their union leaders were as angry as the air traffic controllers when Postmaster General William F. Bolger said he was definitely planning to freeze their wages for the next three years and to set up a two-tier wage structure.

Like the air traffic controllers, the postal workers threatened to strike, but Bolger warned that, if they did, they would all be fired.

However, the postal workers had another option, supplied by Congress in 1970: arbitration.

In 1970, when postal workers struck in defiance of the law, President Richard M. Nixon called in federal troops to move the mail in New York, and the strike was soon settled in a compromise.

But the strikers were not fired. Instead, Congress gave postal workers the option of going to arbitration before a neutral third party if they failed to get agreement on a new contract. That option was not used until the recent dispute.

Bolger was apparently so unhappy about the results that he refused to attend a press conference Dec. 24 where terms of the arbitration award were announced.

The arbitration panel, chaired by Clark Kerr, president emeritus of the University of California, boosted the average postal worker’s pay to $24,548 a year from $23,689 and rejected Bolger’s demands for two-tier wage structure.

The panel did set up lower pay grades for new workers, but those workers will get pay raises to bring them up to the regular pay scale within about 2 1/2 years. Under a true two-tier structure, wages for workers brought in after an agreement is reached always remain below those of workers already on the payroll. The pay boost means a hike of about 5% for most postal workers.

Meanwhile, other federal workers face a pay cut of 5% that has been proposed by President Reagan. If Congress rebuffs him on that, the Administration is studying a plan to cut the 2.1-million federal work force by 125,000.

Unless federal workers want to defy the anti-strike law, or quit their jobs, they will have to accept a pay cut and other terms the government imposes. That possibility could well encourage other federal workers’ unions to press Congress to allow arbitration.

However, given that the prospects of such a measure passing Congress and being approved by Reagan are zero, most federal workers can only look with envy at the postal workers.