AI basket drove roughly 57% of 13 funds’ collective U.S. stock gains
The 15-company basket provides only a partial view of the artificial-intelligence exposure held by public pensions, but it shows how concentrated some portfolios have become. A Wall Street Journal analysis of securities filings found that 13 of the largest state and local public-employee pension funds with in-house investment operations held about $195 billion in the companies as of June. The 15 companies were selected as representative of the AI trade and included hyperscalers and top U.S. chip firms.
Those shares represented roughly 27% of the 13 funds’ collective domestic equity holdings, up from 12% in the last quarter of 2022, when ChatGPT launched. The basket drove about 57% of the 13 funds’ collective U.S. stock gains between the end of 2022 and June, fueling $138 billion in paper gains.
The 13 funds tend to invest passively in stocks by following indexes. The basket did not include many AI-infrastructure providers or software companies. Those figures also leave out additional AI exposure through international stocks, private equity and the billions raised through private-debt deals.
A Pennsylvania pension holds a stake in a Blackstone infrastructure fund that has financed data centers in Phoenix and Virginia, according to PitchBook. California’s $650 billion public-worker fund put $500 million into a vehicle funding two data-center service providers. An official from a Texas teachers’ fund recently said the fund had $2.6 billion in data-center exposure across private markets.
Political pushback collides with AI investment exposure
During the final stretch of the midterm campaign, officials in many of the states where these funds operate have placed new barriers before data-center projects. The dispute has left fund managers and boards assessing risks to their AI-linked holdings. In Pennsylvania, a gubernatorial candidate who sits on a teachers’ pension fund board is pressing the incumbent over data-center development. California union representatives are pushing fund managers to account for threats posed to workers and communities, while New York has instituted a moratorium on many new data centers despite its pension funds’ growing AI holdings.
The conflict is already dividing political and financial roles in New York. “It’s so contradictory,” said Joseph Hernandez, GOP candidate for New York state comptroller. “We’re on both sides of the bet.” In March, New York Comptroller Thomas DiNapoli, a trustee of the state’s Common Retirement Fund, urged 18 technology companies, including Amazon.com, to engage residents about concerns involving power prices, land use and water consumption. The Democrat wrote that the approach would “protect shareholder value and ensure sustainable growth.”
New York’s pushback culminated in the state’s July moratorium on many new projects to study regulation. In a recent hearing with representatives for Meta, Alphabet and other technology firms, New York City Council Member Shekar Krishnan questioned the companies about retirement-fund risks. “Because so much of the stock-market gains are concentrated in a segment we don’t fully understand, that raises a red flag itself,” Krishnan, a Democrat, said in an interview. He said funds should diversify away from AI to shield retirees from risk.
Many politicians have called for development to slow rather than stop as governments consider guardrails for power use, land, water and community impacts. President Trump, who has backed rapid construction, said Wednesday that data-center operators must provide their own electricity or pay communities dividends to boost their popularity.
In Pennsylvania, Republican State Treasurer Stacy Garrity criticized Democratic Gov. Josh Shapiro for “fast-tracking” data centers and called for a pause in development. As state treasurer, Garrity helps oversee the Pennsylvania School Employees’ Retirement System, which holds billions of dollars in AI-linked assets, according to securities filings. A treasurer’s office spokesman said Garrity was focused on “protecting the financial interests of [pension] beneficiaries while supporting Pennsylvania communities’ ability to have a voice in large industrial projects.” Shapiro announced measures in August to slow data-center development and require proposals to meet standards for energy affordability, environmental protection and community engagement. He said he was imposing the restrictions in response to “a whole bunch of developers who were acting in unscrupulous ways who were running roughshod over our communities.”
Pennsylvania State Sen. Katie Muth, a Democrat and PSERS board member, said many former public employees living near proposed projects did not know their retirements rely partly on AI investments. Muth said even she has difficulty understanding the fund’s total exposure and added, “It’s like being Nancy Drew.”
Pension funding gains face two alternative downside paths
The broader market increase extended across hundreds of state and local public-employee pension funds. Their combined assets grew from $5.8 trillion in 2023 to $7.3 trillion in June, according to Federal Reserve data. The AI-linked stock gains helped public pensions recover toward funding levels they held before the 2007-09 recession.
Funding levels show whether funds have enough money on hand to meet the needs of future retirees. During the 2007-09 crisis, collective assets relative to promises to pensioners fell from 93% to 63%, according to the Equable Institute, a nonprofit that researches pensions. The institute’s most recent projections put funding at 86%. If the boom continues, pensions “will reach an escape velocity and get pretty close to being fully funded,” said Anthony Randazzo, the Equable Institute’s executive director. A sharp downturn, by contrast, could leave governments responsible for tens of billions of dollars or more in costs and transmit losses to millions of teachers, firefighters and other workers the funds support.
Recent weakness in some corners of the sector has previewed potential pain for pensions, and millions of teachers, firefighters and other workers they support, if growth decelerates or the boom goes bust. The stakes would rise under two alternative paths. Governments could regulate data-center projects out of existence; in a separate scenario, a broader pullback could cascade through the AI industry and crush markets.
Boards weigh fiduciary returns and social risks
Pension managers have previously trimmed positions to allay political pressure over apartheid-era South Africa, firearms and other issues, sometimes to the financial detriment of retirees. Although those controversial holdings represented only a tiny fraction of total investments, stock indexes are now top-heavy with trillion-dollar technology companies, leaving funds less room to maneuver without sacrificing returns.
“What distinguishes the current debate is the enormous scale of public pension assets, their substantial exposure to public equities, and the increasingly polarized debate over what constitutes an appropriate investment,” said Olivia Mitchell, executive director of the Pension Research Council at the University of Pennsylvania’s Wharton School. Pension boards have a fiduciary duty to pursue the best risk-adjusted returns for retirees. “It should not be treated lightly or simply for a pension fund to wade in if they want to change how they’re investing their money, because they’re choosing a side,” Randazzo said.
In California, CalPERS board member Mullissa Willette is among those pushing fund managers to gauge broader social risks. She described the possibilities of AI crimping job growth and consumer spending, as well as pushback to projects around the country, as social risks that could eventually hurt investors. While slowing development could ding short-term gains, Willette, president of Service Employees International Union 521, argued that ramping up oversight to address Americans’ concerns could yield more sustainable returns. “Move slower and break less things.”