Public Pension Funds Face Political and Market Risks from AI Investments

By the Editorial Team · Monday, October 26, 2026

U.S. public-employee pension funds have significantly increased their investments in AI-related stocks, generating roughly $138 billion in unrealized gains and now comprising about 27% of their domestic equity portfolios. However, rising political and community concerns over the environmental and social impacts of AI infrastructure have led to new regulations and moratoriums, complicating fund managers' efforts to balance financial returns with social responsibility.

The rapid expansion of artificial intelligence (AI) investments is presenting both significant opportunities and considerable challenges for the United States' public-employee pension funds, which collectively manage trillions of dollars in assets. According to Federal Reserve data, these funds’ combined assets grew from $5.8 trillion in 2023 to $7.3 trillion by June 2026, buoyed in part by substantial gains in AI-related stocks.

An analysis of 13 of the largest state and local pension funds that handle investments internally revealed that their holdings in a basket of domestic AI-linked equities generated approximately $138 billion in unrealized gains between the end of 2022 and mid-2026. These stocks, which include major technology companies and chip manufacturers, made up roughly 27% of the funds’ domestic equity portfolios by June, up from 12% in late 2022. This AI-focused segment accounted for about 57% of the collective stock gains during that period.

Despite these financial benefits, the rapid proliferation of data centers and broader AI infrastructure has sparked political and community backlash in several states. Some officials and activists have expressed concerns over environmental impacts, such as increased power consumption and land use, as well as social risks involving workers and local communities. This has led policymakers to impose new regulations and moratoriums on data-center developments.

In New York, for example, state Comptroller Thomas DiNapoli, who oversees the Common Retirement Fund, urged tech companies to engage with communities to address concerns about data-center projects. However, the state followed up with a moratorium in July on many new facilities to allow for regulatory review. New York City Council Member Shekar Krishnan emphasized the risks associated with concentrated investment in AI stocks, advocating for greater diversification to protect retirees.

Similarly, in Pennsylvania, political figures are sharply divided. GOP gubernatorial candidate and pension board member Joseph Hernandez described the situation as contradictory, noting that state officials benefit from AI investments while opposing data-center expansion. Republican State Treasurer Stacy Garrity has called for a pause on data-center growth, accusing Democratic Governor Josh Shapiro of fast-tracking projects without adequate community safeguards. In response, Shapiro introduced measures aimed at slowing development and enforcing standards related to energy use and environmental protection.

California’s public-worker pension fund has directed hundreds of millions into entities that finance data-center operations, yet union representatives are urging managers to better assess potential social and economic risks linked to AI growth. Mullissa Willette, a CalPERS board member and union leader, argued that while heightened scrutiny might reduce short-term returns, it could foster more sustainable outcomes by addressing community concerns and workforce impacts.

The prominence of AI stocks in pension portfolios complicates efforts to divest or reduce exposure, as large technology firms constitute a significant portion of major stock indexes. Olivia Mitchell, executive director of the Pension Research Council at Wharton, noted the unique scale and political polarization surrounding these investments.

Financial experts caution that while the AI boom has helped pension funds improve their funding ratios—now approaching pre-2007 financial crisis levels—any sudden slowdown in the industry could have serious repercussions. Anthony Randazzo, executive director of the Equable Institute, warned that a sharp market downturn might leave governments responsible for covering substantial pension shortfalls.

Pension fiduciaries face a complex balancing act between maximizing risk-adjusted returns for retirees and navigating the evolving political and social landscape influenced by AI’s rapid development and associated infrastructure expansion.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.