The artificial-intelligence boom is driving a wedge through America’s multitrillion-dollar public-pensions system. AI-crazed markets have turbocharged hundreds of state and local public-employee pension funds, whose combined assets have grown from $5.8 trillion in 2023 to $7.3 trillion in June, according to Federal Reserve data.

Across 13 of the largest funds that manage their investments in-house, a basket of domestic AI-linked stocks fueled $138 billion in paper gains between the end of 2022 and June, according to a Wall Street Journal analysis of securities filings.

But while those pensions were racking up AI-fueled returns, officials from many of those same states have begun to throw up barriers to data centers and are criticizing the industry in the final stretch of the midterm campaign. The pushback has left fund managers and boards scrambling to gauge the risks of one of the most polarizing industries in the U.S.

In Pennsylvania, a gubernatorial candidate who sits on the board of a teachers’ pension fund is hammering the incumbent on data-center development. California union representatives are pushing fund managers to account for threats posed to workers and communities. New York state instituted a moratorium on many new data centers, even as pension funds’ AI holdings have surged.

“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, trustee of the state’s Common Retirement Fund, urged 18 tech companies including Amazon.com to engage residents and allay concerns around power prices, land use and water consumption. DiNapoli, a Democrat, wrote in a letter that the approach would “protect shareholder value and ensure sustainable growth.”But the backlash has only grown, culminating with the state’s July moratorium on many new projects to study regulation.

In a recent hearing with representatives for Meta, Alphabet and other tech firms, New York City Council Member Shekar Krishnan grilled the companies on 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 thinks funds should diversify away from AI to shield retirees from risk.

Many politicians have called for development to slow—not stop—as governments erect guardrails to protect residents from the fallout of a disruptive industry. President Trump, who has backed rapid building, on Wednesday said data-center operators must provide their own electricity or pay communities dividends to boost their popularity.

But recent weakness in some corners of the increasingly debt-driven sector have previewed potential pain to pensions—and millions of teachers, firefighters and other workers they support—if growth decelerates or the boom goes bust.

Pensions tend to invest passively in stocks by following indexes. The 13 funds the Journal analyzed held about $195 billion in shares of 15 companies selected as representative of the AI trade, including hyperscalers and top U.S. chip firms. That sum comprised roughly 27% of their collective domestic equity holdings as of June, up from 12% the last quarter of 2022, when ChatGPT launched.

The basket of stocks, which doesn’t include many AI-infrastructure providers or software companies, drove roughly 57% of the funds’ collective U.S. stock gains in the period. Those figures also leave out additional AI exposures through international stocks, private equity or the billions raised through private debt deals.

The 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 has put $500 million into a vehicle funding two data-center service providers. An official from a Texas teachers’ fund recently said it had $2.6 billion in data-center exposure across private markets.

Pension-fund managers have previously trimmed positions to allay political pressure over apartheid-era South Africa, firearms and more—at times to the financial detriment of retirees. While those controversial holdings accounted for only a tiny fraction of pensions’ total investments, stock indexes are now top-heavy with trillion-dollar tech companies, leaving the funds with 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.

In Pennsylvania, Republican State Treasurer Stacy Garrity has criticized Democratic Gov. Josh Shapiro for “fast-tracking” data centers and called for a pause on development. As state treasurer, Garrity helps oversee the Pennsylvania School Employees’ Retirement System, which holds billions of dollars in AI-linked assets, securities filings show.

A treasurers’ office spokesman said Garrity is focused on “protecting the financial interests of [pension] beneficiaries while supporting Pennsylvania communities’ ability to have a voice in large industrial projects.”

Shapiro in August announced measures slowing data-center development and requiring proposals for the centers to meet standards on energy affordability, environmental protection and community engagement. He told reporters he was clamping down in response to “a whole bunch of developers who were acting in unscrupulous ways who were running roughshod over our communities.”

Many former public employees who live near proposed projects don’t know their retirements rely in part on AI investments, said Pennsylvania state Sen. Katie Muth, a Democrat. The PSERS board member said even she struggles to understand the fund’s total exposure to AI, adding, “It’s like being Nancy Drew.”That raises the stakes for pensions if governments regulate projects out of existence—or if a broader pullback were to cascade through the AI industry and crush markets.

The current boom has helped many U.S. pensions recover. Their funding levels, which show whether they have enough money on hand to meet the needs of future retirees, are now close to where they were before the 2007-09 recession. During the crisis, funds’ collective assets relative to their promises to pensioners cratered from 93% to 63%, according to the Equable Institute, a nonprofit that researches pensions. That funding level has since jumped to 86% in the organization’s most recent projections.

If the boom continues, pensions “will reach an escape velocity and get pretty close to being fully funded,” said Anthony Randazzo, executive director of the Equable Institute. If there is a sharp downturn, governments could be on the hook for tens of billions of dollars or more in costs.

Pension-board members have a fiduciary duty to focus on getting retirees the best risk-adjusted returns. “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 abstract threats. 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. As she put it: “Move slower and break less things.”