The statement that states are reluctant to invest public-employee pension funds in small businesses and venture capital funds suggests an error in your understanding of economics.
Public-employee pension funds, or any pension funds for that matter, are not moneys of the state or the labor union. They are the collected savings of the participants in the fund.
What the state does with its funds is not my concern, but what it does with my money is. I don't have any say as to how my money in the retirement account is invested, and now, the suggestion is made to put my money at high risk.
The highest prudent return to the fund should be the only goal of a retirement fund. If that can be derived from a small business, fine, but providing assistance to any class of business is really not the point.