Get Politics Out Of Illinois Treasurer Frerichs’ Investment Of Huge And Growing Cash Hoard – Wirepoints

By: Mark Glennon*

It’s long past time for the General Assembly to impose financial supervision and controls on the office of the Illinois Treasurer, which now manages a combined $52 billion of taxpayer money.

Thanks to soaring interest rates and higher balances, just the primary account the treasurer manages for state money is generating over $1.4 billion annually in interest.

His investments decisions, however, are subject to no oversight, leaving him free to use the assets for political purposes, which is exactly what current Illinois treasurer, Michael Frerichs, does.

The latest example of Frerichs’ political use of your money is small but illustrative.

Five days after the October 7 Hamas attack on Israeli civilians, Frerichs announced he would buy an additional $10 million of Israeli bonds for the express purpose of helping Israel.

You’re probably sympathetic to the thought behind that, which is surely why he did it, but it’s utterly meaningless in the bond market. Israel’s government debt is nearly $300 billion – 30,000 times larger than Frerichs’ purchase.

More importantly, Frerichs has no authority whatsoever to base investment decisions on what countries he would like to help.

It was pure theatre. Frerichs’ purchase was good for one thing only – plenty of headlines around the state, which it got.

Bafflingly, Frerichs’ answer to our request for comment on this matter, reproduced in full below, says, “As the CEO of Israel Bonds noted at the time of the $10 million purchase, demand exceeded the amount of bonds that they were able to sell at that time.”

Does Frerichs not understand that helps prove the point that his purchase made no difference?

The far more important matter at hand, however, is the totality of how Frerichs manages other taxpayer money, which is far from trivial, and it’s not being invested to maximize returns on your money.

On any given day, the Illinois treasurer manages about $30 billion for the State of Illinois, called the State Investments, plus about $18 billion on behalf of local Illinois governments, called the Illinois Funds.

He also oversees over $17 billion in college savings plans and money in the new Secure Choice Retirement Savings Plan, though investment decisions on those plans are made by account holders.

Funds the treasurer does manage increased substantially in recent years thanks to the end of Illinois’ budget impasse and concurrent income tax increase in 2017, federal Covid relief money for the state and market gains.

Far more importantly, interest rates soared when the Fed began raising them in 2022. Where the state earned an average rate of return of just 0.34% before the hikes it now earns over 4.5%, as recently reported by COGFA, which reports on state budget matters.

That means the treasurer’s office now is responsible for a major income source. Its most recent report shows earnings on just the State Funds of $125 million for August alone. That’s $1.5 billion per year.

The problem is that Frerichs, partly with the state’s blessing, has politicized his investments and financial power.

He has a long history of abusing his status as an investor for political ends instead of focusing on maximizing return for taxpayers. For example:

• In 2018, he tried “demanding that Facebook disclose information on its oversight and policies to stop the spread of fake news, election meddling, and hate speech.” On that one, it turned out he didn’t even manage any Facebook shares. Wirepoints learned that the only Facebook shares remotely close to being under his control were in college savings accounts. In other words, he was trying to use somebody else’s assets – college savers – for his own clout.
• Also in 2018, he used his position in pharmaceutical companies in an effort to bully them into doing what he wanted on the opioid crisis.
• In 2021, Frerichs and a group of other state Democratic financial officials sent a letter to six of the nation’s largest private sector money managers in a transparently partisan attempt to bully them out of supporting Republicans.

Further examples are in the articles linked below.

What are the limits on the treasurer’s investment discretion?

For the most part, the treasurer is restricted by the Deposit of State Moneys Act to conservative bonds and notes – government debt, bank deposits, high grade corporate debt and the like – not stocks. It’s mostly short-term, the weighted average maturity of the Illinois Funds being 412 days, according to its most recent report.

Those limitations don’t limit his clout or how he uses that clout. His total investments under management make him a significant player in financial markets, particularly if he gangs up with like-minded money managers in other states, as he did through the 2021 letter referenced above directed at political contributors.

Frerichs also claims to adhere to his office’s written investment policy statements, which incorporate the Deposit of State Moneys Act. Those statements, for the State Funds and Illinois Funds, provide for an Investment Policy Committee.

But who is on the Investment Policy Committee? Only members of the treasurer’s own staff – people he hires.

In short there is no external, apolitical oversight or supervision other than the general asset classes in which in which he may invest.

Most importantly, “sustainable investing” is part of how the treasure invests, and that means pretty much whatever Frerichs wants.

Frerichs spearheaded the Illinois’ Sustainable Investing Act, which he implements through his investment policy statements. What’s thereby authorized is absurdly vague, letting the treasurer invest based on factors such as the following:

Social capital factors that…may include human rights, customer welfare, customer privacy, data security, access and affordability, selling practices and product labeling, community reinvestment, and community relations…. Human capital factors that recognize that the workforce is an important asset to delivering long-term value….

That’s a reflection of Frerichs’ relentless commitment to what’s also called socially responsible or ESG (Environmental, Social, Governance) investing. Just last week, he co-authored an op-ed in the Chicago Tribune pledging his undying loyalty to ESG, writing “this anti-ESG fad isn’t going to distract me from that mission. I remain as committed to sustainability as ever before.”

In truth, however, it’s ESG itself that was the fad. It’s all but dead, and it wasn’t killed by conservatives with dark money, as Frerichs claimed in his op-ed.

Even CNN recently reported that ESG is “dying on Wall Street,” and “the numbers speak for themselves,” it said. Similar, recent articles have appeared recently in Financial Times, BBC, Bloomberg, The Wall Street Journal and many others.

The Wall Street Journal reported Sunday that investors “rushed to embrace sustainable investing just a few years ago. Now it is quietly closing funds or scrubbing their names after disappointing returns that have investors cashing out billions….The retreat comes after investors withdrew more than $14 billion from sustainable funds this year….”

“Born in sanctimony, nurtured with hypocrisy and sold with sophistry, ESG grew unchallenged for a decade, but it is now facing a mountain of troubles, almost all of them of its own making,” wrote a New York University business professor.

Aside from putting social justice goals ahead of earnings, the problem with ESG that it means whatever you want.

“It came to mean everything and nothing,” as that BBC column says. There you have it in a nutshell. ESG has meant what Frerichs decides based on the latest political wind direction.

Another batch of money where Frerichs has asserted omnipotence is the Illinois Growth and Innovation Fund (ILGIF), which invests long-term. It started in 2002 as a small effort to stimulate Illinois’ tech sector, which was still in its infancy, by investing $74 million in venture capital funds that invest in Illinois.

It was smartly designed by the late Steve Beitler, an accomplished venture investor, to keep investment decisions out of politicians’ hands and in the hands of financial professionals.

However, Frerichs gradually took over investment control and the fund is now authorized to invest $1.5 billion over ten years. As Frerichs’ Investment Policy Statement for ILGIF expressly says, “The Treasurer exercises authority and control over the management of ILGIF by setting policy and procedures which the staff of the Treasurer executes either internally or through the use of contractors.”

There’s an investment policy committee but, again, it’s only Frerichs’ staff. The policy statement for ILGIF is also loaded with social justice goals similar to his other policy statements.

How is Frerichs performing on his investments? He often boasts about how much money he earns for the state, as he did in his statement below, but is he doing as well as he should be?

Good luck finding anything meaningful.

He does report monthly yields for the State Funds and Illinois Funds. The State Funds, for example, earned a 30-day effective yield of 4.74% in the last report, which was for August. Simple, safe, one-year treasury yields have beat that for most of the past year, but that’s not a fair comparison since some of what Frerichs holds dates back to when rates were lower. A fair assessment requires an appropriate benchmark or comparison to measure against. That’s what’s really needed, but none is published, so there’s no genuine transparency.

For the ILGIF, I am unable to find anything from Frerichs or elsewhere on how the fund is performing. There’s no excuse for that lack of transparency.

Frerichs has no personal background in finance or investing. He studied Chinese at Yale. Sometimes his lack of background shows in comments that would seem tone deaf to people in the financial world, like his comment above on Israeli bonds. Another example was on CNBC in 2016. Apparently for the purpose of establishing his importance, he said his office does about $1 trillion per year of financial activity. If that’s true, it’s nothing to brag about because it would indicate hugely excessive “churn” – a no-no in finance. It would mean he effectively bought and sold all the assets he held at the time every three or four days.

Frerichs’ unbridled dominion over taxpayer money has gone on far too long, and now borders on megalomania. It’s up to the General Assembly and governor to impose oversight and transparency.

*Mark Glennon is founder of Wirepoints.

Statement from Illinois Treasurer Michael Frerichs in response to request for comment on the general points made in this column:

The Illinois Constitution gives the authority for the “safekeeping and investment of monies and securities” to the State Treasurer. This is the Treasurer’s sole authority in the same way that the Attorney General is the “legal officer of the State” or the Governor has the authority to issue pardons or vetoes.

The General Assembly does place restrictions on what investments the State Treasurer can make. Those are found in the Deposit of State Moneys Act, which was comprehensively updated in 2021. Generally, the types of investments authorized are fairly conservative. For example, the State Treasurer is not allowed to invest directly in publicly traded stocks. Most of our portfolio is invested in low-risk investment vehicles like government bonds and money markets.

The Deposit of State Moneys Act requires the State Treasurer to develop and publish in a newspaper and on our website an overall investment policy. You can find our 23-page investment policy for the state treasury at www.illinoistreasurer.gov. Since becoming State Treasurer in January 2015, my office has earned more than $2.54 billion for taxpayers in the state portfolio.

Our investment in Israel bonds maintains a decades-long investment strategy under treasurers of both parties. Israel bonds diversify the state portfolio, achieve good returns, and offer a safe investment. The rates on Israel bonds are higher than U.S. treasuries of similar length. As the CEO of Israel Bonds noted at the time of the $10 million purchase, demand exceeded the amount of bonds that they were able to sell at that time.

Finally, as you know I have testified before Congress, written op-eds and otherwise publicly campaigned against legislative efforts to explicitly politicize state investments. Some Republican elected officials have proposed state and federal laws to expressly boycott financial institutions or restrict the data that can be used in evaluating potential investments. As I said earlier this year, these Republican schemes are “anti-free market and anti-investor.”

Earlier Wirepoints columns on The Illinois Treasurer: