Hypocrisy meets dereliction at Chicago Teachers Pension Fund – Wirepoints

By: Mark Glennon*

Here’s another page in the volume of illustrations of why Chicago is a “failed city state,” as Chicago’s billionaire ex pat, Ken Griffin, recently put it. It’s another example, too, of how Illinois state government has shunned its duty to fix what’s wrong in Chicago. And don’t think this is just a problem for Chicagoans. State taxpayers are exposed here as well.

First some background: The Chicago Teachers Pension Fund (CTPF), sponsored by the Chicago school district, has an unfunded liability of about $14 billion. It has only about 48% of the assets it needs to pay benefits for work already performed by Chicago teachers. That’s from its most recent actuarial report, which adds in bold face, “This is a severely underfunded pension,” which is true by any measure.

You should also know that private equity is the exemplar of rapacious, capitalist billionaires — as radical teachers unions see the world, that is. Private equity is the sector that invest in buyouts, venture capital, turnarounds and the like on behalf of big funds like pensions. There’s nothing categorically wrong with private equity, but it draws contempt from anti-capitalists like teachers’ unions. Just last month, the Chicago Teachers Union passed a “Resolution For A Pension Fund that Provides A Dignified Retirement While Promoting a More Just Society.”  It’s largely a rant against private equity.

But that was last month. This month, the CTPF board of trustees voted to approve three new investments in, you guessed it, private equity. The vote was “confusing and brazen, considering it was right on the heels of the CTU anti-private equity resolution,” says Second City Teacher, a blog that follows  such things and shares CTU’s hostility to private equity.

Yes, the hypocrisy is brazen given that the CTU and CTPF board are essentially one and the same. The board is dominated by CORE, the CTU’s ruling, radical faction.

But maybe it’s not so confusing. The three new private equity investments will be in Africa, and racial justice is central to how CTPF runs. One trustee has proudly noted, for example, that “52% of our assets are with MWDVBE (Minority Women Disadvantaged Veteran Business Enterprises) firms, promoting diversity, which is a best practice for achieving maximum investment growth.”

What exactly is special about the African deals that make them the best available for the pension?

That question sure doesn’t appear to have been answered, as the Second City Teacher column indicates. It says one trustee asked why they were getting private equity reports without highlighting the lows or highs of previous quarters and benchmarked quarterly reports. “I’m sure you’re gonna hear a lot of great things about investing in Africa,” said that trustee, “but you must remember the big risk and challenges, political and regulatory instability, infrastructure and bureaucracy, and currency volatility.

Another trustee asked why they had no input from the pension fund’s investment advisor, Callan, which is a reputable institutional firm. “I’m not sure why Callan was not a part of this process, because we’ve paid them a lot of money to hear their opinion,” she said. There was no response, says Second City Teacher.  “That is the million dollar question. Callan is supposed to be the consultant that vets these investments. Why were they quiet?”

On two of the private equity investments, only four trustees voted yes. That’s partly because two trustees didn’t vote because they were simultaneously attending another meeting with the investment meeting. Not good.

Perhaps most importantly, where is there any investment experience on the board? Ten of the 12 trustees are elected entirely by active teachers, principals, administrators and retired members. Two are appointed by the Board of Education. I went through the bios of most but not all of the trustees and saw not a spec of investment background. At least two of them did ask some good questions, so maybe I missed a few good ones, but this is a problem with most pensions in Illinois. Financial credentials are almost always lacking.

I asked a former chairman of the CTPF’s investment committee what he thought about the new African private equity investments. That’s Phil Weiss, who is financial savvy. He is also the plaintiff in the lawsuit to force the CTU to release its audit, which is now getting national headlines because the federal government is investigating. That was enough to get him booted earlier by the CTU. Weiss said, “It’s sad that CTPF consultants stayed quiet as CTPF Trustees are negatively influenced by CTU and make higher risk investment decisions. Politics should not be influencing investment decisions at The Fund.” It’s now all controlled by the CTU, he added.

That’s the problem. Pension trustees should be focused solely on picking the best investments for the highest rate of return. Nothing else should matter, not anti-capitalism, social justice goals, politics or racial preferences.

Who bears the cost of bad investment policies? Not pensioners. If CTPF funding turns out to be inadequate, the school district is directly liable, which means taxpayers.

But state taxpayers have skin in that game, too. The state funds all of the “normal cost” of CTPF, which is the government contribution required for new pension obligations incurred in any given year. Lower returns on pension investments increase that cost to state taxpayers.

The buck for all of this stops in Springfield. It’s state government that sets the rules for Chicago and other municipal pensions. They could have required sensible investment policies long ago. As with so many other problems plaguing Chicago, state lawmakers just look away.

They, too, are simply derelict in their responsibilities.

*Mark Glennon is founder of Wirepoints.

This column was updated to correct numbers on the CTPF board composition.