The Chicago Teachers Pension Fund (CTPF) once again presented a list of money managers on their Watch List at the April 20 Board Meeting.
The problematic money managers added to the growing list included Leading Edge and William Blair International for performance, and Atticus for personnel turnover because they just hired a new CEO.
Retired Teacher Trustee Lois Nelson asked the Pension Fund consultant Callan what their criteria is for determining how long a money manager has to perform poorly or show improvement before action is taken.
A manager on the list for performance must have three good quarters to get off or be placed on a Do Not Hire list, according to a Trustee. But Callan said there is no formulaic model that guides them when there is staff turnover.
This is an important question because public pension funds like CTPF are hiring expensive private equity managers like Lazard and Ariel that have lost a lot of money, but they continue to manage the teachers’ pension money.
And good luck trying to figure out how costly their fees are. The CTPF and other public pension funds are not transparent when it comes to how much money managers are being paid.
But another question Chicago Teachers Union members and others concerned about their pensions should ask is - who is Callan?
In an article entitled, “San Diego Accuses Callan of Pay to Play Conflicts,” Callan was sued for recommending the city hire money managers that had paid Callan as much as $500,000. The suit alleged that out of 339 money managers under consideration to hire, Callan only recommended a half dozen who made payments to Callan.
The article appeared on the website Plansponsor.com.
The question for the Chicago Teachers Pension Fund is, do they also hire money managers not based on their performance, but on how much they pay Callan or the Chicago Teachers Union.
When CTPF President Jeffery Blackwell complained about racism at the Teachers Fund a couple of years ago, he also complained that former convicted Speaker of the House Mike Madigan was pressuring the Pension Fund to hire his people. Madigan is currently on trial for a ComEd corruption case in which he helped pass friendly legislation for the Illinois utility company in exchange for money and jobs.
How disastrous can it be to hire people who paid into the pot rather than the most qualified?
In San Diego, the city said the pension fund’s actuarial firm had concealed the fund’s problems and alleged that the firm covered up the fact that a proposed funding plan would lead to a severe plan deficit.
In addition to operating a pay to play scheme, Callan was accused of not following city investment guidelines it helped write which called for all money managers to be ranked in the top 40 percent of asset managers. Callan instead recommended a firm that ranked in the bottom 8 percent of its investment class.
The San Diego pension fund had a $1.4 billion deficit from slumping investment values, which is similar to the funding woes of the Chicago Teachers Pension Fund today.
Every dollar counts!
When the Chicago Teachers Pension Fund decided to deposit $11 billion of the teachers retirement money in 2014, their financial advisor Callan told CTPF to give the cash to the Bank of New York (BNY). The Trustees who agreed to this were not told that BNY pays Callan for both general consulting services and financial education programs before they agreed to the deal.
How can this conflict of interest hurt Chicago teachers’ pensions?
There could be banks that offer better interest rates to hold the teachers’ pension money and thus earn a better return. In essence Callan and Bank of New York win, Chicago teachers and their pensions lose. Add to this the fact that BNY is a Wall Street giant that has repeatedly faced law enforcement action for skimming money from its clients, according to IB Times.
“BNY had just agreed to pay more than $700 million to settle federal charges for defrauding its pension fund clients and Callan had previously faced sanctions from the Securities and Exchange Commission (SEC) for failing to disclose to clients that it was getting payments from BNY Mellon in exchange for referring brokerage business.”
Many pension plans rely heavily on the expertise of pension consultants like Callan to help manage its assets since the Trustees are made up of workers such as teachers who lack investment expertise. In 2005 the SEC concluded that conflicts of interest were pervasive which resulted in “substantial financial harm.”
“Today, many consultants derive far greater revenue from conflicted revenue streams than from providing objective advice on a non-discretionary basis,” wrote Ted Siedle, a whistleblower and former SEC lawyer who conducts forensic audits of public pension funds.
Is the Fox Watching the Teachers’ Pension Henhouse?
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