What does Forensic Audit of Worst Funded Chicago Police Pension Reveal?
The Chicago Policemen’s Annuity and Benefit Fund (PABF) - commonly referred to as the “Chicago Police Pension Fund” - is one of the worst funded public pension plans in the U.S. today and in U.S. history. Its funded at only 23%.
“It is also so damaged by a total lack of transparency that it puts the interest of Wall Street & Chicago Investment Managers over its own current and retired officers,” wrote Chris Tobe in his forensic audit report of the police fund entitled ‘Twisted Priorities.’ “PABF has hidden $10s of millions in investment fees, while denying payment for a disabled officer’s wheelchair.”
Second City Teachers spoke with Chris Tobe because his forensic audit of the police has similarities to what a similar audit of the Chicago Teachers Pension Fund (CTPF) could look like. CTPF is funded at 45 percent.
Retired pensioneers upset at what is happening to public pensions here and across the country are paying for forensic audits that their public pension boards refuse to pay for. Retired Chicago Police Officer Rosemarie Giambalvo initiated the call for a complete forensic audit of the Chicago Police Pension Fund in February 2020. Rosemarie also founded the CPD Pension Board Accountability Group consisting of over 2600 retired, widows, and active officers who signed two petitions calling for the audit.
The Chicago Teachers Pension Fund (CTPF) has also ordered a forensic audit, but its findings have not yet been released.
The retired police group hired Christopher Tobe, a forensic investigator and former Kentucky Retirement System (KRS) Trustee. He is also a Securities and Exchange Commission (SEC) whistleblower who wrote the book Kentucky Fried Pensions about the corruption of Wall Street and Public Pension Funds.
What happened when Mr. Tobe began his audit?
“The board and staff of the Chicago Policemen’s Annuity and Benefit Fund (PABF) have gone out of their way to conceal and block information for this report,” he said. “They illegally denied most of our Freedom of Information Act (FOIA) requests only providing small amounts of information which should have been previously disclosed on the web page.”
He told Second City Teachers he is currently still in court to find out exactly how much the police are paying their private equity money managers who are notorious for charging high fees that are hidden. Tobe and other watchdogs believe public pension funds are paying exorbitant money manager fees to actively manage their pension money when experts say almost none of them beat investing in a low-cost index fund that could save tens or even hundreds of millions of dollars over the long run.
Richard Ennis, a former consultant for Chicago Police Pension Board, wrote that underperformance in Public Pension plans is mostly caused by the excessive fees in alternative investments.
Tobe wrote that the police pension board structure “facilitates excessive conflicts of interest with the mayor’s immediate long-term goal of a city budget and political fundraising overshadowing long-term goals.” The Chicago City government has used the police fund like a credit card, charging $300 million each year instead of paying into the fund.
“To add insult to injury, the city even underfunds the pension more than the statutory amount, blatantly breaking the law, with no consequences,” he wrote.
The police fund refused to give Tobe any important information, including the names of managers of fund of funds. He said that many of the Chicago Teachers Pension Fund (CTPF) money managers are the same ones who manage the police retirement money.
Tobe states that the Chicago Police Pension chose to collaborate with Wall Street firms at the expense of the cops. “Predictably, hundreds of millions have been squandered on excess fees and poor performing managers as transparency has ceased to be a priority.” Undisclosed fees could be as high as $70 million or more a year.
$2 TO $3 MILLION IN FEES PAID TO WALL STREET EVERY YEAR FOR DOING NOTHING
I asked Tobe in a telephone interview why is the police pension fund so low. His theory he told me is that they are not connected to the Democrats because they do not vote or vote Republican. Teachers, on the other hand, are known to be more active and vote, especially in the democratic primaries.
“The teachers are powerful,” he said. “In the primaries they are better voters than the police.”
It is not uncommon for public pensions to have sometimes hundreds of hidden “ghost managers” inside hedge funds and private equity funds of funds that are not named, and fees that are not disclosed. PABF may have over 100 ghost managers in funds of funds. In 2009 hundreds of plans in hedge fund of funds were shocked to find that one of their “ghost managers” was the Madoff fund, Tobe wrote.
An inquiry into public records by a Chicago Alderman in 2014 disclosed that former Mayor Rahm Emanuel received campaign donations of over $600,000 from investment managers who manage accounts for the PABF and other city funds. This led to a SEC investigation initiated by a Chicago City Alderman.
One manager, Madison & Dearborn, was not disclosed in public financial documents because it was in a Fund of Funds. It was only disclosed in a separate economic development document for Illinois related investments required by the state for each Illinois based pension plan, Tobe noted in his report. This document provides the names of all Illinois based “ghost managers” even those in funds of funds. He sent FOIA requests to both the Chicago Police and the state and they have redacted all these potential names from this report to avoid disclosure.
Tobe figures that when a private equity company or any large money manager lands a $50 million deal with the Pension Fund, they can spread a little around, say 10 percent to grease the politicians pockets so they get elected and everyone’s happy, save the poor pensioner who private equity thieves like former Gov. Bruce Rauner say no longer deserve a pension after their many years of service.
“It’s a political cesspool,” Tobe said. “Who gets the bigger bribe? The sky’s the limit.”
Public documents reveal that over $200,000 in donations were made to Mayor Lori Lightfoot by Madison Dearborn who managed investments for Chicago pensions. Chicago Police continues to invest with Brinson partnerships, and Gary Brinson was a large doner to Mayor Rahm Emanual. Real Estate mogul John Grayken of Lone Star funds (a major Ghost Manager of PABF) has donated in the past to some officials. “Under full transparency of ‘Ghost Managers’ we expect that more conflicts with political donations will appear.”
With about $2.6 billion in assets, the shortfall over the last five years has been around $403 million dollars, or over $80 million a year. Tobe said only under more transparency will they be able to tell how much of this was from excessive fees versus bad investment performance.
The explosion of Wall Street fees and private equity into public pensions resulted after the Citizen’s United Supreme Court ruling which allowed dark money to reign so that these money managers ripping off pensioners do not have to reveal how much they give to political campaigns.
“They keep it a secret,” Tobe said. “They even have judges on their payroll.”
Tobe planned on getting media exposure when he made his forensic audit public in 2021, but not one Chicago media outlet wrote about it. That was not surprising, he said, considering that private equity owns a lot of media companies.
Tobe also noted in his report that the police fund hired a cop to serve as their CIO or Chief Investment Office who has no investment or any financial qualifications to be an investment officer. This proves that politics trumps sound finances.