Our February 2009 Lane Report was adapted from a column published in Crain's Chicago Business on January 26, 2009.
Revelations about public corruption, government waste, official malfeasance and ballooning budget deficits have plunged Illinois into a crippling crisis of confidence.
To slash bureaucratic costs while warding off wrongdoing, state Treasurer Alexi Giannoulias is championing the merger of the investment duties of boards that manage retirement, survivor and disability benefits for public school teachers (save for those in Chicago), lawmakers, judges, university employees and state workers. Mr. Giannoulias' vision is a new Illinois Public Employees' Retirement System (ILPERS), which would assume oversight of all five state-funded pension plans' investments, totaling about $80 billion.
The Teachers' Retirement System has zealously led the charge against ILPERS, arguing that separate investment pools foster greater diversification, a top priority as markets churn. But one larger portfolio can be exposed to the same asset classes and economic sectors that several smaller portfolios select.
Moreover, retirees' pension benefits are constitutionally guaranteed. The taxpayers who fund any shortfall in earnings will benefit from the happy fact that, as assets are aggregated, economies of scale will boost fund returns by cutting the fees paid to investment managers as well as day-to-day costs of running the system.
Although the treasurer estimates upfront costs at about $25 million, by his reckoning Illinois taxpayers stand to save as much as $82 million a year in investment management fees and administrative overhead, which could help offset the state's unfunded pension liability, recently calculated at a record $54 billion.
The TRS also fears that integrating investment oversight responsibilities would heighten the influence of elected officials and investment experts and diminish the input of teacher beneficiaries. But power brokers historically have exercised undue influence on the TRS. TRS board member Stuart Levine testified at the recent criminal trial of Antoin "Tony" Rezko, his fellow pay-to-player, that Mr. Levine and other board members worried that consolidation would curb their influence. And political insider William Cellini Sr. was indicted in October for allegedly conspiring with Messrs. Rezko and Levine to shake down an investment firm seeking a $220-million money-management contract from the TRS.
Mr. Giannoulias understands that ILPERS must maintain the highest of ethical standards. The retirement system would be bound by the state's stringent procurement code. Its board members would be required to file statements of economic interest. Board members, their spouses and all ILPERS employees would be denied finder's fees, and vendors with contracts over $50,000 would be prohibited from making political contributions. Self-dealing would be banned, and ethics training would be mandatory.
Let's urge swift passage of ILPERS and demand that it realize its promise of transparency and ethics reform.
Marc J. Lane (email@example.com) is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law.
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Reprinted with permission from Crain Communication Inc., Copyright 2009