According to a lawsuit filed this week by Tobe, the pension denied most of his requests for records under the Illinois Freedom of Information Act. It’s no secret that state and local government pensions—which are supposed to be the most transparent of all pensions—are regularly criticized for opposing public record requests, particularly related to alternative investment documents.
The report accuses the pension of failing to monitor and fully disclose investment fees and expenses. It is estimated that fees and expenses could be 10 times greater than the $7.4 million disclosed in the pension’s most recent financial audit. Tobe believes the fees related to dozens of investment managers are not properly disclosed. Using assumptions from an Oxford study, Tobe estimated that undisclosed fees could be as high as $70 million a year. Also, $2 million to $3 million a year in investment fees may have been paid to Wall Street for doing nothing, i.e., fees on committed, uninvested capital.
Gambling on the stock market to get out of financial troubles. It’s a fool’s game, but that’s exactly what some politicians in Illinois are considering now to address their cities’ growing pension crises. Lawmakers want to borrow money from the bond market to pay down pension debts by issuing what are known as pension-obligation bonds.
The borrowing scheme is a bit more complicated than the household example, but in essence, pension-obligation bonds are all about taking out a loan, then investing that money and hoping the returns beat out the costs of the loan.
It’s a lose-lose game for taxpayers. If politicians get it right, governments will have extra money to spend and grow even bigger. And if politicians get the bets wrong, they’ll come after taxpayers to pay off their gambling losses.
That’s one of the reasons why national organizations like the Government Finance Officers Association say “state and local governments should not issue POBs.”
There was a personnel earthquake in the summer of 2020 at the Teachers’ Retirement System in Springfield.
Ultimately, five high-ranking employees were removed from their positions, including executive director Richard Ingram. The tumult generated clouds of uncertainly that only recently started to clear, revealing improper and possibly criminal behavior.
Although mum at first, TRS officials recently released their first lengthy statement about what occurred, disclosing that a new employee purposely maintained a conflict of interest that he falsely claimed to have ended.
The OEIG report states the scandal dates back to 2018, when the TRS “began the process of constructing a new pension system that it called the Gemini Project.” Urbanek said the Gemini system recently went online.
That required hiring outside information technology professionals. Singh and his company — Singh 3 Consulting — were initially hired as a contractor. But in 2019, the TRS hired Singh as a permanent employee, the hiring predicated on Singh terminating his relationship with his company.
He told the TRS he had done so. But no one apparently ever checked, because subsequent investigations revealed Singh remained president and chief executive officer.
In a September 2, 2021 statement on the police pension’s website it was stated:
“Recently, certain annuitants, without asserting any wrongdoing on the part of the Fund, any Fund employee, or any Board Trustee, past or current, and in fact repeatedly acknowledging no wrongdoing or fraudulent conduct has occurred, have demanded the Board contract with another entity to conduct a desired independent forensic audit. The purpose of a forensic audit is in substance to conduct an investigation as a means of discovering potential fraud, wrongdoing, or other financial crimes. Given that no legitimate cause for this type of audit exists, it is not a prudent use of Fund resources to engage with an additional auditor to perform a forensic audit.”
According to the report, CPABF is one of the worst funded public pension plans in the U.S. today with a funding ratio at year-end of only 23%. That fact alone merits an independent investigation, in my opinion. And, by the way, forensic investigations of pensions are not necessarily focused upon “potential fraud, wrongdoing or financial crimes.”
One year after the head of Illinois’ largest public employee pension fund resigned due to what the fund has only described at “performance issues,” a recently published report by the state’s chief ethics officer reveals the circumstances behind the departures of two more former high-ranking officials at the pension fund in 2020.
The former chief information officer at the Illinois’ Teachers’ Retirement System repeatedly directed contracts toward the company he founded and also lied about having severed ties with the company, according to a report published last month by Illinois Executive Inspector General Susan Haling. TRS manages the pensions of more than 427,000 current and retired teachers as well as pension beneficiaries.
The report centers on former CIO Jay Singh’s conflicts of interest, but also brings to light the firing of TRS’ former chief financial officer, Jana Bergschneider, who was fired last July as the investigation unfolded. Singh resigned in April of last year, two months after he was interviewed as part of an internal investigation into his conflicts of interest.
Bergschneider was terminated from TRS on July 2, 2020 based upon her “work performance and conduct related to the procurement process on the Gemini Project,” the OEIG report said, apparently quoting from a reason given to investigators by the pension fund.
Ingram was placed on administrative leave at the end of that month — a result of the TRS board’s unanimous vote after an investigation into performance issued conducted by Chicago Law firms King and Spalding. He resigned a few days later and TRS remains tight-lipped about the exact reason for Ingram’s departure, calling it a personnel matter.
But Urbanek reiterated to NPR Illinois the same reasoning given every inquiring media outlet in the last year: that Ingram “had difficulties meeting performance metrics in his contract.”
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 funding ratio as of today is 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. PABF has hidden $10s of millions in investment fees, while denying payment for a disabled officer’s wheelchair.
Retired Chicago Police Officer Rosemarie Giambalvo initiated the call for a complete forensic audit of the Chicago Police Pension fund in February 2020 seeking full transparency and accountability. 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. Rosemarie was told during the February 2020 Pension Board meeting that, “whoever wants an audit must pay for it?” One trustee then stated, “it would cost $20,000”. Rosemarie notified the group members and within two weeks raised the full $20,000 from the group to pay for the audit costing the pension board nothing. Justin Kugler stated, “he didn’t care how much money they raised, we will not consent to a forensic audit!” After the elected trustees refused to address the concerns of their underfunded pensions (22% in 2020), the group agreed to hire myself Christopher Tobe, a Forensic Investigator to which I began the forensic audit report upon being hired by Rosemarie Giambalvo and the group.
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. 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.
Regardless, we have come up with a report that can have an impact by providing more transparency and accountability for the operations of the fund.
It is reasonably well-known that the pension plan has been underfunded for years, and that the state, in setting a new funding plan, allowed a “funding ramp” in 2011 and then re-set that ramp in 2016, so that funding according to the “90% funded by 2055” target only began in 2020. However, Tobe alleges that “Chicago has consistently underfunded the plan more than the statutory amount, blatantly breaking the law, with no consequences.”
Regarding fees and management, Tobe alleges that the pension fund has “failed to monitor and fully disclose investment fees and expenses” and that “fees and expenses could be 10 times that which they disclose” because the fund’s disclosure “omits dozens of managers and their fees.” He also reports that the Fund claimed that “hundreds of contracts for the investment managers” are exempt from FOIA, and denied him access to the fund’s own analysis of fees. He concludes that “PABF may have over 100 ‘ghost managers’ in funds of funds,” that is, the fund is required to disclose its managers but it fails to do so, even though Tobe has identified them through other sources.
With respect to governance, the fund violates a fundamental aspect of prudent governance because its Chief Investment Officer is not a professional with qualification in the field, but simply a trustee and active-duty policeman, and, what’s more, one who has “22 allegations of misconduct as a police officer including one for bribery/official corruption.” Further, no staff members hold the credential of a CFA charter, another marker of professionalism. Another related governance issue is the use of offshore investments, e.g., in the Cayman Islands, which lack key governance and transparency protections of US-based funds.
In the 1990s, Illinois property tax bills were around the national average. But in the two decades from 1999 to 2019, we’ve seen a massive 65% increase in residential property taxes, adjusted for inflation. That increase is what drove Illinois to have one of the highest tax burdens in the nation.
The source of Patricia’s – and her fellow Illinoisans’ – property tax pains? Public employee pensions.
More than 70% of Patricia’s property tax bill goes to the school district. While school districts account for a significant portion of property tax bills in localities across the United States, school district budgets across Chicago and Illinois are getting devoured by underwater pension systems.
While the state is responsible for paying employer pension costs for teachers outside of Chicago, rising pension obligations mean more state dollars are spent on pensions, leaving more classroom costs for school districts to fund through property taxes.
The above is only for taxes that fund the city’s main operating account — its Corporate Fund. Property tax bills in the city include separate charges for the school district and other overlapping taxing districts.
Also, since money is fungible, it’s a bit arbitrary for the city to budget a portion of the property tax to pensions. The city has other revenue sources, though the property tax is the biggest.
Still, the chart makes the point everybody should know: Pensions are a huge and growing crisis. They are the 800-pound gorilla in the room — for Chicago, the state and most of its municipalities.
Perhaps one of the best examples for successful reform is Arizona’s recent effort, where the state amended its constitution and passed pension reforms to, as Arizona Gov. Doug Ducey described it, set its public safety “pension system on a path to financial stability while improving the way it serves our brave cops and firefighters.”
No federal challenges to Arizona’s reforms have been made – which is part of a longstanding pattern nationally. Dozens of states over the past several decades have reformed their public pension systems as problems became apparent over the years. None has been sued successfully under the U.S. Constitution – whether under the contract clause or any other provision – in all that time.