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* Bloomberg…
The second-largest U.S. teachers union has added a firm formerly headed by Bruce Rauner, a Republican leading the race in next week’s Illinois gubernatorial primary, to its enemies list.
The American Federation of Teachers is urging public pensions to review investments with Chicago-based GTCR, a private-equity firm where Rauner was chairman before stepping down in 2012. He supports shifting government workers to 401(k)- type plans from traditional defined-benefit pensions, which give retirees a payout based on years of service and final salary.
The AFT, with 1.5 million members, is scheduled to release an updated “watch list” of 29 money managers that the union says support groups opposed to traditional pensions. GTCR has $4.9 billion of commitments from U.S. public pension funds, according to Preqin Ltd., a London-based research firm. The AFT is also adding Highbridge Capital Management and a unit of London-based insurer Aon Plc to the list.
“Trustees should actually know if someone who is trying to get you to invest with them are also trying to eliminate the pension system,” AFT President Randi Weingarten said in a telephone interview. “The centerpiece of Rauner’s campaign is the elimination of the defined-benefit plan.”
* Pensions and Investments…
“Having earned millions as an asset manager of defined benefit plans, Rauner is now, as a gubernatorial candidate, calling for freezing the benefits of the state’s defined benefit pension plans and putting all new public employees in a defined contribution plan,” the report said.
The union’s first Ranking Asset Managers report, published last April, has been amended twice to remove six firms, including AQR Capital Management and KKR. Following the publication of the report, executives at both firms detailed their support for defined benefit plans in letters to their pension plan clients.
The full report is here.
posted by Rich Miller
Friday, Mar 14, 14 @ 12:26 pm
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“Fire in the Hole”
Comment by x ace Friday, Mar 14, 14 @ 12:30 pm
I hear the folks over at GTCR are really annoyed with their old boss Bruce. GTCR is used to gorging under the radar and Rauner’s campaign is putting far too much sunshine on the firm.
Comment by too obvious Friday, Mar 14, 14 @ 12:43 pm
IEA and ASCME find themselves in a real quandery. Do they stay with “the devil they know, or dothey embrace” the unkown? Teachers and prision gaurds can wish all day long, but the devil is closer in the rearview mirror than they think.
Comment by dogboy Friday, Mar 14, 14 @ 12:43 pm
So wouldn’t that mean that Rauner would LOSE money from GTCR if Illinois went to a 401K style system because they wouldn’t be managing the money?
Comment by 4 percent Friday, Mar 14, 14 @ 12:45 pm
They’ve spent most of the last 4 years marching and screaming and even though I don’t like these people politically hitting the arne duncans with below the belt classless attacks. They haven’t shown any muscle in the elections games and I’m interested to see if they can do anything other than throw below the belt punches and hold up traffic with angry marching.
Comment by shore Friday, Mar 14, 14 @ 12:53 pm
Glad somebody else has noticed this. This campaign by the AFT raises huge First Amendment and other legal issues, which we wrote about here a couple days ago: http://wp.me/p2Oseh-2Nl
Comment by WirePoints Friday, Mar 14, 14 @ 12:55 pm
Seems appropriate. Talking about biting the hand that feeds you.
Comment by Norseman Friday, Mar 14, 14 @ 12:58 pm
Not really a big deal. The unions don’t invest the money. The state pension boards make the investment decisions.
Comment by Meanderthal Friday, Mar 14, 14 @ 1:00 pm
Ha, so by their logic, they would endorse going with a subpar money manager if the other one openly supports defined-contribution plans? That makes about as much sense as a teacher’s strike saying ‘it’s for the kids.’
Comment by Dave Friday, Mar 14, 14 @ 1:01 pm
===Ha, so by their logic, they would endorse going with a subpar money manager if the other one openly supports defined-contribution plans? That makes about as much sense as a teacher’s strike saying ‘it’s for the kids.’ ===
If you’re operating under the (likely correct) premise that a defined-contribution plan leaves you worse off than a slightly more ineptly managed defined-benefit plan, it makes perfect sense.
Comment by CollegeStudent Friday, Mar 14, 14 @ 1:13 pm
===Ha, so by their logic, they would endorse going with a subpar money manager if the other one openly supports defined-contribution plans?===
Time for some truth telling here. ALL money “managers” should be abandoned in favor of index funds with their low low fees. Money managers are like car salesmen adding nothing of value to the product. Apologies to any car salesmen out there, but a valid statement.
Comment by Pensioner Friday, Mar 14, 14 @ 1:14 pm
===so by their logic, they would endorse going with a subpar money manager===
Um, I think you’re stretching their logic a bit there.
Comment by Rich Miller Friday, Mar 14, 14 @ 1:14 pm
Wow… How does this hurt Rauner? Yes, my job was to get great returns. I am now trying to run the state, this is what is best for the state, and what is worse for my firm…. That is how serious I am about NOT being a politician. Tough decisions need to be made… Then… Here they go… Public unions spending your money to keep the broken system… Repeat. If there is no data that says one of the other 3 have a chance…. This was the worst timing ever…
Comment by Walter Mitty Friday, Mar 14, 14 @ 1:18 pm
Mark Glennon did a detailed piece on this scandal — and it is a scandal — a couple days ago. http://wp.me/p2Oseh-2Nl
Comment by Mockingjay Friday, Mar 14, 14 @ 1:19 pm
===so by their logic, they would endorse going with a subpar money manager===
Not to mention how specious the idea of money managers being able to consistently outperform the market really is.
Comment by Johnny Q. Suburban Friday, Mar 14, 14 @ 1:23 pm
The problem is that why did GTCR get into the defined pension business in the first place, if they’re so horrible for the state budgets? So they’re not horrible when GTCR is investing them, but they’re horrible now that Rauner is running for governor?
“GTCR has $4.9 billion of commitments from U.S. public pension funds”
The centerpiece of Rauner’s campaign is that “avaricious union leaders” have destroyed the state. That talking point dies rather easily when we see that his company has huge business with the pensions that “avaricious union leaders” have fought so hard for.
Comment by Grandson of Man Friday, Mar 14, 14 @ 1:24 pm
I have some experience in the investment management field, and believe a 401k plan is no substitute for a defined benefit plan. The idea sounds appealing, especially in rising markets, but the truth is that most individual investors will not only underperform the market, but also imprudently withdraw funds to supplement various living expenses. A 401k plan is fine as a supplement for Social Security and a defined benefit plan but should not be expected to replace them. It’s a fool’s errand.
Comment by Louis Howe Friday, Mar 14, 14 @ 1:33 pm
I’m surprised it’s taken this long. I’m no fan of the public sector unions but I can’t blame them here.
Rauner has made a fortune from union members. Where do people think those humongous management fees come from? Member contributions of course.
So now Rauner uses those members’ own money to bash the very people who made him rich. It is absolutely unbelievable to me that Rauner has gotten as far as he has in this campaign.
Comment by too obvious Friday, Mar 14, 14 @ 1:40 pm
I understand why the AFT does this generally but I don’t know how much impact it really has on a firm like GTCR.
Unlike stocks or bonds managers, it’s practically impossible to fire or terminate a relationship with a private equity firm once an investor has committed the dough. Secondly, PE firms only raise money every 3-4 years and a tenured firm like GTCR has a solid investor base that will usually renew their commitment each time a new fund is raised if the performance is consistently good. Finally, for a pension board to make a decision on investment based on anything other than performance/financial considerations can expose them and the fund to huge liabilities.
Comment by Arthur Andersen Friday, Mar 14, 14 @ 1:59 pm
Those horses are out of the barn. You don’t burn down the barn just because they got out before you could close the gate.
What are these teachers teaching?
Comment by VanillaMan Friday, Mar 14, 14 @ 2:03 pm
Sounds like the public employee union folks already know, Rauner is going to win the primary and most likely the general election.
They are on a fools errand. If the GRTCR firm is doing a good job, who in their right mind would every want to firm them. I agree with the commenter above. What are the teachers teaching? They obviously don’t understand finances.
Comment by Downstater Friday, Mar 14, 14 @ 2:19 pm
“I’m no fan of the public sector unions but I can’t blame them here.”
I’m a fan of your empathy. I’m glad you get it.
Comment by Grandson of Man Friday, Mar 14, 14 @ 2:27 pm
===so by their logic, they would endorse going with a subpar money manager===
Um, no. Read the report, @Dave. Page 3 (emphasis mine):
“In ADDITION to the PRIMARY economic considerations, pension trustees may also take into account certain collateral factors…”
Comment by Read first, comment second Friday, Mar 14, 14 @ 2:37 pm
To all respondees, I’d have to disagree. Perhaps it would be a jump to specifically say ’subpar’ but by restricting available managers only hurts yourself when they should be rated on one thing, the plans actual return. I’m making no contention as to the merits of defined-benefit or defined-contribution but applying restrictions like this will only hurt themselves.
I get the reasoning behind it but mathematically it’s not to their benefit. I would say this is similar to Rahm’s request to restrict investments in gun suppliers, again, I understand it but it only hurts.
Comment by Dave Friday, Mar 14, 14 @ 3:07 pm
Louis Howe - Friday, Mar 14, 14 @ 1:33 pm:
==I have some experience in the investment management field, and believe a 401k plan is no substitute for a defined benefit plan. The idea sounds appealing, especially in rising markets, but the truth is that most individual investors will not only underperform the market, but also imprudently withdraw funds….==
I had a 401K and put all my money in Lason, Inc.
Comment by Samurai Friday, Mar 14, 14 @ 3:08 pm
Most of the comments here are missing the point, which is about something much bigger than Rauner and GTCR. The AFT list targets 28 other firms whose individuals have engaged in protected political speech the AFT doesn’t like, such as support for the Commercial Club and StudentsFirst. They seek to have pensions — state instrumentalities — enforce the blacklist. Yes, it has been effective, according to examples listed in the P&I articles, and the AFT report brags about some of its success. The First Amendment issues and other questions about statutes that bar this kind of misuse of government power should be obvious. Worse, isn’t this like using a bridge in NJ — a public asset — to punish protected political activity? http://wp.me/p2Oseh-2Nl
Comment by Mark Glennon Friday, Mar 14, 14 @ 3:14 pm
Samurai, Please don’t respond to any RFPs on this.
Comment by A guy... Friday, Mar 14, 14 @ 3:15 pm
=== What are these teachers teaching? ===
Kids.
I’ll bet if you tried real hard, you could make your point without throwing off on teachers as a class. But that wouldn’t fit Rauner’s ideological agenda, would it?
Comment by olddog Friday, Mar 14, 14 @ 3:18 pm
“In ADDITION to the PRIMARY economic considerations, pension trustees may also take into account certain collateral factors…”
So you would accept a lower return on your investment if it met one of these other collateral factors? Wouldn’t that be a failure to execute your fiduciary responsibility?
Comment by CapnCrunch Friday, Mar 14, 14 @ 3:24 pm
The unions have a choice. Go vote for Dillard or spend tens of millions on a 50/50 chance that a bad Governor in Pat Quinn can pull off another win. I have said a while these unions need to focus on getting their people to vote next week and explain to them why they must vote for Dillard. as of yet, they are not pushing votes at the Local level. If they don’t, they lose a lot of control and the next 7 months will be a war on public employees.
If Rauner will really spend close to over 20 million of his own money or more, we could see a 50 million dollar 7 month media war. Good for Rich, bad for the other 10 million of us living in IL.
Comment by the Patriot Friday, Mar 14, 14 @ 3:27 pm
The fund managers are a scam, anyway.
You could get an intern to invest pension funds in an S&P Index at Chucky Schwab and you’d be just fine without the PE juice.
It’s just another form of pinstripe patronage, like GO bond counsel or bond underwriting. Money for nothing.
Comment by wordslinger Friday, Mar 14, 14 @ 3:45 pm
A Guy==I would never consider it. Would prefer to rely on guys like Rauner and Mark Glennon.
Comment by Samurai Friday, Mar 14, 14 @ 4:15 pm
“A 401k plan is fine as a supplement for Social Security and a defined benefit plan but should not be expected to replace them.”
It’s my understanding that this is exactly the purpose for which 401(k) plans were originally invented. The notion that they should replace instead of supplement pensions is a comparatively recent one.
Comment by Secret Square Friday, Mar 14, 14 @ 4:21 pm
word, I beg to differ. Warren Buffett is spot-on about index funds being a good choice for most investors, but he’s not saying put all your dough there.
The unbiased data shows that over the long haul a diversified portfolio with stocks, bonds, and alternative investments like PE and real estate are the strongest performers. Heck, for a lot of us, real estate-the family home-is far and away the largest investment.
Comment by Arthur Andersen Friday, Mar 14, 14 @ 4:36 pm
===“A 401k plan is fine as a supplement for Social Security and a defined benefit plan but should not be expected to replace them.”
It’s my understanding that this is exactly the purpose for which 401(k) plans were originally invented. The notion that they should replace instead of supplement pensions is a comparatively recent one. ===
Well, the involuntary capital infusions of the 401K system have done so much for the stock market that the financial community sees little reason not to double down on it.
Comment by CollegeStudent Friday, Mar 14, 14 @ 4:56 pm
“Calling for freezing the benefits…” Actually, Rauner is calling for a reduction/cut in already earned benefits as well as freezing further service credits and future salary credit. Eliminating the automatic increase on already earned benefits is a cut by definition.
Comment by Archimedes Friday, Mar 14, 14 @ 5:21 pm
WSJ now has a good piece on this. Again, this is not about whether Rauner is right on pensions: http://online.wsj.com/news/articles/SB10001424052702304185104579437631822576374?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304185104579437631822576374.html
Comment by Mark Glennon Friday, Mar 14, 14 @ 5:28 pm