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Pension funds crash, budget woes mount

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Illinois

* This ain’t good at all. Not at all…

The state’s two biggest public pension funds suffered historic losses in 2008, shedding a combined $17 billion in assets and leaving them significantly underfunded.

The State Universities Retirement System saw its assets decline nearly 28 percent last year, and the Teachers’ Retirement System, the state’s biggest pension, saw its portfolio drop 30 percent.

“It’s been unprecedented – there’s been no place to hide,” said Dan Allen, chief investment officer for SURS, which is based in Champaign and represents 205,000 current, retired and inactive university and community college employees in Illinois.

SURS’ pension assets declined $5 billion last year to $10.9 billion, as of Dec. 31. The Teachers’ Retirement System pension assets declined from $41.7 billion on Dec. 31, 2007, to $29.1 billion a year later.

Here’s the kicker…

SURS and TRS are now funded at 42 percent of their future liabilities and officials said it will take significant increases in state funding to put them back on solid financial footing.

How much more state money? Not sure yet. But it won’t be cheap. And, as this story points out, Gov. Quinn’s latest directive to cut state spending will likely produce far fewer budget-savings results than advertised. The problem is deep and wide.

* My syndicated newspaper column tries to show us the way forward, and it ain’t pretty on several fronts…

Gov. Pat Quinn’s choice of Jerry Stermer as his new chief of staff tells us a lot about what’s going to happen soon.

As the head of the advocacy group Voices for Illinois Children for the past 22 years, Stermer has been a tireless advocate for progressive tax reform and expansion of human services and education programs.

If this was anybody else working for any other governor, you might think that Stermer would be the perfect choice to deliver the bad news to Medicaid providers, education lobbyists and liberals of all stripes that their agenda just wasn’t affordable in the face of Illinois’ horrific budget deficit mess.

But almost nobody believes that will be Stermer’s role.

It’s doubtful that Stermer, 65, took this job so he could cap his career as a bad guy after working most of his life to expand programs near to his heart.

nstead, Stermer’s appointment reinforces the belief at the Statehouse that Quinn will unveil a “temporary” income tax hike of 1 or 2 points next month during his budget address, coupled with increased exemptions for individuals and families and a much higher Earned Income Tax Credit to make the tax hike more progressive.

There might even be some tax relief component as well, perhaps for property taxes. Stermer and Quinn have both pushed those ideas for years.

The tax hike would reportedly be followed by a constitutional amendment referendum in 2010 to institute a “true” progressive income tax.

Also, it’s widely expected that Quinn will push to close numerous corporate “loopholes” that he’s worked so hard to expose over the years.

Stermer is much more of an advocate than an administrator, and many insiders believe that Quinn will take the actual helm of running the government himself and use Stermer more as a policy chief.

Quinn reportedly mulled acting as his own chief of staff last month, but was talked out of it by friends, sources said weeks ago. He has long been known as a micromanager, and not exactly in a good way.

The governor’s management history has many of his old friends worried sick about how he’ll handle this new job, and they’ve been spilling their guts over the past 4 or 5 days about why they feel this way. I’ve heard horror stories about Quinn’s management style that would make your hair stand on end.

That sort of behavior is no big deal in the tiny lieutenant governor’s office, but it’s a huge deal now that he’s at the helm of a gigantic bureaucracy. Many longtime Quinn associates were hoping the governor would choose a strong administrator as chief of staff to get the bureaucracy in line and try to put the brakes on spending.

Every new governor faces two important tasks right off the bat. They have to figure out what sort of governor they want to be, which usually becomes apparent to the public and themselves during long political campaigns.

Quinn, of course, was dropped into office without having to face that illuminating event. But new governors also have to get their heads around what, exactly, a governor needs to do to be a successful manager.

The appointment of Stermer likely shows us what kind of governor Quinn will be: a progressive who wants to expand government to help people in need and fight against the ruling class. But we still don’t know quite yet whether Quinn fully understands his management role.

Yes, it’s early. He’s only been in office a couple of weeks. But it’s difficult to overstate the problems the government is facing right now, and most of the people who know Quinn the best are not even close to being convinced that he fully comprehends the task at hand.

And if they’re that worried, then we should all be concerned.

* Related…

* Cullerton open to all sorts of tax hikes: In cash-strapped Illinois, everything from a 16-cent gas tax hike to taxes on Internet purchases and an income tax increase is on the table for new state Senate President John Cullerton.

* Sell lottery tickets online, Illinois Senate President John Cullerton says

* Report: Online sales tax would raise $150M: But it also cautions that $150 million is far less than other estimates, which put the loss total at as much as $800 million. As a result, taxing Internet sales would only go a little ways toward filling state government’s $9 billion state budget hole.

* State Lawmakers React to Governor Quinn’s Cost Cutting Proposals

* Taxpayers group serves up warning on Quinn

* Former governor sees a light in dark situation

* Quinn dumping Blagojevich’s people

posted by Rich Miller
Tuesday, Feb 17, 09 @ 8:53 am

Comments

Gee, that was a short honeymoon, wasn’t it?

Comment by Six Degrees of Separation Tuesday, Feb 17, 09 @ 9:02 am
Two thoughts:

1. Democrats need to man up and accept responsibility for this mess. They control both houses and the Governorship. They created this mess and need to be honest they created it top to bottom.

2. We can live with tax hikes if spending is also reigned in. But don’t keep spending like a bunch of drunkin sailors and ask us to keep paying. Cut the budget, then ask us to fix your past mistakes. We can live with that. Don’t keep making the same idiotic mistakes and expect us to fund them.

Comment by the Patriot Tuesday, Feb 17, 09 @ 9:04 am
Its gonna take more then a 2% income tax hike to solve this one kids… The decades long ponzi scheme approach to budgeting is coming down.

Comment by John Bambenek Tuesday, Feb 17, 09 @ 9:14 am
If the state makes its pension contributions on schedule, the underfunding will improve as the recession ends (it will) and the value of the investments rises. Just simple dollar cost averaging. Not that this will fix the entire problem, but it won’t be as bad as this in the long run. As for the operating budget, we can raise taxes enough to keep the state above water but don’t even think about expanding anything.

Comment by Excessively rabid Tuesday, Feb 17, 09 @ 9:21 am
I’m curious to see how the state GOP leadership will address the specter of proposed tax hikes, especially since aid to states in the stimulus package will fall far short of what’s needed to balance budgets.

Interesting article in today’s NYT about how GOP governors are at odds with the Congressional Republicans regarding the stimulus. Seems likely that the tax relief in the stimulus package will be offset by tax hikes at the state level.

Radogno, Cross et al better come to the table with a lot more than the usual old saws.

Comment by The Doc Tuesday, Feb 17, 09 @ 9:24 am
Interesting but disturbing column.

A governor or president needs a hammer as a chief of staff to ensure things get done, intimidate those who would cause problems and punish those who do. Jim Reilly was a good one; in the current environment, a Luca Brasi type seems ideal.

The last big-time politician I can remember who thought he didn’t need a chief of staff was Jimmy Carter, who didn’t name one until the third year of his administration (and we know how that went). He was spending parts of his days refereeing disputes on who could use the White House tennis court.

Comment by wordslinger Tuesday, Feb 17, 09 @ 9:25 am
===Gee, that was a short honeymoon, wasn’t it? ===

Two weeks is about 13 months longer than I gave Rod Blagojevich. lol

Comment by Rich Miller Tuesday, Feb 17, 09 @ 9:28 am
Remember when the DPI pitched Blago and Quinn as the “Dream Team!” A dream team indeed, a very scary dream team. More nightmares ahead for all of us in the Land of Lincoln? Better count on it.

Comment by Cousin Ralph Tuesday, Feb 17, 09 @ 9:38 am
I think Edgar is right about asking state workers about their recommendations for cutting costs. Why not set up a website where employees and others could make recommendations anonymously…or not. Of course, some comments would be self-serving, but many might take it seriously. And a few state employees are probably young enough and new enough to have some ideas none of their elders have though of–plus the belief that change is possible.

Here is one idea: In the internet age, how many office buildings to we taxpayers need to be building or renting from/by politically connected commerical real estate operators and builders. Do agencies need offices all over the state….or internet hookups. Skype really is the future.

It’ll be interesting to see if Quinn is able to close those corporate loopholes and raise corporate taxes in the middle of a recession.
Campaign finance laws haven’t changed that much–we’re still the same old pay to play Illinois–and I wouldn’t expect the private sector to just go along. So will the whole budget problem fall on Illinois’ middle class via that tax increase. It looks like that could happen. There is only so much you can do with the EITC. Ditto the progressive income tax proposal which has never been very popular in Illinois. On the national level, even Obama has backed off of it.
Why would Illinois embrace it.

Comment by Cassandra Tuesday, Feb 17, 09 @ 9:41 am
I bet the unions are really grateful they defeated the con-con last year. The pension situation would likely have been on the table and in the current economic climate they would have a very difficult time defending why taxpayers must make up for their pension fund losses when the average taxpayer has seen their own retirement account go down the toilet. Eventually we must face up to the fact that these state and local pensions are simply not sustainable in their current forms.

Comment by Bluefish Tuesday, Feb 17, 09 @ 9:46 am
The State’s taxes are too low consider the services almost everyone expects to receive. This is true at the Federal level as well and those who expect those services are Republicans as well as Democrats. It’s time to pony up! We’ve been buying the spend more, tax less line for a couple of decades now and it clearly does not work.

Those of us who still have jobs need to expect to pay more in taxes in order to continue on in the style in which we have become accustomed.

It would be nice if the effort to fix the budget were bipartisan, but I doubt it will go down that way. I hope when the sniping starts, more journalists will ask the politicians what Rich asked us: “What will you cut?” And not let them off with vague references to waste because we all know the problem is much bigger than that.

Comment by Pot calling kettle Tuesday, Feb 17, 09 @ 9:46 am
Bluefish,

The state pensions would be sustainable if they had been managed like the Illinois Municipal Retirement Fund.

Comment by Six Degrees of Separation Tuesday, Feb 17, 09 @ 9:53 am
Six - IMRF tanked by 30% last year and is now forcing huge increases on local governments (i.e. taxpayers).

Comment by Bluefish Tuesday, Feb 17, 09 @ 10:15 am
Rich, how come you deleted my comment about the pension fund management?

Comment by SAM Tuesday, Feb 17, 09 @ 10:31 am
I delete comments that violate copyright laws. You pasted almost an entire article into that thing.

Comment by Rich Miller Tuesday, Feb 17, 09 @ 10:32 am
Sorry, Tobin! Capping pensions would be unconstitutional, immoral, and unethical. Every time you open your mouth something dumber comes out.I can’t believe that you can make a living spouting your own greed.

Comment by Bill Tuesday, Feb 17, 09 @ 10:49 am
Ah, all I can do is keep reminding myself how much worse it would be if Blago were still running the show. Perhaps our state motto ought to be “Abandon all hope, ye who enter here.”

Comment by Secret Square Tuesday, Feb 17, 09 @ 11:12 am
I thought the last article of the bunch was the most interesting re: dumping blago’s cronies.

Most of the folks listed should go sooner, rather than later. Clayton Harris was Blagojevich’s chief of staff (albeit short term). His loyalty is questionable at best.

Dean Martinez has seen his salary more than double since joining the state. That raises red flags.

Jack Lavin seems competent, but because of teh Rezko links, he needs to be put on a VERY short leash.

Rajinder Bedi is a big Blago fund-raiser and an alleged sexual harrasser. There is no reason why he shoudl be working for the state.

Lainie Krozel is someone I know very little about. However, the fact that she started in HR leads me to believe that she was in tight with the Gov, as the most political folks tend to work in HR.

John Filan is probably needed for continuity’s sake. He knows where the bodies are buried. Another one who should be on a shortish leash.

Steven Guerra spent time in a federal prison. This alone means he should go. My guess is that Quinn will keep him to pander to his political sponsors and the hispanic caucus.

Victor Roberson and Robin Staggers were both big players in Blago’s campaign and heavily involved in personnel. Both were part of the federal probe into hiring fraud and Robin Staggers was also involved in at an OIG probe and was outed for using a state car to go to the mall (ironically, it was Roberson’s car). No question that they both should be let go…quickly.

George Rada is another political hack who was involved in questionable hiring and was suspended after an OIG investigation. Maybe he can commiserate with Staggers and Roberson when he gets his walking papers.

Doug Scofield is supposedly a good guy. Of all the people on the list, one of the ones who is least likely to do damage.

Comment by Cynic Tuesday, Feb 17, 09 @ 11:13 am
Now that the state pension funds are severely underfunded when will the media report on their front pages how they funds are managed by those politically connected to Blagojevich, Obama and the Daleys.

We know how Stuart Levine used the TRS, but there are others like Edgewater, Holland, Ariel and Healthpoint who have managed or are currently managing the pension funds, not because of their investment expertise, but because of political connections or minority hiring reasons.

Some have been kept on even after underperforming the market for years.

Bill Daley’s son works for Morgan Stanley and his wife works for Ariel Capital. Prior to joining Morgan Stanley, Bill Daley, Jr. was a lobbyist for Fannie Mae, the democrat political toy that destroyed the mortgage and housing market.

Ariel Capitol’s CEO is a bundler for Obama, and his firm donated over $100,000 to Blagojevich — money that would have been better spent hiring qualified staff.

Below are three articles from the Sun-Times and NYT, but I suggest taking some high blood pressure medicine before reading them.

We, the taxpayers, will be left propping up the pension funds because a bunch of incompetents chose to fill their campaign coffers and pay back contributors with lucrative contracts rather than perform their due diligence.

And Quinn won’t fix the problem since he won’t fight Daley, Obama, Madigan or their pals. If you think the state will get better now that Blagojevich is gone, you’d be mistaken.

Links:

http://www.suntimes.com/news/metro/rezko/826716,CST-NWS-rezkofile100320.stng

http://www.nytimes.com/2007/10/01/us/politics/01obama.html?_r=3&pagewanted=1

http://www.suntimes.com/news/politics/980898,CST-NWS-daleyfamilybill.article

Comment by SAM Tuesday, Feb 17, 09 @ 11:19 am
“Abandon all hope, ye who enter here.”

I was thinking to myself awhile after reading the original post that it was the most depressing thing I have read here in 5 years. Is it even possible we’d be reminiscing of the “good old days” under Blago in a year or 2?

Comment by Six Degrees of Separation Tuesday, Feb 17, 09 @ 11:40 am
Six - IMRF tanked by 30% last year and is now forcing huge increases on local governments (i.e. taxpayers).

The optimist in me (which admittedly is being challenged like never before) looks at all the years when IMRF’s investments and funding solvency were coasting in a good economy and essentially taking a burden off local taxpayers. The odds of IRMF returning to that position are much greater than any of the state’s pension systems resembling IRMF in the good old days.

Comment by Six Degrees of Separation Tuesday, Feb 17, 09 @ 11:44 am
Re: Quinn dumping Blagojevich’s people
Governor Quinn needs to really look into the Illinois Tollway, he’d have a field day.

Comment by Danny Boy Tuesday, Feb 17, 09 @ 12:17 pm
[…] Rich Miller devotes an entire post to the issue today. The Illinois General Assembly, and definitely Governor Blagojevich, deserve severe criticism for how they’ve balanced the past few years’ budgets on the backs of the retirement funds of our state’s teachers, university and state employees. It’s shameful. Let me add to that: It’s VERY shameful. […]

Pingback by ALL AROUND TROY » Blog Archive » State Pension System Update Tuesday, Feb 17, 09 @ 1:21 pm
“SAM”, scram. You should do some due diligence of your own before using stale news stories to discredit the good works of the two large state pension funds and IMRF. Ariel has had a long run of underperformance that has cost them all of their State business, with one exception; the most lucrative piece managing money for the State’s deferred compensation program. That is overseen by the State Board of Investment, which will never be known for its excellence or transparency. (Note that the reporter didn’t include SRS/ISBI in his story..)

Holland has also lost a great deal of the State business that was acquired over time, again due to underperformance, casting further doubt on your dubious thesis.

Edgewater and Healthpoint, being private equity partnerships that run for a specified term, can’t be terminated except in extraordinary circumstances. The last time their performance was reported, it was pretty darn good-in the top 25 percent of comparable funds, iirc.

TRS, IMRF, and SURS may use Morgan Stanley as a broker (one of dozens that their investment firms pick) but that’s it. The likelihood of Daley Jr. influencing those decisions-nil.

Over the long term, these three funds will hold up their share of the bargain and meet the actuarial return of 8.5%. The members don’t have a choice-they will keep paying their share. The wrath of the taxpayer is properly directed at those who chose to spend funds that should have gone to funding pensions on everything from Build Illinois to AllKids.

Comment by Arthur Andersen Tuesday, Feb 17, 09 @ 2:31 pm
AA, I couldn’t say it that well. Good job.

Comment by steve schnorf Tuesday, Feb 17, 09 @ 4:01 pm
Nice, Arthur. You disagree with someone, and they have to “scram.”

All of the firms made political donations and several underperformed and maintained their pension business nonetheless, something you haven’t disputed. I’m not sure how their underperformance is a “dubious thesis,” as you state. The plain fact of the matter is that they underperformed and in those instances their contracts should be evaluated and dropped if they weren’t up to snuff. They weren’t dropped for years. Was it because of their connections? We don’t know, but we should be given the information before we’re taxed to death to make up for their investment shortcomings.

As has been proven time and again, you have to pay to play in Illinois. All of these entities made political donations, some of which were significant, and I think it’s fair to have a light shined on the connections. Maybe this was the only case where contracts with politically connected firms and minority owned business were issued without them having to pay to play, then again, maybe I’m the Queen of England.

You may not like the idea that Daley, Blagojevich and Obama may have done favors for their benefactors, but that doesn’t mean we shouldn’t look at it and telling me to scram isn’t an option either. Rather it tells me you’re afraid of what someone may find if they look hard enough.

And your suggestion that Daley isn’t influencing Morgan Stanley’s business with the state is silly. There’s no other reason why they would have hired him except to have that connection. As the article states,

“William Daley Jr. moved to New York two years ago for a job with Morgan Stanley, an investment giant with an appetite for the city of Chicago.

…While Daley was lobbying state officials, Morgan Stanley got paid $351,875 in fees from two bond deals for the state tollways.”

Why was Chelsea Clinton hired at a hedge fund even though she didn’t have any hedge fund experience? For the same reason. It gave the firm connections and clout it otherwise would not have had. If those connections allow the company to expand its business legally, fine. If, however, those connections allow a company to bypass the rules or allow their failings to be ignored then the voters should know.

Comment by SAM Tuesday, Feb 17, 09 @ 4:34 pm
It’s interesting to hear various opinions on the state employee/teacher/etc pension funds, but it seems highly unlikely that the governor or the legislators will make any serious efforts to end this perk. Blago tried to implement minor changes when he was still the reform governor, or mostly, and couldn’t do it. Legislators simply aren’t going to vote to eliminate a perk they themselves enjoy, especially these days when government pensions, even modest ones, are looking more and more attractive to the baby boomer generation, many of whom are learning, too late, about market
cycles and 401k’s with regards to retirement planning.

Our latest reform governor is going to have to save money elsewhere. State retiree healthcare is not protected by the constitution. Illinois’ long-term unfunded liability is about $24 billion, I believe. This is a place to cut…corporations have become much less generous with retiree health care in recent years….but for the same reason I doubt there will be any substantial attempts to
cut this perk either.

So, what’s next. Fund sweeps?

Comment by Cassandra Tuesday, Feb 17, 09 @ 4:48 pm
Cassandra-

The pensions themselves are protected; those earlier proposals that were unconstitutional were quickly dismissed, and nothing remaining had any traction. Nothing but a re-financing (again) has any hope of providing a short-term fix for today’s budget, except perhaps a complete turnaround in the investment fortunes of the systems - good luck. As far as health care cutbacks, I think Quinn (and the D’s in general both state and national) are in a trick box here, hemmed in by their long standing beliefs and campaign promises. It would be difficult to trim state employee health benefits while trying to expand health care on a state and national level at the same time.

Comment by Six Degrees of Separation Tuesday, Feb 17, 09 @ 5:25 pm
SAM, first do your own research (beyond 3 overripe news clips that is) and then come back and debate with AA. You will find that exactly as I wrote above, TRS and SURS hired Ariel and Holland through their standard investment manager hiring processes, and when their performance declined, gave them the same chance to make corrections any other manager would get, and when the numbers didn’t get better, they were fired. If funds besides TRS and SURS (and I think IMRF) still has them on the roster, call them out, not the ones who have done their jobs and cut them loose, also not “waiting for years” as you assert without substantiation.

The only “silliness” about young Daley’s Morgan Stanley role is in your mind. Again, if you stink he was inappropriately opening doors at GOMB, IFA, or at the Tollway, then go FOIA some records and prove your point. Don’t wildly assert that because he works for an I-Bank, whatever brokerage business happens to come their way from SURS and TRS occurs because of his influence.

I’m sure that the tinfoil around your melon will reach the bursting point like an old package of Jiffy Pop when you learn that one of the State pension funds actually does business with the investment firm (not a “hedge fund”) that employs Chelsea Clinton. Her employment at the firm was, and is, an absolute non-issue in the due diligence process and Board of Trustees’ consideration of the firm’s offering.

SAM, you clearly have a view about pay-to-play. AA’s view isn’t much different from yours. Where we differ is that I feel that to label all pension funds in this case, or State agencies in another, is both uninformed and counterproductive to the goal of true, meaningful pension reforms.

Comment by Arthur Andersen Tuesday, Feb 17, 09 @ 10:54 pm
Yet again, Arthur, you call people names when you disagree with them rather than sticking with the facts.

In SURS own documents, they acknowledge, as of June 2008, that Ariel Capital Management underperformed its market benchmark for 6 years and 8 months. Hence my comment that they weren’t dropped for years.

Personally, I think giving a firm several years to make corrections before removing its funds as options is unacceptable, but maybe that’s the state’s policy, in which case they shouldn’t ask taxpayers for support if the pension funds are underfunded.

You make a lot of assumptions, suggesting, for example, that I didn’t do enough research when I already had current information pointing to the fact that Ariel Capital Management wasn’t up to snuff in this case.

And articles aren’t “stale” if they point to a pattern of favoritism that continues today in Illinois, particularly when 2 of the 3 articles I linked to were written in late 2007 and mid 2008 and especially if those articles weren’t proven untrue.

Link to SURS document:

http://www.surs.com/pdfs/minutes/x_inv/ex09_13.pdf

Comment by SAM Wednesday, Feb 18, 09 @ 9:16 am
SAM-SURS fired Ariel in December 2008. Your point about giving them too long, and perhaps why, is worthy of debate. In contrast, the Ariel “hire to fire” time at TRS was less than 4 years. (August 2001 to May 2005; source TRS Board minutes.) BTW, Ms. Clinton has left the employ of the investment firm and is attending grad school; hope you will rest easier.

As I wrote before, our positions aren’t that far apart. You just like to use a shotgun while AA prefers a rifle.

Comment by Arthur Andersen Wednesday, Feb 18, 09 @ 1:06 pm
That was my point all along, and it wasn’t a shotgun approach. It was a frank description of what the facts revealed to me in both media reports and from pension documents. Thank you for softening your tone, however.

As far as Chelsea Clinton is concerned, I never said I had a problem with her being hired by the hedge fund. I merely stated that the only reason she was hired was because her name would give the company clout, and as long as they act legally I don’t care. Children of politically connected families often get hired either as favors or to give their firms political connections. I’ve never been concerned about Chelsea Clinton’s impact on Chicago politics.

Given the pension fund issues, however, Bill Daley’s recent hiring is worth looking into because of the rotting corpse that is Illinois politics and because of the myriad investigations surrounding his uncle. The Sun-Times thought so, too.

Comment by SAM Wednesday, Feb 18, 09 @ 4:25 pm