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Union fund loses state pension business

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* Sun-Times

Minutes after supporters of Gov. Bruce Rauner assumed leadership of one of the biggest government pension funds in Illinois, they shook up the way hundreds of millions of dollars are invested — in the process ousting a union-run money manager.

The Republican governor’s appointees to the Illinois State Board of Investment voted to shift $697 million into investments designed to mimic the financial markets’ performance — a move the board’s new chairman says will benefit taxpayers by slashing multimillion-dollar money-management fees.

In line with Rauner’s anti-organized labor stance, one of the managers the board dumped was Ullico, a union-owned investment firm that lends money to construction projects that agree to hire union labor.

The board’s vote to pull its $65.4 million investment in Ullico’s “J for Jobs” fund was along political lines. The four Rauner appointees and two Republicans who are on the board because of other offices they hold voted to dump Ullico. Two Democratic elected officials and a union leader voted “no.”

Marc Levine, the Rauner appointee elected board chairman at the start of the Sept. 17 meeting, says the governor’s battle with organized labor had “absolutely” nothing to do with the decision.

Says Rauner spokesman Lance Trover: “The governor’s office does not, and did not, instruct the Illinois State Board of Investment on how to invest taxpayer dollars.”

Go read the whole thing for more of the board’s reasoning, which makes some sense. But also keep in mind that Ullico’s president and CEO is Ed Smith, a former bigtime labor union leader from southern Illinois.

posted by Rich Miller
Monday, Sep 28, 15 @ 10:21 am

Comments

  1. elections have consequences…

    Comment by Not Rich Monday, Sep 28, 15 @ 10:26 am

  2. Victors–spoils. Not much to see here.

    Comment by SAP Monday, Sep 28, 15 @ 10:26 am

  3. 52% of the investment was being held in cash…it would have been malpractice keeping the money with them no matter who they were.

    Comment by so... Monday, Sep 28, 15 @ 10:30 am

  4. “Unlike the three other firms that the Rauner appointees voted to terminate, Ullico wasn’t fired for “underperforming” on investment returns.

    “Rather, the company had been placed on the state pension board’s “watch list” because too much of its portfolio — 52 percent — was being held in cash, waiting to be lent. Ullico’s returns, though, had been slightly better than those of investment funds it was measured against, board records show.”

    Comment by Precinct Captain Monday, Sep 28, 15 @ 10:30 am

  5. This one will likely turn out to be one where criticism makes little sense.

    Comment by A guy Monday, Sep 28, 15 @ 10:36 am

  6. This is one area of governing that should be all about performance and not about the spoils of an election.
    I do not know what factored into this decision so I will not judge. But this should never be a political decision.

    Comment by Anonymous Monday, Sep 28, 15 @ 10:37 am

  7. Was Ariel a minority owned firm?

    Comment by 360 Degree TurnAround Monday, Sep 28, 15 @ 10:43 am

  8. @360 Degree TurnAround

    The Ariel fund mostly invests in equities of small companies that Ariel believes are undervalued, but show consistency in earnings. The fund also avoids investing in companies with poor environmental records, and those involved in the production of nuclear energy, defense, and tobacco products.

    http://www.thestreet.com/quote/ARGFX/details/fund.html

    Comment by Anonymous Monday, Sep 28, 15 @ 10:54 am

  9. Give me a break. These guys aren’t even trying to hide what they’re doing, so it’s crazy that they lie about it.

    ISBI has more than $15B in assets. They are holding, as policy, a little more than 20% in fixed income and cash, to the tune of $3.3B.

    The $33 million or so Ullico was holding for construction loans represents 1% of ISBI ’s cash position.

    But that was a big problem?

    God forbid you get a better return on job-creating investments, rather than pumping it into some index fund, where you risk principal.

    Comment by Wordslinger Monday, Sep 28, 15 @ 11:08 am

  10. Rich, was Marc Levine one Blago’s people? I thought he went to jail.

    Comment by Mama Monday, Sep 28, 15 @ 11:11 am

  11. B.R. did right by the state with this move. Why would the state pay fees for someone to hold cash? A kid with no understanding of the markets could do that. I would like to see a fee cap of 15 bps on all management fees. Good job B.R. for saving the state money.

    Comment by Money Man Monday, Sep 28, 15 @ 11:16 am

  12. Mama, I think it was Stu Levine.
    And to the topic at hand - yes elections do have consequences.

    Comment by illini Monday, Sep 28, 15 @ 11:17 am

  13. @Mama, Marc Levine used to work at the Illinois Policy Institute. He is a failed Republican candidate for state senate.

    To the post, Ullico provided better than expected returns. Dropping them certainly looks like political retribution.

    Comment by Reality Check Monday, Sep 28, 15 @ 11:19 am

  14. Money Man @ 11:16…According to Lance; “Says Rauner spokesman Lance Trover: “The governor’s office does not, and did not, instruct the Illinois State Board of Investment on how to invest taxpayer dollars.”….BR didn’t “do” this…LOL

    Comment by Are Ya Kiddin' Me? Monday, Sep 28, 15 @ 11:22 am

  15. Ed Smith was the head of Laborers local in Southern Illinois. Now where else have they been wrapped up in controversy lately? The dots arent hard to connect.

    Comment by SO IL M Monday, Sep 28, 15 @ 11:24 am

  16. “Minutes after supporters of Gov. Bruce Rauner assumed leadership of one of the biggest government pension funds in Illinois, they shook up the way hundreds of millions of dollars are invested — in the process ousting a union-run money manager.”
    Which union? TRS or AFSCME or one of the other unions?

    Comment by Mama Monday, Sep 28, 15 @ 11:29 am

  17. Sigh, why are apples and ranges compared here? A REIT/real estate investment has different fees and returns from an investment fund. (And what were the investment returns of Illico?) REITS/real estate investment is used to diversify and stabilize returns from total funds, ie. stocks go down, bonds go up.

    A REIT/real estate investment that invests in Illinois jobs is on a whole different level than an investment firm in Texas and not in the least comparable.

    And why the huge range in fees that Garcia Hamilton and Associates will charge? And are those total fees that include trading fees, fund of fund fees, etc.? Can’t this just be put out to bid? Or will this contract (as other investment contracts are) be “proprietary” and unavailable to view.

    Comment by otherwise Monday, Sep 28, 15 @ 11:33 am

  18. So saving $2+ million in fees is political? I want more political decisions then, because this is just a good move to save the state money.

    Comment by Dudeman Monday, Sep 28, 15 @ 11:35 am

  19. Good for them

    Comment by anon Monday, Sep 28, 15 @ 11:39 am

  20. So Ullico contributes $125K to the Democratic Party of Illinois over the years…DPIL provides $62K of in-kind contributions to Clayborne in 2014…Clayborne votes to keep Ullico. Thus completing the circle.

    Comment by nixit71 Monday, Sep 28, 15 @ 11:41 am

  21. Good. Lower investment fees please. In the long run, that’s usually better than high management fees.

    But of course the decision was political, just as a previous adiministration’s decision to invest in a union-owned investment firm was.

    Comment by Robert the Bruce Monday, Sep 28, 15 @ 11:46 am

  22. =So Ullico contributes $125K to the Democratic Party of Illinois over the years…DPIL provides $62K of in-kind contributions to Clayborne in 2014…Clayborne votes to keep Ullico. Thus completing the circle.=

    Find a money related decision by either a D or an R that doesn’t work the same way and I will buy you a coke.

    Comment by JS Mill Monday, Sep 28, 15 @ 11:46 am

  23. FTSE NAREIT (REIT Index) for 2014 was 27.2%

    Comment by otherwise Monday, Sep 28, 15 @ 11:47 am

  24. From time immemorial the State pension funds have been used in part to reward political friends- If Rauner does one thing as Governor he should impose enhanced scrutiny as to how the pensions invest the State’s money to achieve better returns for the benefit of the participants and taxpayers who as we know are on the hook to make up for subpar performance

    Comment by Sue Monday, Sep 28, 15 @ 11:51 am

  25. ====To the post, Ullico provided better than expected returns. Dropping them certainly looks like political retribution.=====

    Following this logic, I guess they were dropped using the precise same criteria for why they were “picked up” in the first place.

    Comment by A guy Monday, Sep 28, 15 @ 11:56 am

  26. Gee, Guy, it must be disappointing to know that the guvs peeps are lying about the motivation for dumping an investment firm that was outpacing other funds on ROI while financing high-paying construction jobs in the state.

    But who wants those things, anyway?

    Comment by Wordslinger Monday, Sep 28, 15 @ 12:05 pm

  27. No word on which financial firm will get that business? Total earning to the fund is what is important not the fees.

    Comment by Liberty Monday, Sep 28, 15 @ 12:18 pm

  28. “And she was the most qualified person for the job and had absolutely nothing to do with the fact she my sister’s kid”…

    Comment by Mouthy Monday, Sep 28, 15 @ 12:19 pm

  29. All My Assets Live in Texas.

    Comment by Amalia Monday, Sep 28, 15 @ 12:25 pm

  30. Please check my math as I compare Apples to Oranges:
    433,774 / 65,400,000 = 0.00662 = .662%
    So Illico was dismissed because it charged .662% and employed many, and earned a little better than 27.2%, while a Texas firm was hired that may charge up to 0.78% ?

    Doesn’t take a rocket scientist to realize this was not a decision based on numbers.

    Comment by otherwise Monday, Sep 28, 15 @ 12:46 pm

  31. ISBI members have a fiduciary responsibility to plan participants. Ullico apparently outperformed its benchmark. Elections do have consequences, but they are trumped by fiduciary responsibility. Abdicating fiduciary responsibility does have consequences, too. Rauner’s appointees need to be investigated. New day?

    Comment by truthteller Monday, Sep 28, 15 @ 12:52 pm

  32. Otherwise and a couple other folks-Ullico is charging .78%. Garcia Hamilton is charging .09%.

    Comment by Arthur Andersen Monday, Sep 28, 15 @ 12:52 pm

  33. ==investments designed to mimic the financial markets’ performance==

    Not the best time to mimic the markets.

    Comment by Touré's Latte Monday, Sep 28, 15 @ 12:58 pm

  34. Read the article and the facts. They of course are buried in near the end.
    The money invested with Ullico will be transferred to Garcia Hamilton & Associates, a Texas firm that plans to invest it in a less-complicated, fixed-income fund. That company will charge fees significantly lower than Ullico’s on the returns it produces — from .78 cents on the dollar to .09 cents.

    Comment by Dudeman Monday, Sep 28, 15 @ 1:01 pm

  35. The better question many of you auto– anti Rauner types should be asking is Ed Smith who is CEO at ULICO had been Chairman of the State Board Of Investments appointed by Blago- how much business went to Ulico to facilitate that arrangement? A Union head president of a Life Insurance company? seems pretty sweet. Just asking.

    Comment by Sue Monday, Sep 28, 15 @ 1:07 pm

  36. By the way- for any of you history types- Blago’s close victory in the 2002 primary was due to his surprising strength down state where Ed Smith helped him a ton- Then Smith gets appointed to the State Board of Investments chair slot- Spin forward and Ed Smith is now CEO of a money manager he was in a position to help while at ISBI. And you guys are complaining about Rauner- ISBI should be swept clean by Rauner in its totality.

    Comment by Sue Monday, Sep 28, 15 @ 1:15 pm

  37. For you people hanging your hat on the “outperformance”-ULLICO’s own website indicates that the J for Jobs performance objective is to “outperform a fixed income benchmark.”
    As fiduciaries to State employees, judges, and legislators, ISBI is (and was) hard pressed to justify paying ten times the going rate for fixed income level performance. Creating union jobs is not a part of that fiduciary duty no matter what one’s day job might be.

    Comment by Arthur Andersen Monday, Sep 28, 15 @ 1:21 pm

  38. AA-Maybe paying 10 times the going rate was simply to pay Ed Smith’s salary after he left ISBI to join ULLICO- but of course things like that never happen in the public pension arena- Any of you read about what the Comptroller in NY State was doing at his fund where he was the sole trustee and I think is now still in prison.

    Comment by Sue Monday, Sep 28, 15 @ 1:24 pm

  39. Sue, your imagination on these matters has always been substantially more fertile than mine lol. But don’t forget the former CEO of Calpers, that shining beacon on a hill to which all public pensions must bow to their greatness, has a CEO in the slammer and more recent findings that the people in charge of their $30 billion private equity program don’t know a bull from a boiler, if you will.

    I neglected to mention that the fixed income benchmark Ullico has been outperforming has a 10-year return of 4.9% annually gross of fees.

    Comment by Arthur Andersen Monday, Sep 28, 15 @ 2:07 pm

  40. ==This is one area of governing that should be all about performance and not about the spoils of an election.==

    Agreed. But: They were apparently outperforming firms that have been retained.

    Whatever. They probably got the business as a political move in the first place, and lost it the same way.

    Comment by walker Monday, Sep 28, 15 @ 2:25 pm

  41. It may be correlation and not causation, but appointment to boards that manage state pension funds - as opposed to more “Federal Reserve” type systems where these pension fund managers are more civil service types and aren’t hired and fired from administration to administration - is one of the best predictors of a state pension fund being very under-funded, according to some interesting research out of University California.

    Comment by ZC Monday, Sep 28, 15 @ 2:26 pm

  42. === Wordslinger - Monday, Sep 28, 15 @ 12:05 pm:

    Gee, Guy, it must be disappointing to know that the guvs peeps are lying about the motivation for dumping an investment firm that was outpacing other funds on ROI while financing high-paying construction jobs in the state.

    But who wants those things, anyway?===

    Gee, Sling,
    I was only using the same simple logic as the person who suggested it was political retribution. We’ll see how this turns out and whose production with these investments is better. This is one area where even a Mensa like you ought to realize the Governor has some successful experience in. But that isn’t what you do.

    Comment by A guy Monday, Sep 28, 15 @ 3:12 pm

  43. ===Whatever. They probably got the business as a political move in the first place, and lost it the same way.===

    Precisely Walk.

    Comment by A guy Monday, Sep 28, 15 @ 3:33 pm

  44. ZC your quoted research is interesting. Those studies compare funds which hire employees to actually buy and sell investments vs, funds that hire private money management firms to do the same. IL is almost 100% the latter. I have read them and share your concern about correlation v. causation.

    Comment by Arthur Andersen Monday, Sep 28, 15 @ 3:52 pm

  45. is there a 1 billion cap. construction bill somewhere in the system? didn’t the road builders get a wink and nod ? if so will it be called or is this another slap to those that give/gave heavy $ to MJM and JC ? and because of “relations” with those that give/gave construction industry is being “b**chslapped” ? hmmm

    Comment by railrat Monday, Sep 28, 15 @ 3:58 pm

  46. AA- if Rauner had the option to do it-Illinois would be well served hiring Larry Fink’s Blackrock to evaluate the investment allocation and managers of all 5 Illinois systems and do something to finally enlist true professionals overseeing the State’s pension funds. The Boards as well as the direct employees are not and have never been financial wizards

    Comment by Sue Monday, Sep 28, 15 @ 4:02 pm

  47. interesting no response from Mike Carrigan ? has there been a more influential labor leader in southern Ill. in last 30 years than Mr. Smith ? NO

    Comment by railrat Monday, Sep 28, 15 @ 4:15 pm

  48. Arthur Anderson, if the Suntimes article is correct, I stand by my figure of Illico having and expense ratio of .662. I understand your comment that Illico has a higher expense ratio, but the statement you are referencing in the Suntimes can be read both ways. My interpretation is that since Illico’s expense ratio is .662, it cannot be .78, so I am interpreting that there is a variable rate with Garcia et al.

    Perhaps I am biased, but I think we need to keep Illinois dollars in Illinois, so a Texas firm does not cut it. With Illico we get a nice investment result, jobs, and the taxes from those employed through the investments, construction, etc. Same goes for GTCR vs an out of state firm.

    Comment by otherwise Monday, Sep 28, 15 @ 4:21 pm

  49. Guy, one minute you say it’s about investment returns, a few minutes later you agree with Walker that it’s about politics, which the governors peeps deny.

    If you’re going to spin something, try to keep track of your own nonsense.

    Comment by Wordslinger Monday, Sep 28, 15 @ 4:24 pm

  50. Sling, I agreed with Walk’s point about the political connection being the “in” and the “out” in this case.

    Having a strong yield is a universal test. Having lower fees; also universal.

    It doesn’t just happen in politics, it happens in business. People bring in the people they’re used to working with and they know and trust. No more. No less. No spin. And…not really much of a story here. Bugs you more than the dude who just lost the gig. He’s probably grateful for the time he had. He’s not hungry or wet now, is he?

    Comment by A guy Monday, Sep 28, 15 @ 4:41 pm

  51. – you ought to realize the governor has some experience in.–

    Did not you read Trover’s quote? The governor had nothing to do with this decision.

    If you want to be a team player, run the same play. You’re all over the place.

    Comment by Wordslinger Monday, Sep 28, 15 @ 4:46 pm

  52. “biggest government pension funds ” Rich, which pension fund are you referring to (TRS pension fund or SERS pension fund)?

    Comment by Mama Monday, Sep 28, 15 @ 5:06 pm

  53. Other, re-read the article. Ullico was paid 78bps-Garcia will be paid 10. There is no “variable rate.” The trade papers are also covering this and reporting the identical figures.

    The last time I checked, the big 4 public pensions invested over $20 billion with Illinois-based investment firms-isn’t that enough?

    Comment by Arthur Andersen Monday, Sep 28, 15 @ 5:06 pm

  54. Sue, what happens when you bring in any private bigfoot like Larry Fink is that he will say that the funds need more staff and to hire them from the private sector. Fine. Good luck finding people from that world who want to live in Springfield or Champaign and take State wages. The latter can and is being addressed but the former will always being an issue.

    I’m more concerned with results than throwing insults at people, though. TRS announced last week that their performance ranked in the top quartile of comparable funds for all reporting periods ending June 30, 2014, including a 9.4% annualized return per year over the last 30 years.

    Comment by Arthur Andersen Monday, Sep 28, 15 @ 5:19 pm

  55. Make that June 30, 2015.

    Comment by Arthur Andersen Monday, Sep 28, 15 @ 5:20 pm

  56. Arthur Anderson, do the math, the 0.78% figure is not supported for Illico expenses ($433,774/$65,400,000). Note that GTCR was reported to have double digit gains over ten years, yet last year’s figures were not reported. Could that be because of poor results such as bankruptcies?
    http://www.chicagobusiness.com/article/20140726/ISSUE01/307269985/rare-joint-investment-by-gtcr-madison-dearborn-forced-into-bankruptcy
    If we are using the same criteria for determining the investment firms to service Illinois, such as expense rations, then we need to look very hard at private equity firms who often command fees similar to hedge firms 2% of assets and 20% of profits.

    And Arthur, the name is otherwise.

    Comment by otherwise Monday, Sep 28, 15 @ 5:44 pm

  57. AA- you are not reading what they published. For FY 15 returns were I recall 4.4 percent(pretty anemic) and actually below their own hurdle target for the year. The better comparison might be what Yale posted-11 plus percent in a difficult year

    Comment by Sue Monday, Sep 28, 15 @ 5:45 pm

  58. Declare victory, pass your tax hike.

    Comment by Yellow Dog Democrat Monday, Sep 28, 15 @ 6:17 pm

  59. Otherwise, it’s Andersen not Anderson lol.

    You can do that call ten times and it’s still meaningless. The reported expenses and fee rate are what they are, likely because of a different value of assets over the past year than the value reported in the paper.

    I have no idea what you’re talking about with “GTCR not reporting.” Because Crain’s didn’t report it? C’mon, man. As far as private equity, them are the prices. Take ‘em or leave ‘em. No one is holding a gun to anyone’s head to invest. I’ll pay Moneybags 1.5 percent to get 80 percent of the profits if he has a track record.

    Sue, you’re going into troll territory when you compare a public pension to a university endowment. That anemic return beat 85 percent of other public pensions.

    Comment by Arthur Andersen Monday, Sep 28, 15 @ 6:26 pm

  60. And I see BS has been appropriately called on the 52 percent number. More politics from the Rauner administration. Why aren’t the Democrats calling them on it, or at least calling them on it in a way that more than half the state hears?

    Comment by Angry Chicagoan Monday, Sep 28, 15 @ 6:48 pm

  61. If we had a pension system that will be solvent after the next SSA life expectancy increase, I might give a care.

    Comment by Blue dog dem Monday, Sep 28, 15 @ 6:50 pm

  62. So the fund was dumped for political reasons…..and I am sure there is No WAY that a fund led by Ed Smith was ever selected for political reasons by a previous administration..

    Comment by Reformed Monday, Sep 28, 15 @ 10:20 pm

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