Questions surround Chicago teachers’ pension fund, long overdue forensic investigation

Sixteen years after a forensic investigation into the Chicago teachers’ pension was first proposed by deeply concerned administrators, as hailed in the New York Times

, the pension claims that she has contracted a forensic examination. If the scope of the investigation will finally seek answers to long-standing questions from trustees regarding potential conflicts of interest, fiduciary violations and violations of the law regarding its investments, the pension will not tell.

An early 2005 New York Times article titled, Unmask this retired consultant, observed that why public pension funds were so reluctant to investigate whether they might have been harmed by the conflicting loyalties of their investment consultants was a mystery. As the article noted, the prejudices of these consulting firms worried the Securities and Exchange Commission enough for the regulator to conduct an industry-wide investigation of retired consultants and to recommend enforcement action against some of them. ‘between them.

The SEC investigation, which the DOL and GAO later joined, ultimately concluded that pension consultant conflicts of interest involving Wall Street fund managers paying consultants to recommend them to pensions were ubiquitous, poorly disclosed and resulted in significant financial loss. SEC Office of Inspections and Compliance Reviews released report May 16, 2005 and took action against a handful of investment advisory firms in the months following the report’s release. (My firm recommended the targeted review of the investment advisory industry, when the SEC asked them for an initiative that would have a high impact on pensions in particular, and worked with all three federal agencies for two years on the project. )

The NYT article went on to say that the board of directors of the Chicago Teachers Pension Fund was considering a proposal from my firm to conduct a full conflict of interest audit of its investment consultant, Mercer Inc., a unit of Marsh & McLennan.

. The fund had $ 10.3 billion in assets and had been a Mercer client since 1990.

NYT Pulitzer Prize-winning reporter Gretchen Morgenson said: “If the Chicago Teachers Fund continues the audit – it will decide next month – it could very well encourage other pension funds to conduct similar investigations… . It was time.

“I hope other funds will follow the lead of teachers,” Morgenson concluded.

Despite encouragement from the NYT and evidence that in Chicago only local news matters, the teachers’ fund has failed to take the lead.

While some trustees have recommended and voted in favor of the forensic investigation into these industry abuses proposed in 2005, the potential damage to the pension was never investigated and quantified at that time.

The teachers’ pension has changed placement advisers over time.

Again in September 2015, my firm, in a letter to the Board of Directors, recommended a judicial inquiry into conflicts of interest, undisclosed fees and potential violations of the law regarding financial advisers responsible for the investments of the funds. It is not clear whether the letter has already been presented to Council and if not, why not. For some reason, it appears that no proposal to investigate the potential harm to the pension mentioned in the letter was considered by the Council in 2015.

As a result, concerns of trustees about pervasive industry abuses that may have undermined the return on pension plan investments have gone unanswered for decades. Since the Government Accountability Office has estimated that investment consultant disputes can result in returns that are 1.3% lower, the damage to the $ 13 billion pension from this form of industry wrongdoing alone can amount to almost $ 170 million a year and over time – even without making matters worse – can exceed $ 3 billion.

At the October 15, 2020 board meeting, the Trustees themselves again requested a forensic audit of the Fund. This time, five months later, on March 6, 2021, the pension publicly announced that it had entered into a contract with BDO United States, srl for an alleged “forensic audit”.

Recently, I sent Michelle Holleman, Director of Pension Communications, the following questions:

Will BDO’s investigation include an examination of conflicts of interest, fiduciary breaches, hidden and excessive charges and potential violations of law related to the investment portfolio? When will the investigation be completed? Will the findings of the investigation be made public for review by pension stakeholders?

To which Holleman replied:

The CTPF Board of Directors engaged BDO USA, LLP to perform a forensic audit of the Chicago Teachers’ Pension Fund.

An audit is underway as part of the Board’s fiduciary duty. Your request for a contract and amendments has been sent to our legal department and will be treated as a FOIA.

A completion date has not been determined.

The CTPF is a public establishment and operates transparently. The information provided in the audit report will be made public in accordance with Illinois law and the Freedom of Information Act.

I again posed the question that Holleman strategically failed to answer: whether BDO’s investigation would include a review of conflicts of interest, fiduciary breaches, hidden and excessive charges, and potential breaches of the law related to the investment portfolio. Holleman replied, “The scope of the audit is currently confidential. “

So much for pension transparency.

Later, in response to my request for a copy of the contract with BDO, Daniel Hurtado, the legal director of the pension informed me that after consulting BDO (emphasis added), the pension will only produce a redacted copy of the agreement. “Redactions will be made for trade secrets and business or financial and business or financial information obtained from a person or company where trade secrets or business or financial information is provided by virtue of an allegation (presumably by BDO) that they are proprietary, privileged, privileged, or confidential, and that disclosure of trade secrets or business or financial information would cause competitive harm to the person or business, and only to the extent that the claim s ‘applies directly to the requested documents.

To have personally conducted more forensic investigations into public pensions than any person dead or alive – over $ 1 trillion – was worrying. Public pensions, which are funded by taxpayers and civil servants, are supposed to be the most transparent of all pensions. State freedom of information laws are supposed to ensure public control of these trillions of public funds.

All agreements related to my medico-legal inquiries into public pensions have been made public. There is no need for secrecy here. On the contrary, pension stakeholders deserve to know whether the scope of the investigation includes investments, because if not, the investigation is worthless – a waste of money, in my opinion. Moreover, if the forensic investigation did indeed include all investments, all Wall Street fund managers hired by the pension should be informed and urged to cooperate, so that only parties kept in the dark about the scope of the survey would be the stakeholders, whose retirement savings are threatened. It makes absolutely no sense.

Additionally, unlike the potentially misleading statements by Communications Director Holleman above, there is no way that the final findings of the forensic investigation can be made fully public (without redactions) without revealing the scope of the l ‘investigation. Thus, teachers who patiently wait for the eventual publication of the report in months or years to see its scope make no sense.

As I detail in my book, Who stole my pension? How to stop the looting, my forensic investigations focusing on widespread abuses in the investment sector have revealed that investment mismanagement and related embezzlement is the main cause of pension underfunding. Recapturing ill-gotten gains is also often crucial in restoring sustainability.

“A forensic audit that does not examine investment strategies and the pension portfolio, including conflicts of interest and fees, usually suggests laundering – giving the appearance of reform without examine areas with the greatest potential financial impact, ”says Chris Tobe, CFA who completed a forensic check of the Chicago Police Pension in August 2021 and discovered rampant investment problems.

Tobe believes the participant-funded police pension audit he conducted and his conclusions on investments resulted in immediate significant changes to the pension level, including the defeat of the chairman of the board who was also a full-time police officer and acted as chief investment officer for the plan. Note that the Chicago Teachers’ Pension Fund’s over $ 13 billion debt is the highest among the eight pension systems linked to the city and despite the fact that Chicagoans face a property tax burden. which ranks among the highest in the country, the teachers’ pension system is only 45% funded.

Jack Silver, a retired teacher, longtime former administrator and vice president of pension who supported the audit in 2005, believes the investigation is long overdue and its scope should be disclosed immediately. “I don’t know why it’s a secret. Under FOIA, that should be disclosed, ”Silver told me.

Chicago Teachers’ Pension Fund stakeholders, including taxpayers and plan members, deserve to know the truth about the scope of any forensic investigation they pay for. This is a simple question that deserves an honest answer and secrecy is not necessary: ​​Will the forensic investigation include an examination of conflicts of interest, fiduciary offenses, hidden and excessive fees and charges? potential legal violations related to the investment portfolio? Yes or no? Teachers deserve to know.

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