Illinois’ largest public employee pension fund paid more than $1 billion in fees to hundreds of financial managers over the past decade but reaped only a paltry annual return on its investments over that same period, according to a Better Government Association investigation.
The Teachers Retirement System (TRS) of Illinois — which is financially strapped and concerned about its long-term viability — paid more than $1.3 billion for money managers and brokerage firms to handle its $30 billion-plus in financial assets during a 10-year period ending in fiscal 2010.
Despite paying big money for high-powered investment expertise, TRS’ 10-year average rate of return during this span was a mere 3.7 percent excluding the cost of fees, far below its 8.5 percent annual target return.
Below Median Results
Including fees, the pension’s return during that period was 3.3 percent, according to TRS, just below the median of 3.4 percent for public pensions during that period.
Almost 200 firms received more than $1 million in fees, while the top 10 firms averaged $38 million each during the 10-year period between 2001-2010, the BGA found.
Included in the top 10 is Washington, D.C.-based private equity firm Carlyle Group, locally-based Capri Capital Partners, and the now-defunct Commonwealth Realty Advisors co-founded by William Cellini, an Illinois political powerbroker who was convicted of extortion and bribery in federal court last November.
‘Shocking Amount for Little Value’
“It’s a shocking amount of money for very little value,” says Frank Partnoy, professor of law and finance at the University of San Diego School of Law and an expert on financial markets and regulation. “Two things are surprising: One is just the sheer dollar amounts, which are massive. The other is the number of vendors.”
In a written statement to the BGA, TRS said its payouts to money managers are in line with other public pensions of similar size and that its returns were hurt by “steep losses sustained primarily during the 2008 and 2009 global financial crisis that pulled down the system’s 10-year average rate of return.” TRS added that its investments rebounded with 2011’s 24 percent return.
While the pension fund’s returns have been uneven, the amount of money going to outside financial managers escalated over the decade.
The BGA analyzed TRS fee information and found:
• From 2001 to 2010, TRS annual fees more than doubled from $83 million to almost $204 million. During that period, assets grew by a little more than one-third from $23.3 billion in 2001 to $31.3 billion in 2010.
• TRS paid more than $382 million, or about 28 percent of all its fees, to its top 10 money managers and advisers between 2001-2010, according to figures provided by TRS.
• Private equity firm Carlyle was by far the largest vendor for TRS during that 10-year period, according to figures TRS provided the BGA. TRS invested in 11 of that firm’s funds, paying Carlyle more than $71 million. In 2010, TRS recorded declines for five of the Carlyle funds in which the pension invested.
Carlyle also has a controversial past.
In 2009, Carlyle agreed to pay a $20 million fine to resolve its role in an investigation of alleged public pension-related corruption in New York state conducted by Andrew Cuomo, who was then the state’s Attorney General and is now New York’s governor. A Carlyle spokesman declined to comment on the firm’s relationship with TRS.
• Millions were paid to clout-backed Commonwealth Realty Advisors Inc. Cellini’s now-defunct investment group received $30.8 million in TRS fees between 2001-2010 — sixth highest on the top 10 list of financial vendors for the pension. Last November, Cellini was convicted on two federal charges stemming from an effort to extort money from a co-founder of Capri Capital, another investment firm doing business with TRS.
TRS is woefully underfunded. It reports more than $81 billion in long-term liabilities and had enough assets to meet less than half of those obligations as of last June.
Recently TRS has added that its underfunding, coupled with the state’s growing deficit, could mean insolvency by 2030.
Outside industry experts say even when taking the 2008 and 2009 market downturn into consideration, TRS is not getting a big enough return for the amount of money it’s spending on financial adviser fees.
Fees ‘Off the Charts’
“I don’t know how they’re (TRS) paying fees like this,” says Dale Rosenthal, assistant professor of finance at the University of Illinois Chicago. “This is so off the charts, they should be making magic for that kind of money.”
In its statement, TRS said its “investment management fees are competitive, and often superior, to public pension plans of a similar size.”
Indeed, some other state funds are paying higher fees: the Pennsylvania State Employee Retirement System spent $1.3 billion over the past five years for a 3.6 percent return.
Still, other state funds are now aiming to drive down fees, including in Wisconsin, New York and California, home to the nation’s largest state pension fund at $242 billion. California’s pension fees recently grew to $1 billion per year.
Robert Reed ([email protected]) is the Better Government Association’s Director of Programming and Investigations. Brett Chase ([email protected]) is a Chicago-based freelance reporter and BGA investigator.
“Sticker Shock: Lofty Fees, Low Returns,” Better Government Association report: http://www.bettergov.org/sticker_shock_lofty_fees_low_returns/?categoryid=1