Downstate here.

And so it goes.    You try to figure out something that’s already complex with the full disclosure given by the State of Illinois and then you find out there still isn’t enough information to know the answer.

Why does any of this matter to a Downstate Republican?  In case you are wondering the answer is no, I’m not getting a pension from the State.   Neither is anyone in my family.  It’s not personal, it’s just financial.

If the state pensions fall short by paying high fees that are ‘hidden’ or ‘high’ then the compounding won’t happen.   And you and I will be making up the difference in higher taxes.

The Honeypot and the bees

“A fundamental impediment to investment performance is the political nature of public pensions themselves. Lucrative investment management fees often serve as a honeypot. In the pension world, it is not unusual for friends of legislators, political donors and so on to get special treatment. Boards are not constructed to maximize investment expertise, but rather to represent various political constituencies. Trustees usually do not have existing investment knowledge and nearly all have limited time to dedicate to this voluntary service.” –  Who said this? Marc Levine  The Rauner appointed Chairman of the Illinois State Board of Investments.

The same Marc Levine who is a fellow at Illinois Policy Institute, which is being investigated in a series of reports by Chicago Sun-Times and Pro Publica for possible tax fraud but that’s a whole other honeypot.

The same Marc Levine who was appointed by Aaron Del Mar to be New Trier Township committeeman in Oct 2015.

The same Marc Levine who became the Chairman of the New Trier Republican organization in June 2015.    New Trier Republican is the home township for RINOs Bruce Rauner and former Sen. Mark Kirk.

Rauner’s fortune was built on his firm’s management of public pension funds. In 2013, Crain’s Chicago Business wrote:

Mr. Rauner, a millionaire who retired as GTCR chairman last year in anticipation of a run for the state’s top office, led a firm with more than $10 billion under management largely from public pensions nationwide, including the biggest in Illinois. After earning millions of dollars from this work, Mr. Rauner says he wants to use his insights to overhaul the state’s pension system, the worst in the country in terms of meeting its obligations, with an estimated $100 billion shortfall.

Rauner resigned as chairman from GTCR prior to running for Governor but continues to hold a large stake in the company, which receives fees from GTCR’s management of Illinois pension funds.

Republicans are supposed to be fiscally conservative and not the party of ‘tax and spend’.    It’s not a Republican value to feed at the very trough that we complain that Democrats are doing.

So what’s going on now?

Here’s the deal.   The Illinois State Board of Investments unanimously approved a revised asset allocation at the January 29, 2016 meeting for the $15.6 billion pension fund for the General Assembly, Judges, and State Employees.

The changes in portfolio construction include:

  • “aimed at adding value and reducing costs for beneficiaries.”This sounds great!
  • This new asset allocation demonstrably increased the role of passive strategies within the portfolio   This is all the rage now – Just buy the index and be done with it already
  • markedly reduced the hedge fund allocation while seeking to manage costs and reduce complexity.
    The “2 and 20” fee system that hedge funds use to charge their clients is overpriced and “borders on obscene,” billionaire investor Warren Buffett, chairman and CEO of Berkshire Hathaway,  “Two and 20 is going to make a lot of people rich, and it’s going to make very few investors rich,” Buffett told CNBC, calling the charges “ridiculous.”  So reducing hedge fund allocation sounds great!
  • increased the portfolio’s exposure to private equity. Wait…what???  Private Equity charges the “2 and 20” fee system.   They’re complex and your money is tied up for years and years and even private equity profiteer Bruce Rauner said he’s very concerned about.

Follow me on this…..

For the Illinois Board of Investments’ annual reports, hedge fund fees show up as an expense in the budget.    So if you reduce the amount of your portfolio that is investing in hedge funds then that expense line will go DOWN.

However, if you  If you simultaneously INCREASE the amount you invest in Private Equity then the Private Equity fees will go UP.

So if you lower the number of your fees paid to Hedge Funds but INCREASE the amount you pay to Private Equity are you really lowering the cost?  And who is getting the benefit?

The Honeypot and the fees

Well, here’s where the surprise shows up….There’s no way to know.

Why?  Because the fees paid to Private Equity don’t show up on the expense line.   In fact, they don’t show up anywhere as a line item called Private Equity fees.

How are the fees being paid?

The Private Equity fees are TAKEN OUT of income being paid to the pension fund.    It shows up on the income line.   Kind of like a payroll deduction but in this case, we’re only seeing the take-home pay in your paycheck and not the gross pay.   There’s NO WAY to know how much these fees are from looking at the disclosure made to citizens of Illinois.

The Board and staff say they’re “placing great emphasis on increasing the transparency and overall performance of the portfolio”.

What do you think?

And there’s more…. There is NO REPORT listed on the Illinois State Board of Investment’s Website for the fiscal year 2017 that ended June 30, 2017.   What’s the deal?    Did the teachers post a better return than ISBI?  Who knows?

Hedge Fund fees show as an expense and Private Equity fees show up in the income line





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