bruce rauner | Pension360

Firms Managing Illinois Pension Money May Have Skirted Pay-to-Play Rules By Donating To Rauner Campaign

Over the course of his campaign, Illinois governor-elect Bruce Rauner accepted contributions from executives from firms that manage portions of the state’s pension money, according to a new report from David Sirota.

Those contributions may violate SEC pay-to-play rules, under which investment firms can’t make donations to politicians that have any influence—direct or indirect—over the hiring of firms to handle pension investments.

As Illinois governor, Rauner will have that influence – the governor has the power to appoint trustees to the state’s pension boards.

More from David Sirota on the donations:

During his gubernatorial campaign, Rauner raised millions of dollars from executives in the financial sector — and, despite the pay-to-play rule, some of the money came from executives at firms affiliated with funds that receive state pension investments. That includes:

– $1,000 from Mesirow Financial senior managing director Mark Kmety and $2,000 from Mesirow Financial managing director David Wanger. ISBI’s 2013 annual report lists Mesirow Financial as a hedge fund-of-fund manager for the pension system, and lists $271 million in holdings in Mesirow investment vehicles. In an emailed statement, a Mesirow spokeswoman told IBTimes that a separate branch of Mesirow works with the Illinois pension system and that therefore “we do not believe these contributions violate the pay to play laws.” Neither Rauner donor from Mesirow Financial “has any relationship with and/or receives any compensation from any state entity, nor do they pursue state business,” she wrote.

– $2,500 from Sofinnova general partner James Healy. TRS lists Sofinnova as a private equity manager. The system’s 2013 annual report says the firm manages $8.1 million of state pension money, and was paid more than $900,000 in fees that year. In June, TRS committed to invest another $50 million of state pension cash in Sofinnova. Healy did not respond to IBTimes’ interview request.

– $5,000 from Northern Trust’s Senior Vice President Brayton Alley. Illinois TRS lists Northern Trust Investments as an equity manager. The system’s 2013 annual report says Northern Trust manages $2.3 billion of state money, and made $548,000 in fees from the system that year. A spokesman for the firm told IBTimes, “We are aware of the obligations under various Illinois and federal laws and regulations” and “we are unaware of any violation to such requirements.”

– $9,600 from employees of the real estate firm CBRE. The 2013 annual reports of TRS and ISBI show a combined $184 million worth of state pension investments in CBRE investment vehicles. A representative for CBRE told IBTimes that the employees are not covered by the SEC rule because they are not involved in state pension business and not employed by the subsidiary of CBRE that does pension investment work.

– More than $90,000 in in-kind contributions from John Buck of the John Buck Company, which is listed as an investment manager for TRS. A spokesman for TRS, David Urbanek, told IBTimes that the pension system’s investment in the John Buck Company “is now in wind-down mode” and added that “the company is no longer actively managing TRS money.” A representative for the John Buck company said, “We do not manage money for TRS.”

While some of the contributions are relatively small, the SEC recently prosecuted its first pay-to-play case over donations totaling just $4,500. SEC sanctions can be strong: The rule can compel investment managers to return all fees they have collected from the pension systems after the political contributions were made.

Illinois state law also restricts contributions from state contractors to candidates for governor, though the executive director of ISBI, William Atwood, told IBTimes that the pension systems are exempt from the statute.

Specifics of the SEC rule in question, as explained by law firm Bracewell & Giuliani:

Rule 206 (4)-5, which was adopted in 2010, prohibits investment advisers from providing compensatory advisory services to a government client for a period of two years following a campaign contribution from the firm, or from defined investment advisers, to any government officials, or political candidates in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. Some de minimus contributions are permitted, topping out at $350 if the contributor is eligible to vote for the candidate, and the contribution is from the person’s personal funds.

Read Sirota’s entire report here.

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Pension Reform in Illinois Likely to Look Different Under Rauner If Supreme Court Rejects Current Law

Under Gov. Pat Quinn, Illinois passed a sweeping pension overhaul that cut COLAs and raised retirement ages for some workers.

But the state Supreme Court could reject the law. If that happens, it will be Bruce Rauner who will be able to shape reform legislation, which will likely look different than Quinn’s. From the Wall Street Journal:

Confronting the nation’s worst state pension shortfall was the top concern of Illinois Gov. Pat Quinn. The same will likely be true for Bruce Rauner, his newly elected successor.

The Illinois Supreme Court in coming months could dump the $100 billion problem in the lap of Mr. Rauner, who defeated Mr. Quinn on Tuesday to become the state’s first Republican governor in more than a decade.

A year ago, Mr. Quinn, a Democrat, won passage of a bill that lowered future pension costs by shrinking cost-of-living increases for retirees and raising retirement ages for younger employees, among other steps. State workers and retirees challenged the law, and a recent ruling by Illinois’s top court signaled the justices may end up overturning the law.

Mr. Rauner, who was a longtime private-equity executive before deciding to run for governor, has said he favors moving to a 401(k)-style system over pensions, but the shape that would take at the state capitol remains to be seen. Mr. Rauner was quiet the day after his big victory and his campaign declined an interview request.

Part of the challenge for any plan for Mr. Rauner will be getting it through the Democratic-controlled legislature. Many there agree the state has a big problem, but Mr. Quinn had a bruising fight with his own party to broker a deal.

To be sure, Illinois will continue to be a focus of the national debate that’s raging over how to fix ailing public pension systems. But on Tuesday, the Land of Lincoln wasn’t alone in having the issue play a role in the elections.

Bruce Rauner gives some hints about what his plans for pension reform would look like on his website:

I believe we must choose to address this problem head-on. No tinkering around the edges.

We must boldly reform our pension system. To do that, we can:

– Ensure pay and benefits do not rise faster than the rate of inflation.

– Eliminate the ability of government employees to receive massive pay raises before they retire just to increase their pension.

– Cap the current system and move towards a defined contribution system.

Implications for Pension Investments As Elections Put Ex-Financial Firm Executives in Office

The results of several state-level elections could have implications for pension fund investments as three ex-financial firm executives became their states’ respective governors.

David Sirota writes:

Wall Street firms and executives have poured campaign contributions into states that have embraced the strategy, eager for expanded opportunities. Tuesday’s results affirmed that this money was well spent: More public pension money will now likely be entrusted to the financial services industry.

In Illinois, Democratic incumbent Pat Quinn was defeated by Republican challenger Bruce Rauner, who made his fortune as one of the namesakes of Golder, Thoma, Cressey & Rauner (GTCR) – a financial firm that manages more than $40 million of the state’s $50 billion pension system. Rauner — who retains an ownership stake in at least 15 separate GTCR entities, according to his financial disclosure forms— will now be fully in charge of the pension system.

In Rhode Island, venture capitalist Gina Raimondo, a Democrat, defeated Republican Allan Fung. Raimondo retains an ownership stake in a firm that manages funds from Rhode Island’s $7 billion pension system. Raimondo’s campaign received hundreds of thousands of dollars from financial industry donors. She was also aided by six-figure PAC donations from former Enron trader John Arnold, who has waged a national campaign to slash workers’ pensions. Fung slammed Raimondo as a tool of Wall Street, but she eked out a victory after a libertarian-leaning third party candidate, Robert Healy, unexpectedly siphoned votes away from Fung.

In New York, Gov. Andrew Cuomo, a Democrat, handily defeated his Republican opponent, Rob Astorino, after raising millions of dollars from the finance industry. The New York legislature is set to send Cuomo a bill that would permit the New York state and city pension funds to move an additional $7 billion into hedge funds, private equity, venture capital, real estate and other high-fee “alternative” investments. Assuming the standard 1 to 2 percent management fees applies, that could generate between $70 million and $150 million a year in fresh fees for Wall Street firms.

Cuomo has not taken a public position on the bill, but his party in the legislature passed it by a wide margin, and he is widely expected to sign it into law.

In Massachusetts, Republican Charlie Baker appeared early Wednesday to have secured a narrow victory over Massachusetts Attorney General Martha Coakley. Baker was a board member of mutual funds managed by a financial firm that also manages funds from Massachusetts’ $53 billion pension system. Baker is also the subject of a New Jersey investigation over his $10,000 contribution to the New Jersey State Republican Party just months before New Jersey Gov. Chris Christie’s officials awarded his firm a state pension deal. Christie, whose Republican Governors Association spent heavily to support Baker’s campaign, blocked the release of documents related to that investigation until after the election.

Read the full analysis here.

Photo by Keith Ivey via Flickr CC License

Siedle: For Pension Funds, Private Equity Deals Can Come With Baked-In Conflicts of Interest

Over at Forbes, the “pension detective” Ted Siedle has penned an extensive column delving into the contractually-permitted conflicts of interest that can accompany private equity deals.

He hones in on Bruce Rauner and his firm, GTCR, which handled assets for numerous pension funds. Rauner and GTCR encapsulate the secrecy and potential conflicts of interest that pension funds can sign off on when they hand assets over to private equity firms.

Siedle writes of Rauner:

According to a report by Council 31 AFSCME Illinois, a few years ago Rauner’s firm received millions in Pennsylvania state pension assets to invest after a $300,000 campaign contribution to that state’s Democratic governor. In Illinois, a company owned by Rauner paid a member of the Illinois Teachers’ Retirement System Board more than $25,000 a month. His firm was selected to handle TRS pension dollars. The TRS member, Stuart Levine, is now in federal prison for public malfeasance.

It seems Rauner mastered the art of accessing public pension assets to manage, including (according to his firm’s SEC filings) reliance upon placement agents which have proven to be so controversial at public pensions across the country.

In my opinion, before Rauner can be deemed fit to serve as governor of Illinois, an in-depth review of his secret dealings with state pensions is called for– especially since the state’s pensions are in a crisis (which merits investigation) and 4 out of the state’s 7 last governors ended up in prison. The last thing Illinois needs is to compound its pension problems.

If Rauner wins, expect questions about his past and ongoing private equity business dealings to continue to swirl. In my forensic experience, greater scrutiny of opaque investments always reveals weaker investment performance.

Siedle dug through GTCR’s SEC filings. He found that when pension funds signed deals with the firm, they were often also permitting GTCR to engage in a multitude of scenarios that could lead to conflicts of interest for the firm. Siedle writes:

The litany of permissible conflict of interest scenarios (many of which are commonplace throughout private equity) detailed in Bruce Rauner’s firm SEC filings, should be disturbing to any so-called sophisticated investor. Unfortunately, public pensions routinely consent to such potentially harmful conflicts either because they don’t read, don’t fully comprehend the oblique disclosures, or simply don’t care that politically-connected insiders may be profiting at the expense of stakeholders. For example:

“The Adviser and certain employees and affiliates of the Adviser may invest in and alongside the Funds, either through the General Partners, as direct investors in the Funds or otherwise (emphasis added)…

The Adviser and its related entities may engage in a broad range of activities, including investment activities for their own account (emphasis added)…

The Adviser may, from time to time, establish certain investment vehicles through which employees of the Adviser and their family members, certain business associates, other “friends of the firm” (emphasis added) or other persons may invest alongside one or more of the Funds.

In certain cases, the Adviser may cause a Fund to purchase investments from another Fund, or it may cause a Fund to sell investments to another Fund.”

Translation from legal-speak: Rauner and his associates could invest directly, or create a special “family and friends” fund which could invest, at lower cost in shares of the same companies his firm purchased for funds in which public pensions invest. The associates, or “family and friends” fund, could profit by holding onto those shares, or immediately flip them, selling to the funds in which public pensions invest at a guaranteed, riskless mark-up.

Alternatively, GTCR could sell start-up companies it founded (or the family and friends fund could sell companies it purchased from GTCR) to funds the firm managed for public pensions at inflated prices.

“In addition, the Adviser may, from time to time, fund start-up expenses for a portfolio company and may subsequently sell such portfolio company to a Fund. Such transactions may create conflicts of interest because, by not exposing such buy and sell transactions to market forces, a Fund may not receive the best price otherwise possible, or the Adviser might have an incentive to improve the performance of one Fund by selling underperforming assets to another Fund in order, for example, to earn fees.”

Improve the performance of the friends and family fund by selling the laggards to other GTCR funds in which public pensions invest? Seems possible, based upon the firm’s SEC filings.

Read Siedle’s full column, which contains more analysis and insights, here.

Illinois Governor Candidates Talk Pensions in First Debate

One of the hottest issues in the race for Illinois governor is also one where the candidates differ starkly: how to fix the state’s retirement system.

So it’s no surprise that pensions came up during the race’s first debate.

There were no revelations here; Pat Quinn and Bruce Rauner both used the time to double-down on their stances. From the Associated Press:

Quinn signed legislation last year that would fully fund the retirement systems by 2045, in part by cutting benefits. Public-employee unions have sued, saying the overhaul violates a provision of the constitution that says benefits can’t be reduced.

Rauner supports letting retirees keep the benefits they’ve been promised but freezing the systems and moving employees to a 401(k)-style plan in which workers are not guaranteed a certain level of benefits. He said that plan — similar to what most private-sector workers have — wouldn’t save much money to start but would save billions in the long term.

“I don’t believe it’s right to change the payments to a retiree after they are already retired, and that’s what Gov. Quinn did,” Rauner said.

But Quinn called Rauner’s plan “risky” because workers’ retirements would depend largely on market performance. He said he deserves credit for making Illinois’ full pension payment each year he’s been governor — something his predecessors didn’t do. That contributed to Illinois having the worst-funded pension systems of any state in the U.S.

Illinois’ pension reform law has spent the last 6 months being fast-tracked through lower courts. A ruling on the constitutionality of the law could come before the end of the year.

Governorship Presents Conflict of Interest For Bruce Rauner, Pension System

http://youtu.be/Ge1jo2KwyNA

Illinois’ GOP candidate for governor, Bruce Rauner, touts in a recent ad (above) that his investment firm, GTCR, made millions for the state by helping the Teacher’s Retirement System (TRS) invest its pension assets in private equity investments.

The investments apparently returned 17 percent – but returns aren’t the issue.

There may be a serious conflict of interest if Rauner is eventually elected governor. That’s because the governor appoints six trustees to the TRS Board—and GTCR still manages investments for the fund.

That wouldn’t be a big problem, except Rauner is still a partner at a GTCR subsidiary.

David Sirota explains:

Despite assertions that Rauner has retired from GTCR, SEC documents confirm that Rauner remains a partner in a GTCR subsidiary. There are other ownership stakes in GTCR funds listed in Rauner’s campaign finance disclosure forms. And according to state documents, GTCR currently manages Illinois pension funds, meaning that if elected, Rauner would appoint the board of a pension system that employs — and pays fees to — his firm.

If Rauner became governor, he would elect nearly half of the board of trustees of the Teacher’s Retirement System. From the TRS website:

TRS is governed by a 13-member Board of Trustees. Trustees include the state superintendent of education, six trustees appointed by the governor, four trustees elected by contributing TRS members, and two trustees elected by TRS annuitants. Two appointed positions are vacant.

As David Sirota writes, there are other issues surrounding Rauner’s tenure at GTCR, as well:

Rauner’s campaign ad comes as his investments hold center stage in a federal civil trial. Chicago’s NBC affiliate says that the suit involves allegations “that GTCR, the Chicago-based firm where Rauner served as managing partner for decades before retiring in 2012, may have masterminded an operation to allegedly avoid responsibility for the deaths of elderly patients residing in nursing homes it had invested in.” The Chicago Tribune says that GTCR is being “accused by attorneys for the estates of several former nursing home patients of engineering a complicated 2006 sale to avoid wrongful death judgments.”

GTCR denies the allegations.

Rauner promotes a pension plan that would freeze the pensions of current workers and shift all workers into a 401(k)-type plan.

Photo by By Steven Vance via Wikimedia Commons

Quinn: No Plan “B” On Pension Reform

Most experts agree that Illinois’ pension reform law, passed in December, currently stands on shaky ground after a July ruling from the Illinois Supreme Court extended constitutional protection to retiree health premiums.

But Illinois Gov. Pat Quinn isn’t ready to write off the law just yet. In recent interviews, he’s also been steadfast that he’s not ready to start drawing up a backup plan, either.

From the Associated Press:

Gov. Pat Quinn argued Friday that it makes no sense to develop a contingency plan.

The Chicago Democrat, who “fervently” believes the plan is constitutional, said in an Associated Press interview that he’d like to get feedback from the courts before proceeding despite Illinois’ urgent financial difficulties.

“You don’t exactly help your position before the court if you say, ‘Well I’ve got a plan b out here, maybe you could take that instead,’ and it’s not even passed by the Legislature,” Quinn said. “That’s a very bad strategic position …”

Quinn’s comments come as he faces a tough re-election challenge from Republican businessman Bruce Rauner (ROW-nur). He opposes the law Quinn signed in 2013.

After years of debate, lawmakers approved a plan that cuts benefits for most employees and retirees aimed reducing the state’s massive unfunded liability.

Unions sued over the law, saying it violates the Illinois Constitution.

But in a separate case on retiree health care, the Illinois Supreme Court in July ruled a law requiring retirees to pay more for health insurance was unconstitutional. The decision centered on the constitution’s strong protections for retirement benefits.

Quinn has drawn criticism for the lack of backup preparations. Last week, a columnist for the Chicago Tribune wrote:

Gov. Pat Quinn says he doesn’t need a “Plan B” to address the problem because he believes the Illinois Supreme Court will uphold the pension reform law he signed in December.

[…]

Quinn’s faith in the Illinois Supreme Court is farfetched. In July, the court issued a thumping 6-1 ruling striking down a previous legislative effort to cut health care subsidies to state retirees and employing language that seemed to serve as a funeral oration for the pension reform law.

Addressing the state’s “but we can’t afford to provide the benefits we promised!” argument, the majority wrote that the unequivocal pension protection clause in the Illinois Constitution “was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

Even if Quinn genuinely has hope that the court will gymnastically OK the pending law nevertheless, he still owes it to us to reveal what he proposes to do when — I mean if — those hopes are dashed.

As Pension360 has covered, pensions are becoming a bigger part of the race for Illinois governor in light of the July court ruling that opened the door for reworked reform measures.

Do Illinois’ Candidates For Governor Need A Pension “Reality Check”?

Pensions are one of many issues taking a prominent hold in the race for the Illinois governorship.

Both candidates, Pat Quinn and Bruce Rauner, recently sat down in front of the Chicago Tribune’s editorial board for an informal debate on, among other issues, how they would each handle the state’s pension crisis.

One member of the Chicago Tribune’s editorial board, Eric Zorn, listened to both sides. Now he says both Quinn and Rauner need to stop living in their “pension fantasies”.

On Quinn, Zorn writes:

Gov. Pat Quinn says he doesn’t need a “Plan B” to address the problem because he believes the Illinois Supreme Court will uphold the pension reform law he signed in December.

[…]

Quinn’s faith in the Illinois Supreme Court is farfetched. In July, the court issued a thumping 6-1 ruling striking down a previous legislative effort to cut health care subsidies to state retirees and employing language that seemed to serve as a funeral oration for the pension reform law.

Addressing the state’s “but we can’t afford to provide the benefits we promised!” argument, the majority wrote that the unequivocal pension protection clause in the Illinois Constitution “was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

Even if Quinn genuinely has hope that the court will gymnastically OK the pending law nevertheless, he still owes it to us to reveal what he proposes to do when — I mean if — those hopes are dashed.

Zorn then shifts to Rauner and his plan to shift Illinois workers into a 401(k)-style system:

Rauner owes it to us to explain why his ideas — he admits they’ve yet to rise to the level of a plan — are any more likely to survive court challenges than the bipartisan reform law, which he strenuously opposed.

…When I asked if joining such a plan would be mandatory, spokesman Mike Schrimpf echoed word-for-word the dodge Rauner employed in his Tribune candidate questionnaire: “We need to wait to see the parameters of what the Supreme Court says in order to carefully craft a plan that will pass constitutional muster.”

Mandatory enrollment of current public employees into 401(k)-style accounts by which they will ultimately fund their own retirements would likely not pass that muster. They’re generally not as lucrative for employees as plans that guarantee monthly pension payments.

Rauner knows this. It’s why he’s promised to allow police officers and firefighters to keep their “special retirement” that includes a standard pension, and why he projects “billions” in savings.

Zorn also decried the administrative costs associated with 401(k) plans. You can read his full editorial here (subscription required).

Photo by Chris Eaves via Flickr CC License

Illinois Gov. Quinn Accuses Challenger Bruce Rauner Of Paying Off Lawmakers To Vote Against Pension Reform Bill

Things got heated on Tuesday when Illinois Gov. Pat Quinn and challenger Bruce Rauner met for a face-to-face debate in front of the Chicago Tribune editorial board.

[Watch the full video here.]

The session lasted 80 minutes but arguably the most interesting point came when Quinn dropped an intriguing allegation: that Bruce Rauner had offered to pay off lawmakers to vote against the pension reform bill passed by Illinois last December. From the Chicago Tribune:

Quinn said that in December, during the heat of negotiations over a measure to drastically change public employee pension benefits, House Republican leader Jim Durkin told him that Rauner was offering campaign cash to GOP lawmakers to vote against the bill.

Rauner acknowledged working against the pension bill, which Quinn signed into law, but denied the governor’s allegation. Durkin aides referred calls to the state Republican Party, which did not directly address Quinn’s allegation in an emailed statement.

Bruce Rauner has proposed a plan to freeze the pensions of all current state employees and switch them into a 401(k)-style plan.

But Rauner has softened his stance in recent days, perhaps because he doesn’t want to alienate voters in what’s shaping out to be a close race.

During a public appearance Wednesday, Rauner said the following, according to WUIS:

“I’m a believer that we need to protect the pensions for the police officers, and give them a special retirement beyond what’s standardly done in other pensions.”

He didn’t clarify exactly what he meant by the statement.

Photo by Chris Eaves via Flickr CC License

Illinois Governor, Challenger Spar over Pension Links to Cayman Islands

It’s become a tradition for politicians of either party: on the campaign trail, at some point, you need to accuse your challenger of dodging taxes. The race for Illinois governor is no exception, but there’s an interesting spin on this one.

Current Illinois Gov. Pat Quinn earlier this week accused wealthy challenger Bruce Rauner of dodging U.S. taxes by placing his money in offshore accounts in the Cayman Islands.

A Chicago Tribune investigation had previously revealed that Rauner paid a tax rate of around 15 percent on much of his fortune, even though his wealth made him eligible for tax brackets above 30 percent.

But Rauner fought back, first claiming that his offshore investments did not impact the tax rate he paid. Then, he claimed Quinn himself had money in the Caymans. His pension, to be exact.

Rauner claims that Illinois pension funds have hundreds of millions of dollars in Cayman-based investments.

From the Chicago Sun-Times:

Rauner’s campaign said the Teachers Retirement System has invested $433.5 million in Cayman Islands-based funds while the State Board of Investment has $2.3 billion in offshore holdings, which includes some Caymans-related funds though the agency could not specify how much.

Both are tax-exempt entities and, unlike individual investors, derive no direct tax benefit from investing in funds based there, spokesmen for both agencies said. TRS invests on behalf of current and retired suburban and downstate teachers. The State Board of Investment oversees pension investments for current and retired state workers, university employees, judges, lawmakers and state officials, including the governor.

“If Pat Quinn refuses to apologize and tell the truth, he should immediately move to divest all state investments from companies and funds domiciled overseas, including in the Cayman Islands,” Rauner’s campaign said.

As was bolded, pensions systems are tax-exempt and so there’s no tax benefit from putting money offshore.

Quinn’s camp, when pushed for a statement, declined to say whether Quinn would like the pension systems to stop investment in Cayman-related funds. But the Governors spokeswoman told the Sun-Times:

“The governor has no authority to direct pension fund investments, and he’s not about to start getting involved. That’s really not the issue.”

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