SPRINGFIELD – Gov. Rod Blagojevich's budget office is attempting to tell the State Universities Retirement System and the other public contributory systems how to invest the proceeds from the state's recent pension bond sales, rather than leave the individual boards to decide.
"Considering how huge a spending pressure the pension contributions are on the state, it would be foolhardy of the state not to have some kind of management oversight of how the pension funds are investing in these dollars," said Becky Carroll, spokeswoman for the governor's Office of Management and Budget.
But some say those suggestions, such as limiting short-term risk, may have more to do with protecting Blagojevich and his re-election campaign than with the long-term benefit of the systems' retirees.
The General Assembly narrowly voted this spring to allow the governor to borrow $10 billion in pension bonds. More than $2 billion of it was slated for pension contributions for this year and the budget year beginning July 1. The governor is counting on investment proceeds from the rest, about $7.3 billion, to pay back the loan plus interest when it comes due 20 years from now.
But the governor also appears to have another goal: avoiding any short-term loss that might be used as fuel in a campaign by Republicans, most of whom voted against the bond sale.
"You might call it protecting against political risk or political fallout," said State Universities Retirement System Executive Director James Hacking.
Carroll dismissed the idea that the investment suggestions being made by Blagojevich's budget director, John Filan, were politically motivated.
"The only thing we know for certain about the national and international markets right now is that there's uncertainty," she said. "Knowing that, we want them to be conservative in their investments. You lose the principal, those are hard dollars you're losing."
Hacking said the problem with Filan's emphasis on short-term protection of principal is that that kind of conservative investment practice is not going to generate the kind of long-term return that is needed to make the bonding deal work.
Filan scheduled meetings with representatives from the pension systems on June 3, 6 and 9 at the Chicago offices of Mesirow Financial, a money management firm on contract as a financial adviser to the Governor's Office of Management and Budget.
Another one is scheduled there late this afternoon.
While Carroll said Filan was only using the meetings to recommend an investment strategy, not tell the systems where to do business, some attendees interpreted it differently.
"Larry Morris (senior managing director of investment banking) from Mesirow Financial, apparently acting with John Filan's approval, recommended that the bond proceeds be invested in hedge funds, and he proceeded to indicate three Chicago firms that offer hedge fund strategies and one of them was Mesirow Financial, where the meetings were actually being held," Hacking said.
Teachers Retirement System Executive Director Jon Bauman said he took a different view.
"I chose to interpret that it was because it was a convenient location," he said. "I'm aware that other people didn't have that same interpretation, but I took it as merely a convenient location to have those meetings and I've worked from the interpretation that Larry Morris was representing the state at those meetings and not the firm."
Carroll said she was not aware of any law or statute that said such meetings must be held in a state building.
"Mesirow is our financial adviser, along with Kirkpatrick Pettis," she said. "We've obviously worked very, very closely with them. That's why they are involved."
The meetings, and Filan's attempts to direct the board's pension bond investments in a coordinated way, are just a part of the new administration's philosophy to be "proactive" with every agency and organization involved in doing state business, Carroll said.
"By proactive I mean opening the lines of discussion, having meetings, talking about strategy, talking about policy, and at the end of the day ensuring that everyone involved in this process is looking at new, innovative ways to better do business," she said.
One of the innovations under discussion is a proposal to merge the pension systems' assets into one mega-fund, to be run by the Illinois State Board of Investments.
While Filan opted not to pursue the controversial consolidation plan in the final weeks of the legislative session, Carroll said Tuesday that the idea "was never off the table."
The Teachers' Retirement System and the State Universities Retirement System are adamantly opposed to the consolidation proposal.
"The systems are different, the constituent groups that are served are different, with different needs, the rates of liability growth for the systems are different and the liquidity needs are different," Hacking said. "A one-size-fits-all strategy doesn't work."
Filan's renewed mention of the idea at the private meetings he arranged with the pension systems was not intended as a threat to induce acceptance of his investment suggestions, Carroll said.
"Those are completely separate," she said. "One's an apple and one's an orange. There's no tie at all."
Whether it was perceived as a threat or not, the Office of Management and Budget's approach does not yet seem to be working.
The Teachers Retirement System listened to suggestions made by Filan, but decided at its last board meeting to invest its share of the proceeds in accordance with its existing asset allocation policy.
"We have a professional investment consultant, who is my, as well as the board's, principal investment adviser, and if the state has opinions, we're willing to listen to them, but I think that the sole authority to invest the system's assets lies with the board of trustees," Bauman said. "It's pretty simple."
Bauman said he didn't have an opinion on whether Filan's suggestions were politically motivated.
"I think the thing that we are focusing on is that the investment allocation that we've used has exceeded the required return over the 10-year and 20-year horizon, and that's why we've elected to use that approach," he said.
Hacking said his board, which meets with Filan Thursday morning , is also hesitant to stray from its existing asset allocation strategy.
"Any competent investment consultant or adviser is going to tell you that you have to stick with your long-term asset allocation consistently," he said.
Bill Atwood, executive director of the Illinois State Board of Investments, which handles the pension systems for state lawmakers, judges and state employees, did not return a call for comment Tuesday.
You can reach Kate Clements at (217) 782-2486 or via e-mail at firstname.lastname@example.org.