Readers, when I first read that retirees and employees in the Chicago Police pension system were pursuing a “forensic audit,” that seemed like nothing more than wishful thinking. It seemed plainly obvious that the plan’s massive underfunding was explained by the lack of a commitment to fund the plan properly, and by years of delusion that future favorable investment returns would solve the plan’s problems. But it turns out that there are serious issues with how that plan was managed that compounded these underlying issues, as revealed in a new report released at the end of August.
The background to the report is this: after this rapid decline in pension funded status over the past two decades (the police pension was, after all, 71% funded as recently as 2000), a group of retirees, widows, and active officers formed a group called the CPD Pension Board Accountability Group in February 2020, asking for a full audit of the fund. Their requests were denied, even when they offered to pay the full cost themselves, so they hired the author, Christopher Tobe, who set about doing the research based on publicly-available information as well as through making a series of Freedom of Information Act (FOIA) requests, the largest number of which, Tobe says, were illegally denied.
Here are some of the highlights of the report:
It is reasonably well-known that the pension plan has been underfunded for years, and that the state, in setting a new funding plan, allowed a “funding ramp” in 2011 and then re-set that ramp in 2016, so that funding according to the “90% funded by 2055” target only began in 2020. However, Tobe alleges that “Chicago has consistently underfunded the plan more than the statutory amount, blatantly breaking the law, with no consequences.”
Regarding fees and management, Tobe alleges that the pension fund has “failed to monitor and fully disclose investment fees and expenses” and that “fees and expenses could be 10 times that which they disclose” because the fund’s disclosure “omits dozens of managers and their fees.” He also reports that the Fund claimed that “hundreds of contracts for the investment managers” are exempt from FOIA, and denied him access to the fund’s own analysis of fees. He concludes that “PABF may have over 100 ‘ghost managers’ in funds of funds,” that is, the fund is required to disclose its managers but it fails to do so, even though Tobe has identified them through other sources.
Tobe also found that “pay to play” is alive and well in Chicago. A 2014 report found that “former Mayor Rahm Emanuel received campaign donations of over $600,000 from investment managers who manage accounts for the PABF and other city funds.” In addition, Mayor Lightfoot has received $200,000 in donations from firms managing Chicago pension funds.
In addition, while poor performance is never a proof of failure in isolation, Tobe found that the pension fund had well-below-average investment performance, compared to other funds — at the 90th percentile (bottom 10%), which he attributes to the fund’s use of alternative investments, with high fees not compensated for with high returns. He also raises concerns of cooked books, but cannot confirm this because of the city’s repeated denial of records requests.
With respect to governance, the fund violates a fundamental aspect of prudent governance because its Chief Investment Officer is not a professional with qualification in the field, but simply a trustee and active-duty policeman, and, what’s more, one who has “22 allegations of misconduct as a police officer including one for bribery/official corruption.” Further, no staff members hold the credential of a CFA charter, another marker of professionalism. Another related governance issue is the use of offshore investments, e.g., in the Cayman Islands, which lack key governance and transparency protections of US-based funds.
Finally, with respect to financial reporting, “the Chicago Police Pension has decided to stop issuing Comprehensive Annual Financial Reports,” issuing a report neither in 2019 nor in 2020 (though it has made public the actuary’s reports for those years and makes available the valuations back to 2007 on its website).
There’s more, but I’ll stop here, as this is more than enough to illustrate that there are troubling practices at the fund that only compound the already-serious funding issues. It is not possible to know how much these mismanagement issues have effected the plan’s investment returns and plan expenses, but regardless of the magnitude, none of this should be happening. The city of Chicago wants us all to believe that the corruption which has been part of the city’s legacy for so many years, is in the past — but this report calls that into question. And, regrettably, Tobe’s report has gone practically unnoticed in the local media, with, to the best of my knowledge, coverage only at the local CBS affiliate.
As always, you’re invited to comment at JaneTheActuary.com!
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