I bet you weren’t expecting this one.
I have a couple stories regarding diversity issues & Chicago pensions. I will actually not address the diversity issues, though — I think there are other aspects to the stories that I find interesting from a perspective of pension fund management.
CONTRIBUTIONS FOR BACK PENSIONS
Five years ago, the city agreed to hire 111 African-American firefighters bypassed by the city’s discriminatory handling of a 1995 firefighters entrance exam.
Although 13 of those black firefighters were women, the city insisted on using a controversial and now-abolished test of upper-body strength that was being challenged in federal court for discriminating against women.
Now, Chicago taxpayers are paying a $3.8 million price for that decision in the form of back pension payments.
Monday, the City Council’s Finance Committee is expected to approve the pension payment to cover both the employee and employer contribution to the pension funds dating all the way back to June 1, 1999.
Marni Willenson, an attorney representing the women, said the decision to use the disputed physical fitness test ultimately cost taxpayers 3.5 years worth of back pension payments.
Had the city heeded Willenson’s warning to scrap the test, the 12 black women–minus one woman who didn’t make it for reasons unrelated to the fitness test–would have been hired in March 2012 along with their male counterparts.
Instead, the women were discriminated against and forced to wait until November, 2015 to enter the fire academy.
“They should have gone in in March 2012. Instead, it took a lawsuit to get them in … The city owes a lot more now than they would have owed had they heeded our warning not to use the physical fitness test again that was already under challenge,” Willenson said. “They never should have used that test again — ever.”
There is so much to unpack for this. I don’t want to talk about the supposedly discriminatory tests, because I have no expertise in that area.
First off, I have the date confusion again, as with my prior post. Was it that they were still using a flawed entrance exam originally created in 1995 in 2012? (or 2010)
I don’t know.
But here is the bit I find intriguing: I have seen lawsuits re: police/fire admissions & promotions and requiring back pay.
But this one that has to do with back … pension contributions.
No, not pension payments to retirees, but the lawsuit is recognizing that pension contributions are equivalent to compensation.
So yes, this has a “diversity” hook, but what I find interesting as a precedent is that part of the remedy is additional contributions to the pension fund.
This is not quite on the level with actual public pension practice. So it should be interesting to see if other lawyers catch on to the principle here.
ASSET MANAGER DIVERSITY
Who’s managing (and profiting from) trillions of pension dollars? Mainly white men. But some Illinois funds are trying to change that.
Whether you’re talking about retirement dollars for teachers or firefighters, their pensions are a treasure trove—some $40 trillion, or more than twice the U.S. GDP—socked away for people who worked in the public sector. That’s a big number, but the discussions about which firms invest the money and who stands to benefit from the lucrative fees earned are small-scale.
In short, it’s mainly men who invest the money, and they reap the rewards despite plenty of well-intentioned pledges to route more pension business to women- and minority-led firms. “There’s a huge, obvious, glaring, painful, terrible, embarrassing problem,” says Illinois Democratic state Sen. Daniel Biss, pointing to the white men who dominate money management, particularly in private equity and hedge funds. “We (as public pensions) have very real leverage to take it on—let’s go do that.”
All year Crain’s has been examining women’s role in finance, from those exiting private equity to the rise of women in one division of Chicago-based CME Group. Here’s our latest installment.
DIVERSITY IS ‘GOOD BUSINESS’
The $9.5 billion Chicago Teachers’ Pension Fund invests just 15 percent with firms owned by women. That might seem like a paltry amount, but it’s double what most pensions muster, and a feat in a field where women lead less than 10 percent of firms. With a state mandate to consider and track their investments at women- and minority-owned firms, some Illinois and Chicago public pensions are among a small group leading the way in such investing and giving fledgling firms a fighting chance in a consolidating industry.
The nascent nationwide trend is driven partly by an attempt to better mirror the interests of pension stakeholders—like the overwhelmingly female teachers who are members of many of the biggest pensions in the country. Of the 10 biggest U.S. pension funds, three are for teachers—in California, Texas and New York—with more than $100 billion at each. While California is prohibited by law from allocating based on gender, they all have programs aimed at bolstering minority- and women-owned firms.
In the past 20 years, the Chicago teachers pension has posted benchmark-beating returns of 7.12 percent for its members, and in the past five years, it’s an even better 9.98 percent, net of fees. “It turns out that diversity is absolutely good business,” says Jay Rehak, a Whitney Young Magnet High School teacher who has been president of the teachers pension fund board for five years. “The numbers have borne us out.”
The fund overhauled manager hiring after the Illinois Senate started annual public hearings in 2003 to press pension leaders to adhere to a 1993 state law that encourages state and local pensions to invest with women and minorities.
Its allocations to women and minority firms have jumped to a collective 35 percent of its assets, from 6.5 percent when the Senate started the hearings. The pension remade its manager list by revamping its seven-person investment staff so that it’s now mainly women and half African-American. Its board also has open monthly meetings to hear from prospective managers.
So, this is a different diversity issue.
Again, I’m going to ignore the “diversity” portion and look at a few other things.
First, why do public pension funds outsource their asset management?
I have seen people like Leo Kolivakis making the argument that public fund management should be internal. He points specifically to Canadian fund performance for this.
But here’s the problem.
THE JOB IS THE SAME, THE SCRUTINY IS DIFFERENT
Take a look at this headline:
The University of California Regents approved an $841,096 bonus for Jagdeep Singh Bachher, chief investment officer and vice president for the fiscal year ended June 30, according to a posting of regents’ actions from its Nov. 16-17 meeting, on the UC website.
Mr. Bachher was paid a salary of $632,380. With the bonus, his total compensation amounted to $1.47 million. For the prior fiscal year, Mr. Bachher received a bonus of $874,838 on top of $615,000 salary, for a total compensation of $1.49 million.
I’m going to be extremely blunt here: in extremely skilled professions, only suckers work for the government.
[those who have to deal in bullshit can get higher pay in government]
Part of the reason that public pension funds have to outsource is to get basic competence, they are competing with private firms who can pay much more. Those who work for the government can have their pay splashed whereever.
So what happens is that public pension funds outsource some of their holdings, and pay fees as a percentage of the assets under management. The asset manager then compensates its employees out of those fees.
And then, you don’t get headlines as to the bonuses, because this isn’t public information, the way public employee salaries are.
I really don’t like various “$100K pensions” lists because some of these positions really do pay a lot more in the private sector. In general, the highest pensions are going to doctors teaching in university hospitals – to be competitive, medical schools at public universities have to pay rather high salaries, which translate into high pensions.
OTHER ISSUE: FIDUCIARY DUTY
So I’ve been really pissed off at political considerations going into public pension fund investment.
Because I’m one of those persnickety people who believe in certain principles.
Like, the point of the pension fund is to make sure THE PENSIONS GET PAID.
The problem is, public pensions accrue huge pots of money, which is an enticement to throwing away that principles and rewarding preferred groups. Perhaps you’ve heard of pay-to-play scandals before. I know Dave Sirota has.
I have bitched about fiduciary duties re: blacklists. And then there’s when the Calpers investment officer boasted about losing $1 billion on green energy initiatives.
Sorry, I’m too tired to find the WSJ article where the Calpers CIO was quoted on that about 6 years ago. But that stood out to me at the time, as it was a clear violation of fiduciary responsibilities.
So here’s the deal: part of the problem with diversifying their asset management outsourcing is that there are few qualified firms to fill that diversity slot. And there is a fiduciary duty for pension fund managers to mage sure they don’t hire incompetent asset managers.
They could control the diversity of said asset managers better if it was all in-sourced and they deliberately developed people ….
…..but they can’t pay competitive salaries & bonuses to hang onto these people.
So, good luck with the diversity initiatives, guys.
Nevada Pensions: Liability Trends
Pensions Catch-Up Week: Dallas Police and Fire (and Houston)
Rhode Island Pensions: Liability Trends