CHICAGO - When three city of Chicago pension funds were looking for someone to manage a $50-million real estate portfolio in 1990, they turned to Capital Associates Realty Advisors.
It's run by Thomas Rosenberg, a major contributor and trusted adviser to Mayor Richard Daley and, according to one trustee, no other firms were considered for the contract.
When the Cook County pension fund reviewed the performance of Weiss Peck & Greer as one of its largest money managers, it decided to keep the New York-based firm despite returns on the county's investments that put Weiss Peck among the bottom 20% of similar money managers.
James Kiley, the head of the firm's Chicago office, has longstanding ties to local government and makes regular campaign contributions to Cook County Treasurer Edward Rosewell and Cook County Board President Richard Phelan.
A two-month investigation by Crain's Chicago Business, a sister publication to Pensions & Investments, delved into local and state public pension funds.
The unsettling result: Cook County, the state of Illinois and four Chicago pension funds all are giving lucrative contracts to firms that help finance the campaigns of the politicians who have influence over the pension funds.
In some cases, the firms made political donations and later received a money management contract; in others, the firms first received the contract and then began making contributions.
Campaign contributions are the most quantifiable aspect of the multifaceted relationship between pols and the managers. But it's the mix of sometimes modest contributions, coupled with political connections and clout-heavy friendships, that fosters a cozy relationship between politicians and money managers.
"As a public pension fund money manager, you figure (contributions) come with the territory," said one money manager.
Such contributions are not illegal. Still, they're jarring at a time when municipal bond underwriters have curtailed most political donations in the wake of several East Coast scandals involving allegations of influence peddling.
Board members of the Chicago pension funds say political contributions played no part in their selection of money managers.
But, in several cases, the money managers have been mediocre or poor performers. In others, the firms had minimal track records when they were hired. And critics say some were hired without a thorough examination of other managers.
In addition, the decisions to hire and fire managers are made with minimal public involvement and no regulatory oversight.
Conflict of interest?
At best, the situation represents a potential conflict of interest for the politicians. At worst, it provides a systematic opportunity to reward political allies at the expense of taxpayers and pensioners.
"I don't think these money managers are (making contributions) out of the kindness of their hearts," said Clinton Krislov, a Chicago lawyer who specializes in pension fund law. "They're doing it for one purpose and one purpose only - and it's not good government."
The correlation between political donations and management contracts varies across pension funds.
For example, political contributors are found less frequently at the main state of Illinois pension fund than at the city of Chicago and Cook County pension funds.
Still, at every one of the six pension funds examined for this article, many money managers also are substantial political contributors. Among them:
Capital Associates and its principals have donated $25,000 to Mayor Daley over the last five years. The firm collected $2.4 million in fees from three Chicago pension funds in the last three years. Its performance for those funds has been average by one measure, slightly below average by another.
Bear Stearns & Co., New York, and its principals contributed about $6,100 to Mayor Daley over the past five years, including a $500 donation from Milton Rubin, the head of the firm's asset management operation who lives on New York's Long Island.
Bear Stearns reaped $931,797 in fees from city pension funds between 1990 and the end of 1993. Its performance has been average.
Weiss Peck & Greer received $1.2 million in fees from the Cook County pension fund over the last five years. Mr. Kiley has donated $4,500 to Mr. Phelan and $2,500 to Mr. Rosewell over the same period. Its performance for the county has been below average.
Gov. Jim Edgar received $18,450 from Ariel Capital Management Inc. over the last five years, and the firm earned $282,500 in fees from the Illinois State Board of Investment. Its performance has been above average.
Although information on pension money managers and their performance ostensibly is public, the public pension funds, for the most part, didn't want to talk about it. For this story, the Freedom of Information Act was used to gather historical data on firms that manage money for the Illinois State Board of Investment, the County Employees' Annuity and Benefit Fund of Cook County and the four city of Chicago funds - the Municipal Employees' Annuity and Benefit Fund, the Laborers' and Retirement Board Employees' Annuity and Benefit Fund of Chicago, the Firemen's Annuity and Benefit Fund of Chicago and the Policemen's Annuity and Benefit Fund of Chicago.
What follows are detailed examples of how public pension fund boards selected and retained politically connected firms, some of which have tallied below-average returns.
Capital Associates, founded 17 years ago by Chicago entrepreneurs Thomas Rosenberg and Terry McKay, has $1.3 billion in assets under management, about three-quarters of that from tax-exempt organizations, such as municipalities.
Mr. Rosenberg is a longtime fund-raiser for Democratic candidates, including former presidential hopefuls Walter Mondale and Michael Dukakis. In Chicago, he has earned a reputation as a dependable financial supporter and trusted adviser to Mayor Daley on business issues.
Strong ties with City Hall can benefit real estate firms such as Capital Associates in many ways. Besides pension fund contracts, city officials regularly make decisions on real estate issues ranging from zoning to who gets municipal development projects.
Capital Associates was first hired by the city pension funds when the Municipal and Laborers' boards voted in May 1990 to invest $5 million in an apartment fund run by Bear Stearns with help from Capital Associates.
That same year, the boards of the Municipal, Laborers' and Firefighters' pension funds decided to jettison the manager of a real estate fund, called Public Pension Fund I, in which they had jointly invested in 1984.
The 11-property fund had performed respectably, according to fund officials. But trustees felt the existing manager, Meyer Real Estate, was not doing enough to maintain the buildings' value.
Capital Associates had only been working for the funds for only a matter of months when the boards voted to hand the $50 million portfolio over to the firm.
"We knew them and they'd done a good job," said James Capasso Jr., executive director of the Laborers' fund.
Before the end of 1990, the Municipal fund also voted to turn over a $46 million mortgage portfolio to Capital Associates.
Within a matter of seven months, Capital Associates had taken under management about $100 million in city of Chicago pension fund assets - about 3% of the total assets of the Municipal, Laborers' and Firemen's funds.
By the end of 1993, Capital Associates managed 59% of the three pension funds' total real estate and mortgage assets, not including the money the firm co-manages with Bear Stearns.
"We were quickly on point" in dealing with a troubled portfolio of properties, said Mr. Rosenberg. "I think that gave them some confidence about our abilities."
City Treasurer Miriam Santos says she objected to Capital Associates' hiring because, when the firm was hired to take over Public Pension Fund I for the three city pensions in 1990, she saw no presentations from other real estate managers.
In 1991, the firm's first full year of performance for the Municipal fund, one real estate portfolio that Capital Associates controlled rose 5.3%, vs. an average loss of 2.3% that year for institutional real estate managers, according to the Pensions & Investments' Performance Evaluation Report. But a portfolio of mortgages also controlled by Capital Associates tumbled 15.6% in 1991, vs. a 15.7% gain by a Lehman Brothers mortgage index.
Despite what appears to have been a weak mortgage portfolio performance, the Laborers' and Municipal funds decided to hire Capital Associates for a Resolution Trust Co. vulture fund in 1992.
The RTC vulture fund has been a modest success. Its return in 1993 was 6.1%, while the average real estate firm managed only a 5.5% return, according to PIPER. For the past four quarters, the fund has returned 34%, says Capital Associates.
Overall, real estate funds handled by Capital Associates for the Municipal Fund have dropped an average 3.3% a year during the three years ended Dec. 31. The average real estate firm's portfolio dropped 0.5% a year during the same period, according to PIPER.
Mr. Rosenberg says comparison with other real estate managers is unfair because the firm did not choose to invest in most of the properties it is managing.
"We're working through the properties that we inherited," he says. "We didn't pick these properties."
But Capital Associates didn't start at a disadvantage in the case of Public Pension Fund I.
The value of the portfolio was written down about 25% just before the firm's track record starts at the beginning of 1991, according to pension fund documents. Experts say that magnitude of writedown was average for the year, or even a little generous.
As a result, the firm was able to start with low valuations for the properties and didn't have messy writedowns stain its reputation.
Both Capital Associates and city pension fund officials say political favoritism played no role in the firm's selection.
"We have not requested any help and have not received any," says Mr. Rosenberg.
Weiss Peck & Greer
Weiss Peck & Greer has been one of the most successful firms in winning new business from local public pension funds in recent years.
The Cook County pension fund hired the firm in 1988, the Chicago Municipal and Policemen's funds followed in 1989 and the Chicago Laborers' added the firm earlier this year.
All told, Weiss Peck is responsible for about $275 million in Cook County and city workers' pension money - worth about $800,000 a year in fees.
All that growth has come since the firm recruited political heavyweight James Kiley into its Chicago office in February 1988.
Before joining Weiss Peck, Mr. Kiley had spent 17 years in government, including a seven-year stint as an assistant to then-Gov. Jim Thompson and as director of the Illinois Housing Development Authority.
Since leaving government, Mr. Kiley has maintained good relations with local politicians.
He says he knew many Cook County employees from his days working on financing projects with the IHDA. And over the past five years, he's given $4,500 to Mr. Phelan and $2,500 each to Mr. Rosewell and Mayor Daley.
Mr. Kiley says political connections play no role in winning public pension fund contracts.
"I used to think it was important," he says, "but it really gets down to your numbers and your investment strategy."
Weiss Peck has managed to hold onto local pension fund money in spite of its weak investment performance on those portfolios.
The firm runs a balanced fund for the Cook County pension fund that averaged annual returns of 11.6% over the past five years. A simple index of stocks and bonds would have averaged 12.6% over the same period, and the median institutional balanced manager averaged 13.3%, according to PIPER.
The Cook County pension fund put Weiss Peck on a watch list in 1990 because of its performance, but removed it the next year.
"There was a period in time when there was concern about their performance," says John Fitzgerald, the fund's executive director. "They were notified and they've done better."
But the firm has had problems picking both stocks and bonds. Its two oldest stock portfolios, core growth equity and dynamic growth equity, have both ranked in the lowest 20% of their respective stock categories, according to PIPER.
The firm's short-duration fixed-income investments have been average. Its intermediate-term bond investments have ranked in the bottom 20% of all bond funds in its class.
Mr. Kiley concedes the firm had performance problems in 1990 and 1991, but says that, more recently, its returns have improved dramatically. The firm earned an 11.8% return for the Cook County pension fund last year, while the average balanced fund showed an 11.2% gain. Mr. Kiley says the improvement has continued this year.
"We think we're doing very well," he says.
Besides the firm's performance, the circumstances surrounding its most recent contract, to manage $32 million for the Laborers' fund, raises questions.
Rita Condon, who acts as Ms. Santos' proxy on the Laborers' board, says trustees voted to hire Weiss Peck in March of this year without considering other managers. Laborers' board minutes make no mention of consideration of any other managers at the time Weiss Peck was hired.
The pension board's trustees declined comment.
Mr. Kiley says Weiss Peck is dramatically cutting back on its political donations. While the firm is not covered under the Securities and Exchange Commission regulations curbing contributions by municipal underwriters, founder Stephen Weiss wants to show sensitivity to the issue.
Other 'connected' managers
There are other politically connected underperformers profiting from local public pension funds.
Goldman, Sachs & Co., New York, donated $101,500 to Mr. Phelan's campaigns over the last five years, including $84,500 from Wade Fetzer III, a partner in the firm's Chicago office.
The firm, which started managing county money in 1987, has averaged annual returns of 10.5% for the Cook County pension fund over the last three years, compared with 14.4% for the median balanced manager.
Over the last five years, the firm has collected $835,378 in fees from the county pension fund for its asset management services.
The fund's Mr. Fitzgerald says Goldman was put on a watch list in December 1992 because of its performance, although a final decision has not been made regarding the firm's fate.
Goldman Sachs' Mr. Fetzer did not return calls seeking comment.
Dean Witter Reynolds Inc. of New York made a string of donations to Mr. Phelan, capped by a $7,500 check in 1991.
The same year, the firm was hired to manage about $18 million for the county pension fund. Although the firm fell behind other balanced managers in its handling of county money the last two years, the pension fund upped Dean Witter's assets under management to about $100 million by the end of 1993.
The firm has collected $374,302 from the county in the last two years.
A spokeswoman for Mr. Phelan says he has no influence over the Cook County pension fund: "It's a completely separate board and they make the decision about who manages that money."
A Dean Witter spokesman says there's no connection between contributions and its money management contract. Also, the firm says it has stopped giving state and local political donations as part of recent restrictions on municipal bond underwriters.
The Chicago Policemen's pension fund has $55 million in three Heitman Financial real estate funds that have averaged losses of almost 10% per year over the last three years. The company donated $6,700 to Mayor Daley in the last five years.
Miles Berger, Heitman's vice chairman, said there's no relationship between contributions and winning money management contracts.
A few money management firms that make political contributions have racked up good returns for public pension funds.
John Rogers Jr. and his Ariel Capital Management Inc. donate to many top local politicians. Over the past five years, the firm and its president have given $19,725 to Mayor Daley, $18,450 to Gov. Edgar, $5,000 to Mr. Rosewell and $3,900 to Mr. Phelan.
At the same time, Ariel's performance has been superior. The firm, which got its start managing $1 million for the city's Municipal fund in 1984, has averaged yearly returns of 16.6% over the last 10 years, while equity funds averaged 15.5% for the same period.