SPRINGFIELD, Ill. - The $20 billion Teachers' Retirement System of Illinois received a blue- print for redesigning its entire operation, including portfolio management structure, staff operations and external relationships.
The blueprint comes from Independent Fiduciary Services Inc., Washington. The board will meet in February to take action on the report.
Many of the changes recommended by IFS already were in the works, said Keith Bozarth, executive director.
Mr. Bozarth was hired in August to help clean up the fund, which had been criticized for, among other things, using its former chief investment officer as an external manager.
According to the report, the board needs to "critically evaluate the structure and number of investment managers." The fund had 54 managers in 72 assignments as of Sept. 30.
IFS found the fund lacks both internal and external accountability, and that it needs better operating rules.
There "is an urgent need to define, clarify and restructure the respective roles of the trustees, staff and service providers. . . . Currently, the system suffers from serious ambiguity regarding who is responsible for what, significant duplication of effort, territorial concerns and insufficient delegation of authority from board to staff," the report said.
The report also recommends the board redo its investment policy statement and design a new investment manual. IFS said adherence to long-term asset allocation needs to be more tightly controlled.
Some of the recommendations were pretty obvious, Mr. Bozarth said.
Work on issues such as asset allocation ranges, manager termination guidelines and improving the quality of board meeting minutes is under way, he said.
Moreover, the creation of two new roles - CIO and internal auditor - will help meet many of the recommendations in the IFS report, he said.
New CIO Mark Caplinger has begun work on a new investment policy, and the attendant changes, Mr. Bozarth said.
Mr. Bozarth noted Jane Locascio, the new auditor, officially reports to both Mr. Bozarth and the board of trustees, broadening the amount of information available to trustees.
Other findings in the report referred to Illinois Teachers' external business relationships, its travel policy and the use of brokerage reports and performance fees.
The IFS report states: "the roles of legal counsel (internal and external) should be more clearly defined." The board "uses outside counsel in roles where comparable pension funds would use internal counsel or an investment consultant," the report states.
Mr. Bozarth said a special trustee committee has been studying the issue for months.
The recommendations concerning legal counsels parallel complaints voiced last summer by trustees. Trustee Hugh Brown strongly fought the rehiring of Rudnick & Wolfe, Chicago, as the fund's legal counsel, but was overridden following a heated debate.
Regarding its relationship with pension consultant Callan Associates Inc., San Francisco: "the system's most recent contract with Callan covers many specific functions, but omits other important ones," such as risk control and analyzing private equity and real estate deals, the report states.
The pension consultant relationship review process also has begun, Mr. Bozarth said. The system last week issued RFPs for a pension consultant; responses are due in mid-January; a decision is expected by March 1. Incumbent Callan will be considered, he said.
As far as a review of its relationship with custodian Northern Trust Co., Chicago, that process has just barely begun, he said.
The IFS report briefly suggests the system create "a more rigorous set of policies and procedures governing travel by trustees."
IFS also said the fund could make better use of brokerage reports in evaluating firms for possible termination, and notes fund officials spend a lot of time and effort calculating performance fees.
Mr. Bozarth said perhaps there had been some overkill in calculating the performance fees. The fund earlier this year was found to have overpaid some of its performance-based fees; it also demanded some of its managers return their performance fees because changes in manager contracts had not gone before the board for a vote.
Some of the recommendations by IFS that concern statutory items, such as having the state superintendent of education as its board chairman, would be difficult to act upon, Mr. Bozarth said.
"That's not a change our board can make," he said.