Illinois funds feel heat from state execs over investment of assets

Representatives of Illinois Gov. Rod Blagojevich are seeking to influence how three state pension systems invest proceeds of the state's recent $10 billion pension obligation bond sale, suggesting they avoid putting the funds in their current asset allocation.

John B. Filan, director of the governor's office of management and budget, accompanied by Lawrence P. Morris, senior managing director of Mesirow Financial Services, Chicago, has had at least three joint meetings with staff members of the systems: the $22.7 billion Illinois Teachers' Retirement System, Springfield; the $8 billionIllinois State Board of Investment, Chicago, $1.55 billion; and the $8.7 billion Illinois State Universities Retirement System, Champaign.

Mr. Filan has suggested the systems should try to invest the proceeds in ways other than existing allocations, stressing preservation of capital in the midst of market uncertainty, according to SURS officials. In one of the private meetings in June with staff members of the systems at Mesirow's office, he mentioned hedge funds as one alternative, they said.

Mr. Filan declined to comment on his discussions.

At a June 19 board meeting of the universities fund, Mr. Filan did not mention any specific investment, but suggested the trustees — for the short-term, at least — not allocate the proceeds to the system's current asset mix.

The trustees should "take a pause and look at protecting the principal until there is more certainty in the economy," he said.

"Why don't you keep the (pension obligation bond) proceeds and turn them over to us when you think we should invest?" asked J. Fred Giertz, trustee. "If we took a break in the last two months, we would have lost a 20% gain in equities," he added, pointing out a run-up in the stock market, which another trustee noted earned SURS $1 billion.

"We don't know when is the right time to invest," Mr. Giertz noted.

But Mr. Filan said, "We are trying to put on a yellow light, move a little slower, proceed with caution."

Mr. Filan noted the proceeds "come with an explicit price tag," meaning the interest rate on the bond issue. So, he said, "We think (these investments) should be looked at differently."

Jack M. Schultz, trustee, asked, "Would you like us to keep (the proceeds) in cash and then three months down the road, you'll call us to say it's time to invest?"

"That's not my role," Mr. Filan said.

Mr. Filan plans to have further private meetings to discuss investment of the proceeds.

He spoke repeatedly about his fiduciary concerns about managing the state's fiscal affairs, including pension financing. Trustees noted he has no fiduciary role in investing the pension assets. But Mr. Filan said he considered himself a partner with the trustees.

James M. Hacking, executive director, and John R. Krimmel, chief investment officer, both of SURS, called the meetings with Mr. Filan and the others unusual. They said they haven't encountered this type of pressure before from a budget director or governor's representative.

Mr. Hacking, noting that the board has a legal fiduciary responsibility for investing on behalf of participants, said, "Those interests may not coincide with the interest of the state."

Mr. Hacking noted executives at the university fund have examined hedge funds several times in the past and decided not to invest in them because of the lack of return for the risk.

He added that the system is underfunded because the state took contribution holidays in the 1980s and 1990s, not because of investment performance.

Of the $9.48 billion in proceeds available for distribution from the state's pension bond sale, the three systems will receive a total of $7.3 billion July 2.

The teachers' system will receive $4.33 billion; the board of investment, $1.55 billion; and SURS, $1.43 billion.

Despite the pressure, SURS trustees decided to invest the proceeds in three portfolios, all passive, in keeping with its 70% equity and 30% fixed-income allocation.

Trustees will seek bids from existing managers Northern Trust Global Investments, Chicago, and Barclays Global Investors, San Francisco, for the new allocation, seeking low fees, including low costs on the transition through cross trading.

SURS will invest its proceeds 45% in a U.S. total equity market index, 25% in the MSCI All-Country World Index, ex-US, and 30% in a Lehman Aggregate fixed-income index.

The system had 40.7% of its assets invested passively in U.S. and international equities and U.S. fixed income, as of March 31.

The Illinois State Board of Investment will decide how to invest its share of the proceeds at a June 27 meeting. William Atwood, executive director, said he and his staff are still working on recommendations.

The Illinois Teachers' Retirement System hired Northern Trust to manage its proceeds passively; trustees were concerned about existing manager State Street Global Advisors having too large a share of the system's assets. Northern will initially manage all of the proceeds in passive accounts until trustees allocate the proceeds to the fund's current active managers and asset classes later this summer, said Jon Bauman, executive director.

Robert E. Schiller, board president for the teachers' plan and state superintendent of schools, said Mr. Filan and Mesirow's Mr. Morris attended a June 9 special meeting called by the teachers' board specifically to discuss how the TRS portion of proceeds from the bonds would be invested. Mr. Filan was invited to address the board and didn't discuss whether the proceeds should be invested in a specific way, Mr. Schiller said. "I do not believe there was any untoward influence exhibited," he said.

Christine Williamson contributed to this story