Gov. Blagojevich proposes sweeping reforms to state pension investment practices         

[AUG. 27, 2005]  CHICAGO -- On Friday, Gov. Rod Blagojevich announced a series of reforms that would significantly change the way in which the state's pension boards conduct their investment business. These reforms are intended to bring more accountability and openness to a system whose business practices have recently been the subject of federal indictments and numerous media reports.

Many of these reforms would be the first adopted by the state's pension systems and would align their practices more closely with those of their governmental counterparts. Some reforms would also be the most extensive adopted by any state in the nation.

"We need to restore the public's faith in our state pension systems and send a message that those responsible with investing public dollars have to be held to the highest ethical standards," Blagojevich said. "When they fail to do that -- as we've seen in recent weeks -- they undermine the system and breach the public trust."

The governor's proposed reforms include:

1. Eliminate contingency fees to placement agents. The governor's proposal would prohibit any contingency fees paid by money managers to placement agents for helping them gain access to pension investment boards. Placement agents will also be required to register as investment advisers and would be subject to oversight by the U.S. Securities and Exchange Commission. This addresses concerns raised in reports involving Robert Kjellander, who served as a placement agent between a money management firm and financial advisers to the Teachers Retirement System board and then made $4.5 million in fees. Illinois would be the first state to eliminate such contingency fees.

2. Increase professional standards for investment advisers and eliminate conflicts of interest. This would create stricter standards for investment advisers and money management firms by prohibiting pension boards from using firms that have either had their professional licenses revoked or violated ethical standards. These firms would also be prohibited from employing or contracting with former pension board members or employees -- a requirement similar to the revolving door policy included in the state's ethics code.

This proposal would also eliminate conflicts of interest by investment advisers by prohibiting state pension systems from hiring any adviser, subsidiary or affiliate that receives revenue from sources other than consulting fees or engages in any business relationship with firms that manage state pension funds. If Illinois adopts this proposal, it would be the first state to do so.

3. Increase penalties for fraud and ethical violations. The governor's proposal would both strengthen existing penalties and create new penalties to address recent improprieties associated with the pension systems. These proposals would significantly increase financial penalties, in some cases from $1,000 to $25,000 in fines; increase time served in prison for such violations from six months of probation to two to five years served; and would enhance existing penalties for fraud if such is perpetrated against an employee pension plan.

These proposals would address reports that Stuart Levine, who at the time was a Teachers Retirement System board member, allegedly extorted money from money management firms seeking to do business with the board. He reportedly directed a $50 million investment to a firm after the firm's placement agent agreed to give two-thirds of his $375,000 fee to an associate of Levine's. When a Virginia-based money management firm refused to pay Levine's fee, he reportedly told TRS staff to take the investment off the board's agenda. Joe Cari, a Chicago lawyer, and Steven Loren, former outside counsel to TRS, have also been charged in this incident.

4. Make pension investment process 100 percent open. This proposal would require that each public pension board adopt a competitive solicitation process no less restrictive than the state's procurement code. It would also increase disclosure requirements through enhanced disclosure by any pension board, investment adviser or money management firm; increased dissemination of required disclosures, such as requiring online posting of such disclosures; and a requirement that the auditor general perform frequent and comprehensive audits of the systems, including audits of all newly enacted reforms.

Enhancement of existing disclosure legislation would include the following:

1. Trustees -- Each member must file a statement of economic interest.
2. Boards -- Disclosure of all investment adviser and firm contracts, management fees charged by firms, and all comparable data and enhanced disclosure of relationships with privately owned vendors.
3. Advisers -- Disclosure of ownership by nonpublicly owned investment firms or other firms doing business with pension funds.
4. Managers -- Disclosure of any contracts with placement agents and ownership by other nonpublic entities and firms doing business with pension funds.

This proposal would address the perception that investment firms must use placement agents to get access to TRS. Between December 2001 and May 2004 this system made 31 private equity investments totaling about $1 billion, and nearly half of them had placement agent fees totaling more than $9 million.

5. Enact stronger ethics rules. This would require that public pension systems be subject to all ethics reforms enacted by the General Assembly in 2003 so that they are bound to follow the same rules as their governmental counterparts.

Several legislative leaders on pension and fiscal reforms from both the House and Senate came forward with their support on Friday as well. State Sen. Jeff Schoenberg, D-9, who serves as co-chair of the Commission on Government and Fiscal Accountability, said these reforms will lead to much-needed accountability and transparency in the pension systems.

"The notorious bank robber Willy Sutton claimed that the reason he robbed banks was because 'that's where the money is,'" Schoenberg said. "With potentially lucrative opportunities available to firms who wish to do business with the state's retirement systems, it is critical that we aggressively move toward greater accountability and transparency in how the state's pension systems engage firms that wish to do business with them. These meaningful pension reforms will make great strides in restoring the trust of the thousands of Illinois public retirees who have their financial security invested the state's pension systems, as well as all other Illinois taxpayers who believe that we need greater accountability in state government."

His colleague Sen. Don Harmon, D-39, said passage of these reforms is critical, given the chain of recent indictments and lack of accountability the pension boards have afforded both the public and the General Assembly in the past.

"I am unsettled by recent revelations of substantial payments to middlemen for brokering pension fund investments," Harmon said. "It is not clear what, if any, value these middlemen provided to the pension fund. Even more unsettling is the air of secrecy that surrounds these payments -- it just doesn't smell right. We need timely disclosure of these relationships and payments, so that we can determine whether these middlemen actually add value or are just siphoning money out of the pension funds."

State Sen. Iris Martinez, D-20, echoed Harmon's comments. "As chairperson of the Senate Pensions and Investments Committee, I am fully aware of the problems associated with these 'third party marketers,'" she said. "I look forward to working with the governor to reach a solution."

State Rep. Robert Molaro, D-21, a long-standing pension reform leader in both the House and Senate, said the time is now to implement these reforms. "The governor did the right thing by pushing for significant pension funding reforms last session, and he's doing the right thing now proposing these badly needed pension investment reforms," Molaro said. "It's hard to move forward with getting our state's pensions back on track with indictments like those tied to Stuart Levine weighing us down. The time has come for these reforms."

Support for these reforms from Illinois' labor community was immediate.

"These are sound pension investment reforms and address the many concerns raised by those who rely on the pension board to invest their retirement dollars wisely and without incident," said Margaret Blackshere, president of the Illinois AFL-CIO. "I urge the General Assembly to pass the governor's reforms, which will help reassure the thousands of pension beneficiaries and their families that their retirement dollars won't be compromised."

[News release from the governor's office]