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Pension Fund Sparks Fly

Jim Vail - December 18, 2010

Two trustees of the Chicago Teachers Pension Fund (CTPF) who are also Chicago Public School Board of Education members did something that many long-time observers would say was impossible — they disagreed. Alberto Carrero, who retired from Banco Popular in 2008, has been a member of the Chicago Board of Educaiton since Mayor Daley appointed him in 2002. Peggy Davis, a lawyer whose CPS biography says she works for Exelon Business Services Corporation, was re-appointed by Daley to serve as a board member on the Board of Education in 2006. Previously, she had worked for CPS, at one point serving as Chief of Staff for Arne Duncan.

The two have, along with the rest of the Board of Education members, gone along with almost every recommendation by the Board's chief executive officer — from Paul Vallas, Arne Duncan and Ron Huberman — whether it was to close public schools and open up charter schools, approve a radical plan to fire teachers and finance an alleged budget deficit, agree on certain vendors and outside contractors, and other measures to govern the Chicago public schools.

Pension trustee Peggy Davis (above right), who is one of two representatives of the Chicago Board of Education on the 11-member trustees, listens to the report by Mercer advisors at the November 2010 meeting of the Chicago Teachers Pension Fund. Substance photo by George N. Schmidt.As Chicago Teachers Union President Karen Lewis has noted recently, the members of the Chicago Board of Education almost always vote together, unanimously and without any dissenters. (The last split vote, according to Substance records, was four years ago when Arne Duncan demanded that the Board members vote on a report he wanted but the majority of them didn't).

Rarely have they ever been seen to disagree in public on such controversial matters governing the Chicago Public Schools.

That all changed, however, on Tuesday, December 14th, 2010, at 203 N. LaSalle on the 26th floor at the monthly teachers pension fund meeting. The two Board trustees on the Pension Fund disagreed over which consultant to choose to help the fund make money.

Carrero argued passionately in favor of awarding the business to the consultant NEPC because they would do the "best job" for the fund.

"I look up to NEPC of all the investment conferences I've been to," Carrero said. "We're trying to get the best. For me, Callan was the weakest in the real estate market."

Chicago Teachers Pension Fund Trustee Alberto Carrero Sr. (above right) disagreed with his fellow Chicago Board of Education member Peggy Davis at the December meeting of the trustees of the Chicago Teachers Pension Fund (CTPF). Above, Carrero reading some of the financial reports to the fund during the CTPF's November meeting. Substance photo by George N. Schmidt.Davis disagreed, passionately as well. She, along with many other trustees, thought a "fresh" look at another consultant was in order, which happened to be Callan. An 8-4 vote was taken to award a $650,000 one-year contract to Callan and Townsend, which will handle real estate.

In another interesting twist, the two new teacher trustees split with their fellow CORE-slated trustees who were elected last year. Lois Ashford and Jay Rehak joined Carrero and pension fund president John O'Brill to vote against the measure, while Jeffrey Blackwell and Jeanne Freed voted with the majority in favor of Callan.

A series of real estate investment horror stories were then paraded before the trustees as investment managers gave different reasons why the teachers pension money performed poorly the past couple of years.

First up was Capri with its real estate assets which so far has lost $14 million of the $25 million the CTPF gave it.

"I understand the real estate business is bad, but this seems really bad," Davis said.

The Capri representative said after the financial crisis hit in 2008, escalating following the collapse of Lehman Brothers in September 2008, the credit markets stopped commercial lending to office real estate, hotels and condominiums where it is very difficult to get mortgages.

Capri added, in reponse to a question from Rehak, that they considered their investments conservative while holding debt they had no control over. However, it was pointed out later by a CTPF official that Capri is a high yield, high risk investment.

Next up was discussion about a $40 million investment with the Asian Real Estate Fund, which invested $40 million of CTPF money into real estate in China, India, Korea and Japan. The Fund was originally owned by Merrill Lynch until Bank of America decided to sell it to the Blackstone group which focuses on real estate. This time the fund manager said they could recover 82 cents on the dollar in the investment, or about $32 million of the $40 million.

One interesting successful real estate investment locally concerned the John Hancock Building. Morgan Stanley issued a $29 million loan to the Hancock Building that could see a 28% increase in value. The Morgan Stanely rep said the Hancock has a 68.4% residential occupancy rate, all its retail stores are fully leased, while the garage has underperformed due to a decrease in tourism, along with the observatory at the top where revenues have also dropped a bit due to the economic crisis.

The Walton Street Real Estate Fund spoke a little about its investments in Mexico where they say their competitors are pulling out only because their parent companies, such as AIG or Morgan Stanley, decided to, rather than basing it on sound investment reasons. They said the violence in Mexico today is focused in the northern areas, while Mexico City and the tourist areas are much safer.

But a $25 million investment with Walton is also seeing difficulties due to foreclosures and low occupany rates in the real estate market.

"We'll work hard to get your money back," said the Fund rep, who added that 70% of the fund's money is "leveraged" or borrowed.

A motion to give an additional $25 million to Mesirow Financial was deferred after Rehak raised reservations about Mesirow's committment to the CTPF.

"I think they are distracted by their other businesses, and are not focused enough on making us money," Rehak said.

Mesirow is owned by James Tyree, who bought the Sun Times, and also supports charter schools. The pension fund decided earlier that all future money managers disclose their association to charter schools which are replacing public schools. Charter school teachers who are not certified do not pay into the pension.

The actuarial report stated that the pension fund actually did very well the past year, being up 14%, making over a $1 billion in the process. As of June 30, 2010, the pension fund has almost $11 billion. The teachers pension is 67% funded, according to the actuary report.

Chicago Public Schools Human Capital Director Alicia Winkler promised "an aggressive timeline" to the board that by the end of April (2010) they will transfer all the employee data that the pension board has been seeking to have straightened out since the Board first messed up the records of teachers who retired in June 2007. Winckler, who began working for CPS one year ago, is the fourth or fifth CPS official to report to the pension trustees about CPS attempts to solve the problem, which involves a transfer of accurate work records to CTPF. 

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