By: Mark Glennon*
Let’s hope sincerity isn’t among the attributes of Chicago’s new Treasurer, at least when it comes to his action plan for city investments.
Kurt Summers was sworn in today as Treasurer and released a 90-day action plan that he described in a luncheon address at the City Club of Chicago. His comments are reported in a Sun-Times article linked here and the plan is linked here.
His plan contains a number of elements, but first on his list, and the one he emphasized most, is pushing both city treasury money and pension funds into local investments and local entrepreneurs. “If Summers has his way,” the Sun-Times reports, “the city’s investment decisions will be based, in large part, on how much of the money is being invested in Chicago neighborhoods.”
Summers’ language on this was strong:
“In every RFP and every investment management discussion … every board vote, they’re gonna be asked that question. And they’d better have a good answer. If they don’t, they won’t have my support.”
He will have plenty of influence to implement his goal. The city has a portfolio of its own of about $7 billion and, as Treasurer, he will sit on the boards of five city pensions that manage a total of another $25 billion.
Here’s the first problem: Maximizing returns, not local economic development, is widely recognized as the cardinal principle that should guide investment decisions, especially for pensions. Professional investment managers, particularly pension managers, guard their duty to maximize returns zealously. They have a fiduciary duty to do that, and they don’t want conflicting goals undermining their objective. Maybe there’s room for a small portion of treasury money to be locally directed, and there are a few exceptions in other states, but the general rule for pensions in America is to invest for maximum returns. Break that rule and returns suffer. Period.
Second, an invest-local strategy is a classic beggar-thy-neighbor policy that economists rightly despise — an economic policy through which one location attempts to remedy its economic problems by means that worsen the economic problems of other places. Discriminate against out-of-town investments, as Mr. Summers proposes, and other cities are likely to do the same to you, and everybody will be worse off.
Most frightening is that his action plan expressly includes “direct investing.” That’s a hot button term with finance professionals because they know it opens the door to incompetence and graft. In the first 90 days, the plan is to “Look for direct investment opportunities within the Treasurer’s Office and local retirement plans.” Plan, page 9.
Pensions and city treasurers wisely avoid direct investments into companies, as a general rule. Instead, they invest in funds run by professional managers that select, make, manage, and exit the investments. That’s true for publicly traded stocks, private equity, venture capital, and everything else. Pension trustees and even their staffs are not qualified to invest directly. Finance professionals on their staffs are trained, instead, to select the best funds, and they generally do that pretty well, but they typically have no experience with direct investing.
Ultimately, decisions are made by Chicago pensions boards of trustees, which are mostly comprised of union officials. Enough said on that. And for treasury money, we will be having city employees making direct investments?
Chicago’s pension are already in miserable shape. The firefighters’ fund has just 24 cents for every dollar it owes pensioners; the policemen’s fund just 30 cents. That remaining money should be invested for pensioners’ maximum benefit, and nothing else.
*Mark Glennon is founder of WirePoints and has thirty years experience as a venture capital investor, lawyer and consultant.