Chicago City Treasurer Kurt Summers says a unified bargaining effort by city pension funds for management fees could save $50 million. (Chicago Tribune / E. Jason Wambsgans)

Chicago City Treasurer Kurt Summers says a unified bargaining effort by city pension funds for management fees could save $50 million. (Chicago Tribune / E. Jason Wambsgans)

CHICAGO TRIBUNE / Melissa Harris

Pension boards vote to join forces, bargain for lower service fees.

Chicago treasurer Kurt Summers thinks he can save taxpayers more than $50 million.

Four of 11 Chicago and Cook County employee pension funds have signed on to a plan pushed by City Treasurer Kurt Summers to jointly bargain money manager fees.

Summers cites an example, first reported in Crain’s, where an investment company owned by a local bank charges the Chicago Transit Authority’s pension fund 0.42 percent of its assets annually, the park district fund 0.35 percent, the policemen’s fund 0.33 percent and the municipal employees’ fund 0.30 percent.

The widest range Summers’ team found pension plans paying the same manager was 0.3 percent to 0.7 percent.
“Each one has been operating in a silo for decades,” said Summers, who sits on the boards the municipal employees’, policemen, firemen’s and laborers’ funds. “The way this all got started is that I was appointed to all of these boards, and I said, ‘Wait a second. We’re all paying different fees.'”

What’s depressing is that the idea of economies of scale — that costs will fall as the size of the investment up for grabs increases — dates to the 1700s. Summers said pension plans in New York, Atlanta and Los Angeles already are using aggregate pricing.

“None of this is new,” he said.

He also described it “as hard as hell.” But saving $50 million in fees, as Summers’ estimates, is worth it.

That’s because about 70 trustees have a say in how these pension funds are run. Summers needs, at a minimum, to attempt to reach them and their staffs. The blitz has required so much coordination that Summers jokes he should have hired a lobbying firm.

Resolutions supporting Summers’ plan have passed the city’s labor, fire, municipal and parks pension fund boards. The teacher’s plan deferred a vote until March. The policemen’s fund is expected to vote this week.
Some of the variance in the fees, Summers acknowledged, can be explained by the difference in the size of each investment.

If the CTA were to invest $100 million and the municipal fund $25 million, the plans would, no doubt, be charged different fees. But Summers said the variance can’t entirely be explained by size.
“You have different consultants negotiating independently on behalf of each of the plans,” Summers said. “One consultant might have an especially good relationship with an investment manager, so they can negotiate tougher.”

But doesn’t aggregate pricing imply the newly negotiated fee might be higher for some pension plans and less for others, resulting in an overall decrease in fees but an increase for those already getting better deals?
Summers said no way. But he acknowledged there will be cases where it’s impossible to negotiate the fee down further.

“There’s a firm giving the very lowest price to one of our plans in the entire industry because that plan was their very first client 30 years ago,” Summers said. “We’re never going to be able to negotiate that further.”
Summers said the next step could be to use the same process to negotiate better terms with banks, who are charging different fees to the city’s sister agencies, from the school district to the public housing authority, for everything from savings accounts to stock trades.

In one fell swoop, such bargaining power could save money and give the treasurer’s office some muscle. But there’s an even greater political benefit here.

Using sound economic logic, Summers urged that the time to make these improvements is now — a dollar saved now is more valuable than a dollar saved later because that dollar can be invested and earn interest until that next dollar is collected.

As the Tribune reported Sunday, the city faces a $550 million escalation in payments to the pension funds for police and firefighters next year as well as a requirement to boost payments to the city’s other two pension funds by $50 million. (In aggregate, the local funds Summers is trying to corral faced a $37.3 billion deficit in fiscal year 2012, meaning that’s how much the promised benefits exceeded the plans’ assets, according to the Civic Federation.)

Savings now will compound further as more money gets pulled into the system.
Still, it will not be enough.

“You can reduce expenses and pool funds to optimize administrative costs, but that’s not going to move the needle,” said Carrie Hightman, the former chair of Illinois’ State Universities Retirement System. “But why wouldn’t you look at this? … You want to be prudent. This is prudent.”

Barring state supreme court intervention, once the financial houses are forced to give a little, the remaining choices are pay more, cut more, tax more, reduce benefits or all of the above.

At least when that time comes, both Mayor Rahm Emanuel and Cook County President Toni Preckwinkle, unlike new Gov. Bruce Rauner, will be able to stand at a podium and honestly say they got what they could from Wall Street first.

http://www.chicagotribune.com/business/ct-confidential-kurt-summers-0225-biz-20150224-column.html