High-risk real estate investments cost Chicago pension funds $54M, win fund managers $9M
A real estate investment deal arranged by a firm that employed former Mayor Richard M. Daley’s nephew has dealt a blow to Chicago’s cash-strapped pension funds, underscoring the need for a 401(k)-style alternative.
A 12-year-old real estate investment deal struck between all five of Chicago’s pension funds and a politically connected investment management firm has resulted in a collective loss of more than $54 million, according to an investigation by the Chicago Sun-Times.
The deal was assembled by DV Urban Realty Partners, an investment management firm formed by Robert M. Vanecko, nephew of former Chicago Mayor Richard M. Daley, and Allison S. Davis, a developer who headed the law firm that first employed former President Barack Obama.
DV Urban lost most of its $3.4 million investment as well, but more than made up for it with the $9 million the firm collected from the pension funds in service fees.
According to the Chicago Sun-Times, the deal had been advertised by the firm as “high-risk,” cautioning in the prospectus that the pension funds may “lose their entire investments.” Despite the excessive risk and the already-insecure condition of the pension funds, however, each of Chicago’s five pension fund boards invested tens of millions of dollars with the firm.
Daley had still been serving as mayor at the time the deal was finalized and had top aides serving on three of the city’s pension fund boards, raising the question of whether conflicting political interests may have played a role in reaching the deal.
In May 2009, a federal grand jury opened an investigation into the investment package. Vanecko left the firm shortly thereafter, according to the Sun-Times, purportedly at the behest of Daley. The firm ousted Davis in 2012. Federal authorities did not bring charges against any employees of DV Urban following the investigation.
The five pension funds bruised by the investment deal cover retirement plans for Chicago employees including “teachers, police officers, municipal workers, garbage collectors and bus drivers,” the Sun-Times notes.
Whether these particular losses can be attributed to unsound judgement or interested political entanglements, what cannot be overlooked is that defined-benefit pension systems trap thousands of public-sector workers with these kinds of risks, with no way out.
With a 401(k)-style retirement plan, government employees unhappy with a politically connected deal gone wrong would have had the ability to move their retirement funds elsewhere.
State lawmakers should allow Chicago and all other local governments to enroll all new workers into a 401(k)-style system that puts public employees themselves – rather than Chicago political whims – in control of their retirements. More than 20,000 state university employees in Illinois have already opted for such a plan.
Defined-benefit pensions jeopardize government workers’ retirement security and tether taxpayers to massive, unpredictable costs. While the transition into 401(k) plans is in urgent order statewide, Chicago officials would be wise to take the first step forward.