Teacher retirement fund consultant facing lawsuit

The following article appeared in the Chicago Tribune.
The allegations below are just part of the chronic problems that face our public school system (government schools). Yet another reason to do away with public pensions and switch to self-funding individual retirement accounts for government school employees.

Teacher retirement fund consultant facing lawsuit

By Michael Higgins
Tribune staff reporter
Published August 31, 2006

A former top consultant to the state's teacher retirement fund took in millions of dollars in fees from money managers, including managers that the consultant later recommended for lucrative state work, a retired school official alleges in a lawsuit.

By taking the fees, Callan Associates, based in San Francisco, violated its duty to serve only the interests of the state's school teachers, who depended on Callan to provide fair and objective recommendations, contends Patrick Patt, a retired school superintendent from Lake Forest.

"The Illinois Pension Code is clear," said Brian McTigue of Washington, an attorney representing Patt. "You cannot have an investment manager with a conflict of interest. ... Callan should pay for any losses that result from the conflict."

Patt is seeking class-action status of the suit, filed last week in Cook County Circuit Court.

Officials at Callan, which faces similar allegations in a lawsuit by city officials in San Diego, declined to comment.

Officials at the Teachers' Retirement System of the State of Illinois said this week that Callan disclosed the potential conflict, as required under its state contract, and that no investor money was lost. With Callan as adviser, the pension fund ranked in the top 10 percent among funds of similar size, said Jon Bauman, executive director of Teachers' Retirement System.

The performance "was excellent and does not indicate any substandard managers," Bauman said.

But officials at Teachers' Retirement System, which is not named as a defendant in the suit, also acknowledge that they downsized Callan's consulting role in March and that the outside fees were "a consideration" in making that decision.

Callan was a primary investment consultant to the retirement fund from December 2001 to March 2006. The state paid Callan about $2.8 million in fees from fiscal 2002 to 2006, state officials said.

At the same time, Callan was receiving fees from money managers, who paid to attend Callan seminars, such as its Callan College and Callan Investments Institute, the suit alleges.

Teachers' Retirement System officials said they studied the matter in 2004 and found that various state consultants had collected combined fees of $6 million to $7 million per year from money managers from 2001 to 2003, and that Callan's share of that was millions of dollars. State officials said they could not determine on Wednesday how many of the money managers that paid fees to Callan received the consultant's recommendation or how many the state ultimately hired.

Patt is seeking to force Callan to return its fees from Teachers' Retirement System to the state fund. Patt's attorneys said that as part of the litigation, they also will investigate whether Callan's influence regarding the choice of investment managers caused the retirement fund to lose money.

----------

mjhiggins@tribune.com


Copyright © 2006, Chicago Tribune