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Building better mousetraps December 1, 2008

Posted by deepblueillinois in Uncategorized.
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Today’s Chicago Tribune has a story about a legislative proposal by Illinois State Treasurer Alexi Giannoulias to consolidate all of the state’s pension boards into a single uber-investment board in the hope of realizing cost-efficiencies and greater transparency. While there are many laudable ethics reforms featured in his plan, most notably, the requirement of all individuals sitting on retirement system boards to file full economic interest statements and making the retirement systems subject to the state more stringent procurement code, I nonetheless have serious reservations about the consolidation issue that is the highlight of the Treasurer’s well-intended proposal.

In short, I’m skeptical that bigger always means better when it comes to governing public finance. 

“There’s an inherent danger whenever one tries to funnel so much activity into a single source because it weakens the checks and balances over these public funds,” said Sen. Jeff Schoenberg (D-Evanston), who has long worked on pension reform issues.

The downsides to consolidation include fewer opportunities for newer investment firms and those headed by women and minorities to break into public fund management in Illinois. That also means less likelihood that those firms which manage public funds in Illinois would be relinquishing their share of the pie any time soon.

Folding all the state retirement systems into one board doesn’t necessarily mean more accountability. These same reservations bubbled to the surface when early in the governor’s first term, the Blagojevich administration sought to wrap all of the state’s quasi-public bonding authorities into one massive debt-issuing agency. The legislature wisely rejected that move, and this consolidation effort is reminiscent of that earlier play.

What’s really needed here is greater focus on building better mousetraps given the billions of dollars of cheese involved in state pension and investment decisions. Requiring anyone who seeks to be involved in an investment decision with a public pension fund to be a licensed broker-dealer certified by the Financial Industry Regulatory Authority (FINRA), is a far better path to take in promoting greater accountability and transparency in state public pensions. 

Here’s the skinny on the FIRNA from it’s own Web site:

Created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business—from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. It also performs market regulation under contract for The NASDAQ Stock Market, the American Stock Exchange, the International Securities Exchange and the Chicago Climate Exchange.

Mandating that everyone associated with state public pension fund transactions is a licensed securities professional more effectively achieves the goal of taking political influence out of the equation. No longer would insiders be able to pass themselves off as marketing consultants for investment banking firms while pocketing huge fees for minimal work on large deals, and the protective umbrella  of securities industry’s higher standards would more likely prevent Illinois taxpayers from getting soaked. 

Most of the ethics provisions in the treasurer’s reform package have already passed the House or the Senate. Now that we’ve finally put the pay-to-play ban into effect, pension and investment reform should be the next big ethics issue that is tackled at the State Capitol. There will be plenty of challenges ahead on that front, but focusing primarily on fund consolidation shouldn’t be one of them.