Published Online: May 7, 1997

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Ill. Pension-Fund Audit Reveals Losses, Spurs Lawmakers' Criticism

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The Teachers Retirement System of Illinois lost $266 million on investments managed by a former pension-system employee, according to a new audit.

The audit, released late last month by the state auditor general's office, found that a private firm run by Thomas Zimmerman was paid $5.4 million in fees at the same time it was managing teacher-pension funds to a heavy loss over the past two years. Pension officials, however, contend the loss amount is much lower.

While the pension fund is still in good financial shape thanks to its other investments, news of the loss has fueled legislators' criticism of the state officials who retained him.

First in line for the lawmakers' ire is state schools Superintendent Joseph A. Spagnolo, who is already under fire because of a state school board audit that raised questions about his travel and expense-reimbursement costs. ("Audit Questions Oversight of Ill. Education Agency," March 26, 1997.)

Mr. Spagnolo, who chairs the board of the retirement system, responded to criticism by pointing out the system's positive overall return on investments despite the losses and saying the pensions of former teachers were not at risk.

Firm Blamed, Defended

Nonetheless, legislators were angered that the state paid Zimmerman Investment Management Co. millions of dollars. The company's contract with the pension fund was terminated several months ago.

"It's tough to lose money in the biggest bull market of this century," said Rep. Cal Skinner Jr., a Republican. "I trust the audit commission," he said of the results.

In a statement, Mr. Zimmerman defended the firm against what he termed "implicit criticism" of fees that he said were identical to those pension officials paid to other firms for similar services.

Mr. Zimmerman also questioned the auditors' methods for determining how much the pension fund lost.

Mr. Zimmerman left his post as the chief investment officer with the teachers' retirement system in 1994. The following year the TRS contracted with his Chicago-based firm, authorizing the firm to manage the

Dispute Over Amount Lost

Pension officials have questioned the state audit figures. They estimated the pension-fund loss in the past two years at approximately $46 million and said the index used to compare pension systems did not reflect the retirement fund's overall investment gain of 16.9 percent for the past two fiscal years.

"The TRS figure correctly reflects the gains and losses posted by our risk-management and overlay program," Mr. Zimmerman said.

Officials with the auditor general's office said the discrepancy between their estimate of the loss and that released by pension officials is the result of differences over how much credit the firm should get for the generally positive performances of other pension funds. Auditors maintain Mr. Zimmerman's firm had no control over those other investments, however.

Positive Returns Overall

"We have had a very good return for the fund," said Scott Mulford, a TRS spokesman. "But the focus has been on the lack of performance of this one manager."

A total of $56 million was distributed to the system's 65 investment managers last year.

Over the past two fiscal years, the system had investment income of $2 billion with an overall market return of 16.9 percent. It continues to grow, with nearly $15 billion in assets, according to the TRS.

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