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CTA Union Hits Up Pension Advisers

In what experts regard as a potentially serious conflict of interest, a union official who sits on the CTA's pension board has been soliciting donations from financial firms doing business with the retirement fund.

By the BGA and Crain's

January 13, 2014 9:15 AM

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Local 308 President Robert Kelly / YouTube

A union whose president is a member of the Chicago Transit Authority pension fund board has repeatedly asked top investment firms to donate to the union's scholarship fund, raising questions of conflict of interest, a joint probe by the Better Government Association and Crain's Chicago Business finds.

At issue is nearly $100,000 garnered over the past four years for the scholarship fund of Amalgamated Transit Union Local 308, which represents CTA rail workers.

Much and perhaps the bulk of the $100,000 came from advisers and investment firms, including some that work for the $1.7 billion Retirement Fund for CTA Employees, which covers 9,000 retirees and their families. The companies donated after receiving letters and phone calls from Local 308, President Robert Kelly says. He is one of 11 voting members of the pension fund board that determines which firms are and are not hired. His daughter received a $5,000 grant from the scholarship fund.

Pension fund Executive Director John Kallianis, after initially saying the solicitation didn't violate state law, now says he's asked the plan's lawyer to review the matter under all laws and pension policies. Kelly says he acted properly.

"I've told every pension manager I've dealt with, we can be friends today, but if you don't do your job I'll fire you tomorrow," he says. But he concedes that union lawyers told him, "People could take [the solicitation] the wrong way."

The Regional Transportation Authority, which supervises the CTA, says in a statement that it will ask pension-fund lawyers "to determine whether any violations of law have occurred and what safeguards should be enacted."

Outside experts say the solicitations are a matter of concern.

"You don't want that trustee even to be unconsciously swayed by these factors," says David Hess, associate professor of business ethics at the Ross School of Business at the University of Michigan. And "you don't want those people doing business with the fund to feel pressured. A lot of what it's about is appearances."

The CTA declines to comment.

Local 308 is by no means the only public-sector union in Chicago with a charitable fund and a vote on a government pension board. ATU Local 241, which represents CTA bus drivers, also has a scholarship fund, but its records are not public; its trustee did not return calls.

Still, in a city with a tradition of pay-to-play politics, the circumstances surrounding Local 308's situation are striking.

At least 13 of the firms that bought ads hold work with the pension fund, including Chicago's Ariel Investments LLC, which manages about $54 million there, according to a June 30 disclosure.

According to Kelly, money for scholarships comes from "all different places," including ticket sales and donations. The big event is an annual golf outing and scholarship dinner. Last year's fete, held in June, included an advertising/sponsorship book with full-page congratulatory notes from dozens of fund managers and advisers. One ad came from the foundation of Gray & Co., which is under investigation by the U.S. Securities and Exchange Commission. The Water Reclamation District of Metropolitan Chicago is reviewing its contract with the Atlanta-based firm, which still advises the CTA fund.

Ariel President Mellody Hobson says the firm contributed $2,500 to the union's scholarship fund last year, as it has given to many educational charities. "I don't think anyone could believe we ever tried to buy business with the CTA with a de minimis donation," she says.

Hobson says she "did not know" that Kelly's daughter got a grant. Kelly says almost every applicant is awarded a scholarship.

Ariel, which manages $7.3 billion, has produced solid returns, Hobson adds.

Since 2003, the CTA fund has performed slightly better than other local public-pension funds, according to the Civic Federation, a Chicago-based government research nonprofit. The fund outperformed its peers during the recession but has lagged the average total return in each of the past four years.

Chicago Equity Partners LLC, which manages $29 million for the CTA pension fund, also had a page in the ad book. Patrick Lynch, president of the Chicago-based firm, says any contribution to the scholarship fund was so small it did not come to his attention.

The pension fund's Kallianis says Illinois pension law does not ban the fundraising.

But Hess says that fiduciaries should generally avoid situations that give even an appearance of a conflict and that guidelines should be in place to help guard against these types of practices.

A closer look at the CTA's pension fund, however, raises several questions about its management and whether or not it does maintain proper controls. Several requests under the Illinois Freedom of Information Act have revealed that the fund does not have an annual budget or payroll records showing how much its employees make each year.

The fund also does not keep on file resumes or other documents showing the qualifications of board members, nor does it have a method of tracking any free or reduced tickets and meals that trustees or staff receive from consultants. Kallianis would not answer questions about instances in which he apparently received gifts or perks.

Furthermore, as the BGA previously reported, the retirement fund's contract with Gray & Co. was lacking an important disclosure provision that would have required the company to notify the pension board if the firm became involved in an SEC investigation.

Kallianis did not respond to questions about the fund's governance.

Charitable donations have become increasingly controversial among political circles. While pay-to-play politics has typically been associated with campaign contributions, money given to a politician's pet cause can have similar implications. For example, a recent BGA investigation revealed that phone, cable and electric companies have donated more than $1.7 million since 2001 to charities affiliated with U.S. Rep. Bobby Rush (D-Ill). A look at Rush's track record in Congress shows that Rush, in turn, strongly supported the corporate interests of these same companies.


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Even though it's charitable, problems can arise when a fiduciary asks for a donation, says James Hawley, professor of economics and business at St. Mary's College of California. "Any time you are asking for side favors – and it may be for a very good cause – you are essentially holding out bait," he says.

This story was written and reported by the Better Government Association's Katie Drews and Robert Herguth, and Greg Hinz of Crain's. They can be reached at kdrews@bettergov.org or (312) 821-9027.

If you appreciate the work of the BGA, please consider making a donation.

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