From Wirepoints:
Low Returns and a New Political Handout: How the Illinois Treasurer Invests Your Money
A decade ago, Wirepoints began questioning how Illinois manages billions of dollars of government money through the Office of the Illinois Treasurer. Since then, asset balances have skyrocketed from about $10 billion to over $41 billion and political abuse of the money has been common. The money is currently returning just 3.7% per year. The issues are now more important than ever because the missed opportunity for better returns on that much money is huge.
Most recently, Gov. JB Pritzker signed Senate Bill 3086 into law.
The bill authorizes the state treasurer to invest as much as $350 million in the AFL-CIO Housing Investment Trust (HIT), which provides financing for housing projects primarily by purchasing mortgage-backed securities. It’s an irresponsible handout to one of the most favored members of the Illinois political establishment – a big, national union:
- HIT’s track record making money is awful, having ten-year annualized returns in its two funds of 1.6% and 1.2% per year.
- It’s not even targeted toward Illinois housing since HIT’s work is nationwide, though it does say Chicago is one of its six key markets.
- And nobody could claim that another $200 million for the trillion-dollar nationwide mortgage-backed security market, at least a third of which is for low- or moderate-income projects, is going to make housing cheaper. It’s just too small to make a difference and institutional capital is abundant.
It’s no surprise that HIT’s returns are poor since HIT’s stated purposes include other objectives: creating union construction jobs, creating and preserving rental housing and “measuring the generation of broader economic benefits of these investments for communities.” Illinoisans have long broadly supported unions and the state has the right to reflect that in policy, but it would be hard to argue that using its treasury money for HIT is the right means.
Proponents of the bill made only a transparent effort to hide that the appropriation was specifically for HIT. The law itself says the money must go to trusts “with voting trustees that are officers or employees of a national labor federation, or any member unions thereof, with assets exceeding $1,000,000,000.” But Gov. JB Pritzker, Illinois Treasurer Michael Frerichs and other supporters said openly it’s for HIT.
That means there was no bidding, competition or questioning about whether HIT is the most sensible investment for taxpayer money or is even an effective means of addressing its social justice goals.
The bill passed by wide margins in both the House and Senate with bipartisan support, so it’s not the Democratic supermajority alone to blame.
The chart here is the treasurer’s own showing growth since 2015 in total assets in what’s called the “State Investments,” which are the state’s own and are the focus of this report. The treasurer also runs the Illinois Funds, which is money belonging to Illinois municipalities with total assets of $18 billion, and has partial responsibility managing the state’s 529 college savings fund and several other programs not covered here.
Ideally, and probably naively, we might hope the HIT story sparks a broader review of how all the billions are managed by the treasurer, because HIT is merely the latest chapter in a long history of shoddy stewardship over that money.
Here’s that backstory:
Why this is important
First, huge amounts of taxpayer money are at issue. A difference of just one-half of one percent per year on the treasurer’s State Investments means over $200 million for taxpayers every year. Second, transparency and accountability are lost if political favors underpin how taxpayer money is invested. The treasurer, governor, and legislature can infuse investment choices with political considerations that are easily hidden from public view.
How did all this money accumulate with the Illinois Treasurer?
Over recent decades, Illinois lawmakers have created 832 separate “funds” that hold state money earmarked for specific purposes, and the balances therein have grown and grown. For example, there’s an Underground Storage Tank Fund with a current balance of $83 million raised from fuel sales taxes. It’s used to clean up leaking or abandoned fuel tanks. There’s an Octave Chanute Aerospace Heritage Fund with $50,000 that gives money to Rantoul, Illinois area museums, and an Illinois Equity Fund with $2.6 million.
Many are far bigger, led by the Road Fund with over $4 billion and funded by vehicle registrations and the fuel sales tax. The Healthcare Provider Relief Fund is another big one with $1.8 billion.
Some funds have valid reasons for being segregated. Federal grant money and bond escrows, for example, typically must be kept separate by law. The Road Fund is now segregated by state constitutional mandate. (Whether that’s being honored is a different story. Among several diversions of Road Fund money, some was used recently to bail out Chicago-area public transportation.)
But many funds have simple earmarks created by the legislature that can be changed by the legislature. They are often created to placate an interest group that was annoyed by some related piece of new legislation. If the special purpose of the fund is just a legislative earmark, that purpose can easily be changed or eliminated by the legislature, That’s done routinely to raid funds in order to support phony claims of a “balanced” budget.
We don’t know exactly how many funds have valid mandates to be earmarked, but an earlier Associated Press report found that only about one-third do; that is, two-thirds could have their special purpose changed or eliminated. The bottom line is clear: In aggregate, the balance in the funds has soared and billions of dollars are kept in funds maintained by the treasurer with special purposes that can be changed.
Political misuse of the money has been routine.
Among the instances where higher returns for taxpayers have been subordinated to political whim are the following:
- For its 2026 budget, the state swept a total of $271 million from 57 special-purpose funds and redirected those dollars to the General Fund, as reported by the Civic Federation. Republican and Democratic administrations alike have done the same for many years in order to claim “balanced budgets.” The Underground Storage Tank Fund mentioned above, for example, was raided under both Gov. Bruce Rauner and Pritzker.
- Five days after the October 2023 Hamas attack on Israeli civilians, Frerichs announced he would buy an additional $10 million of Israeli bonds for the express purpose of helping Israel. That was a purely political stunt, and a pointless one at that because Israel’s government debt at the time was nearly $300 billion – 30,000 times larger than Frerichs’ purchase, making The Illinois money immaterial.
- In 2021, Frerichs and a group of similarly minded state financial officials sent letters to six of the nation’s largest private sector money managers in a transparent effort to bully them out of supporting Republicans. “[With] assets under management of over $1 trillion,” Frerichs and the others wrote, “we are frequently asked to evaluate asset allocations to asset managers.”And they asked in the letter, “Will [you] forswear corporate political spending (direct or indirect) to the 147 members of Congress who voted to overturn the results of a free and fair democratic election on January 6th, 2021?”
- In 2018, Frerichs used the state’s stock shares in pharmaceutical companies in an effort to bully them into doing what he wanted on the opioid crisis.
- Also in 2018, Frerichs tried “demanding that Facebook disclose information on its oversight and policies to stop the spread of fake news, election meddling, and hate speech.” On that one, it turned out the state didn’t even manage any Facebook shares. Wirepoints learned that the only Facebook shares close to being under his control were in 529 college savings accounts in which the treasurer has a hand in managing. In other words, he was trying to use somebody else’s assets – college savers – for his own clout.
- In 2024, Frerichs again abused 529 account shares the state didn’t own when he sent a letter to Exxon Mobile shareholders telling them how to vote on the election of directors and other matters.
Other examples are in our earlier articles linked below, and there are no doubt others we are unaware of.
One root of the problem is Frerichs’ steadfast commitment to ESG investing (Environmental, Social and Governance), which is largely authorized by the state under the Sustainable Investment Act. Often ridiculed as “woke investing,” ESG is was shunned by most of the financial world several years ago. “Born in sanctimony, nurtured with hypocrisy and sold with sophistry,” as a New York University business professor wrote, it was “beyond redemption.” Poor returns and the fickleness of what’s politically correct doomed ESG. The Wall Street Journal said in 2024 that ESG had become a “dirty word.”
But not for Frerichs, who answered critics with unwavering commitment to ESG in an op-ed. The “anti-ESG fad isn’t going to distract me from that mission, he wrote. “I remain as committed to sustainability as ever before.”
Why is such a large, stable amount of money held in low return, short term assets?
Bonds and similar investments with longer maturities generally produce higher returns than those with shorter maturities. However, the longer the term the higher the risk that market value will drop due to rising interest rates, which could mean a loss if the securities had to be sold to pay current bills.
Balancing returns against risk therefore requires matching the duration of an investment with when the money will be needed – or when it might need it in an emergency. State Investments has a weighted average maturity of less than two years — one year and 95 days.
But the huge balance of State Investments is not seasonal or temporary. The balance in any one of the state’s many funds might fluctuate, but in aggregate they change little. In this century, the State Investments balance has never suffered a drop of more than 15%. It dropped by about that amount only twice, during the Great Recession and the Covid pandemic. Same for other state treasury funds as far as I could find.
To earn more for taxpayers, would it be sensible to extend out the maturity of at least a large part of State Investments to, say, five years?
Colorado apparently thinks so. The average duration is 68 months in the $14 billion fund its treasurer manages. With five-year treasuries alone, which today yield about 4.5%, Illinois would be making about $338 million more per year on its State Investments than it earns at its current annual rate of about 3.7%. And that’s just with ultra-safe, low-yield, no-brainer treasuries. Returns could be bolstered significantly more with high quality corporate and government agency bonds with the same maturity.
Whether the state should lengthen the average duration of its investments is stated above as a question, not an assertion, for good reason. Cash management experts should weigh in and rating agencies no doubt would be watching. However, the question certainly appears to be a good one given such a huge mismatch between the stability of the State Investments and the manner in which it is invested. That should be one part of a broad review of how money is managed by the state treasurer.
What needs no review, however, is that political favoritism and questionable social justice goals should be entirely eliminated. Illinois doesn’t have the luxury of doing otherwise at the expense of its taxpayers.
*Mark Glennon is founder of Wirepoints.
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In my last year as McHenry County Treasurer,I invested 99% of the money the county had and achieved a 7.8% rate of return
