Already under fire for high pay despite big investment losses, the pension system for Ohio’s retired teachers lost between $27 million and $40 million when Silicon Valley Bank failed last weekend. That appears to be by far the biggest investment by a public pension system in the United States.
The losses follow a nearly $10 million loss last year when cryptocurrency platform FTX failed, according to the Ohio Retired Teachers Association, a group that represents pension system members.
The exact losses aren’t immediately known because Anthony Randazzo, executive director of pension watchdog Equable, said they were $39.3 million in a tweet. But pension system spokesman Dan Minnich said in an email, “As of last Wednesday, STRS Ohio held shares of Silicon Valley Bank (SVB) worth $27.2 million.”
Alarm bells should be ringing about the Ohio Police & Fire Pension following the release of a fiduciary audit of the fund, finished six years after the legal deadline.
Ignoring the law falls on the Ohio Retirement Study Council and their creator, the Ohio General Assembly. But the warnings on investment risk within the OP&F portfolio demand immediate, widespread attention.
The combined pension contribution for police is 31.75 percent of their salary and with firefighters the employer-employee combination is 36.25 percent.
Ohio Police & Fire is “clearly thinking outside the box,” according to Funston Advisory Services. “OP&F is among a very small number of major institutional investors to have adopted a risk parity investment approach across the plan’s entire investment structure,” Funston tells us. Ohio’s police and fire pension is also a pioneer in an investment strategy called “portable alpha.”
In each case, the characteristic that separates OP&F from the rest of the public pension pack is “meaningful use of portfolio leverage.” The Ohio safety forces pension is using one of the riskiest investment strategies in America. The 25 percent of leverage showing on the balance sheet is actually much higher because the alternative investments also include leverage.
The entire portfolio is managed by outside managers, 135 fund managers by our count, who pulled down “mind boggling” fees according to pension expert Richard Ennis. If Mr. Ennis’ name sounds familiar you probably remember he was the expert Ohio turned to for comprehensive analysis of the Coingate scandal at the Ohio Bureau of Workers Compensation. Mr. Ennis gave us an assessment of the OP&F performance over the last 10 years that indicates the pension matched the results of an index fund despite the high fees.
The State Teachers’ Retirement Board of Ohio shifted its asset mix at its board meeting last week, announcing it will now target 26% of its assets to U.S. equities, down from 28%. It also decreased its international equity allocation to 22% from 23%. The fund increased its allocation to private equity to 9% from 7% and its allocation to fixed income to 17% from 16%.
The increase in private equity, which had record returns this past year, is part of a broader trend. STRS Ohio saw 29% returns in fiscal year 2021, in part driven by a 45% return on alternative assets. These returns were topped only by domestic equities, which returned 46.3% for the fund.
The pension plan is also beginning to share some of these returns with pension beneficiaries. At its board meeting last week, the pension approved a 3% one-time cost-of-living increase for beneficiaries who retired before June 1, 2018. The 3% adjustment is still less than half of the Bureau of Labor Statistics’ official inflation calculation of 7% in 2021.
The nearly $100 billion State Teachers Retirement System of Ohio never tires of telling its members of past transparency awards it has received from Ohio State Auditor Keith Faber. The fact that Faber’s office is currently conducting a special investigation into the pension’s transparency practices, prompted by public records lawsuits and numerous member complaints—the results of which could, says the auditor, affect the retirement system’s rating in the future—is not disclosed by the pension.
In April 2022 Board News under the heading, “STRS Ohio earns auditor of state’s top rating from transparency for second year,” the State Teachers Retirement System of Ohio’s website boasts:
Perhaps not surprising, this self-professed paragon of transparency is not touting the following ugly facts provided to me by the auditor’s office in a recent email:
In other words, it appears the Auditor of State’s transparency rating system merely asks whether a public agency has policies and procedures addressing transparency, not whether the agency is, in fact, being transparent in its dealings with the public in compliance with applicable laws. Such a rating system is of limited value to stakeholders, in my opinion, and presents the very real risk of being misinterpreted, as well as unduly relied upon, by the public.
Who is Facebook international man of mystery Robert Parkle and why is he advising Ohio Public Employees Retirement System stakeholders not to follow through with an expert forensic investigation of their state pension? Why did Kasandra Ward from Aurora, Colorado create a fraudulent OPERS Forensic Investigation GoFundMe page apparently to divert funds from the real project? Our nation’s public pensions have never been more precarious and there are powerful interests working hard to keep pension stakeholders in the dark.
Earlier this year, a forensic investigation of the $90 billion-plus State Teachers Retirement System of Ohio commissioned by the Ohio Retired Teachers Association and performed by my firm, was completed. The damning preliminary findings were reported to Ohio legislators, regulators and law enforcement in a 100-plus page report entitled The High Cost of Secrecy.
In conclusion, I won’t speculate who may be seeking to derail the proposed forensic investigation of the $115 Billion Ohio Public Employees Retirement System on behalf of pension stakeholders, or why. One thing is for certain: One or more persons is seeking to disrupt the investigation into potential mismanagement and malfeasance at the massive pension.
Stakeholders in all 5 Ohio public pensions, including OPERS, should be alarmed and securities regulators and law enforcement ought to investigate any apparent violations of law through social media.
State securities regulators and NASAA have historically had very little to say about Wall Street looting of these pensions. That’s not altogether surprising given that state securities regulators almost universally serve at the whim of elected politicians—politicians who depend upon Wall Street campaign contributions. If a state securities regulator aggressively pursues Wall Street pension looting, she may be swiftly out of a job.
However, since NASAA believes “every investor deserves protection and an even break” the organization should focus upon the disturbing fact that today public pension stakeholders in all 50 states are routinely denied prospectuses and other material investment information related to their pension assets—the very same information which is widely disseminated globally to wealthy individuals. In the absence of prospectuses, public pension stakeholders cannot possibly evaluate whether pension assets are prudently invested.
Recently I filed a complaint with the Ohio Department of Commerce, Division of Securities regarding the State Teachers Retirement System of Ohio which has failed since February to provide prospectuses and other offering materials related to the teachers’ pension investments in response to my public records request filed on behalf of 19,000 Ohio teachers. Not a single page of a single prospectus has been released to me by STRS Ohio since February. The Division is investigating my complaint at this time.
In Rhode Island, my request for the prospectuses regarding that state’s pension investments was also denied by Treasurer Seth Magaziner last week as the pension perversely asserts, on behalf of Wall Street, that widely distributed prospectuses can somehow be “trade secrets.” I intend to file an appeal and a lawsuit challenging Magaziner’s secret pension dealings in Rhode Island.
Given that public pensions in all 50 states today refuse to provide some or all prospectuses to stakeholders, including both participants and taxpayers, publci pension secrecy is a national problem that needs to be addressed.
For nearly two decades, alternative investment managers have been permitted to handle public pension money while they refuse to play by the rules applicable to these funds and submit to public scrutiny.
Wall Street alternative managers have successfully argued that the very same investment information widely distributed to wealthy individuals somehow amounts to “trade secrets” exempt from public records laws… when requested by state workers.
While it’s not surprising Wall Street’s biggest gamblers want to keep investors in the dark as to their misdeeds, it’s unconscionable that STRS Ohio and other public pensions around the nation are willing to abandon transparency, exposing workers to unfathomable risks and jeopardizing their retirement security.
Alternative investment managers may seek to keep secrets, but it’s no secret what’s often in these well-guarded documents: excessive and illegal fees; outrageous conflicts of interest and self dealing; fiduciary breaches and outright violations of law—even criminal conduct. For example, eight years ago the SEC staff found that a majority of private equity firms inflate fees and expenses charged to companies in which they hold stakes.
The $95 billion Ohio State Teachers Retirement System (STRS) is facing a special state audit over a report that accuses the pension fund of secretly collaborating with Wall Street firms, lacking transparency, and wasting billions of dollars.
In June, Benchmark Financial Services released preliminary findings of a forensic investigation of Ohio STRS titled “The High Cost of Secrecy.” The report ripped into the retirement system, saying it “has long abandoned transparency, choosing instead to collaborate with Wall Street firms to eviscerate Ohio public records laws and avoid accountability.”
The Ohio Auditor of State’s Office recently sent a letter to Ohio STRS Executive Director William Neville saying it has received “numerous complaints” regarding the report and that it had conducted a preliminary examination into the matter.
Mr. Majeed is the investment chief for an $18 billion Ohio school pension that provides retirement benefits to more than 80,000 retired librarians, bus drivers, cafeteria workers and other former employees. The problem is that this fund pays out more in pension checks every year than its current workers and employers contribute. That gap helps explain why it is billions short of what it needs to cover its future retirement promises.
“The bucket is leaking,” he said.
The solution for Mr. Majeed — as well as other pension managers across the country — is to take on more investment risk. His fund and many other retirement systems are loading up on illiquid assets such as private equity, private loans to companies and real estate.
So-called “alternative” investments now comprise 24% of public pension fund portfolios, according to the most recent data from the Boston College Center for Retirement Research. That is up from 8% in 2001. During that time, the amount invested in more traditional stocks and bonds dropped to 71% from 89%. At Mr. Majeed’s fund, alternatives were 32% of his portfolio at the end of July, compared with 13% in fiscal 2001.
Forensic investigations in Rhode Island, North Carolina, Kentucky and Ohio reveal that gambling 30 percent or more on high-cost, high-risk, secretive alternative investments has exposed pensions to massively greater risks and reduced net returns. The time is ripe for legislators, regulators, and law enforcement to act to stop the looting.
A recent New York Times NYT-3% article revealed that putting more than half of the $62 billion Pennsylvania state teachers’ retirement fund’s assets into risky alternative investments hadn’t worked out well for the pension and had spurred an investigation by the FBI. The FBI is investigating reporting fraud—returns allegedly falsified to avoid increased worker contributions to the pension.
Law enforcement investigations into public pension funds that lie about their returns are long, long overdue.
About 1,000 current and retired Ohio educators skeptical of the true financial shape of their $90 billion state pension fund are preparing to sue to force greater cooperation with a $75,000 self-funded investigation of its books.
The forensics audit, financed through money raised from members, is being undertaken by pension investment expert Ted Siedle — a former Securities Exchange Commission attorney, financial forensics investigator, and co-author of the book “Who Stole My Pension?”
The public records lawsuit will ask the Ohio Supreme Court to force the State Teachers Retirement System, serving some 500,000 active, inactive, and retired members, to release information that investment firms have claimed is proprietary or a trade secret.
In a white paper for The Pew Charitable Trusts, Eric Scorsone and Natalie Pruett of the Michigan State University Extension’s Michigan Center for Local Government Finance & Policy assessed local government early warning systems through case studies in Colorado, Louisiana, Ohio, and Pennsylvania. Each of these states applies various financial ratios—an approach known as ratio analysis—and other indicators to identify signs of local fiscal distress. Ratio analysis uses fractions that capture financial or economic activity within a locality—such as total expenditures over total revenues—to measure solvency, the ability to pay debts and liabilities over the short or long term. Ultimately, the authors determined that there isn’t one optimal system and instead offer several recommendations for states to build or improve their early warning systems.
The authors present detailed descriptions of the four states’ systems and analyze trade-offs and implications of the indicators employed to measure different types of solvency. They offer a variety of recommendations for states to consider, including use of indicators for four types of solvency: