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:
“Last month, Ohio Auditor Keith Faber posted the results of the annual Sunshine Law compliance review. The auditor’s office launched its STaRS (Star Rating System) program to promote government transparency. In both fiscal year 2020 and 2021, STRS Ohio received the Highest Achievement in Open and Transparent Government Award, the highest possible rating from the auditor’s office.”
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 October 2021, Auditor of State Keith Faber informed STRS that his office was launching a special audit after receiving numerous complaints, following the release of a report issued by Benchmark Financial Services Inc. titled “The High Cost of Secrecy: Preliminary Findings of Forensic Investigation of State Teachers Retirement System of Ohio,” commissioned by Ohio Retired Teachers Association.
The audit work that led to the current StaRS rating of STRS was completed for the fiscal year that ended June 30, 2021, prior to the launch of this investigation (emphasis added). The Auditor of State’s Office expects to complete its special audit of STRS later this year. The results could affect the retirement system’s StaRS rating in the future (emphasis added).”
It is important to note that the above-mentioned preliminary forensic investigation of STRS Ohio commissioned by members of the Ohio Retired Teachers Association—some of whom apparently filed complaints about the pension with the Auditor’s office—was released to the public by my firm in June 2021. The findings included that the pension had long abandoned transparency.
As stated in the report:
“On February 19, 2021, we filed a request pursuant to Ohio Revised Code Section 149.49, et seq. for an opportunity to inspect or obtain copies of public records related to the pension’s investment managers, investment consultants, performance compliance auditor, investment cost monitor, financial auditor, and custodians, as well as board and staff. The overwhelming majority of the most critical disclosure information we requested was summarily denied. That is, STRS simply permitted the investment firms involved to unilaterally determine whether the information we sought on behalf of stakeholders had to be disclosed under Ohio law. Not surprising, most firms granted the opportunity to oppose public scrutiny of their financial dealings with STRS, chose to do so.
Most disturbing, not a single prospectus or offering document required to be provided to all investors under our nation’s securities laws was provided to us in response to our public records request. As a result of the extensive denials of important public records requests, it is impossible for STRS stakeholders to evaluate the investment strategies, performance, fees, risks, and conflicts of interest related to the pension’s investment portfolio.
Accordingly, on May 21, 2021, we filed a complaint for writ mandamus with the Supreme Court of Ohio seeking certain STRS public records we have been denied.
The lack of cooperation by STRS is all-the-more surprising given that STRS is well-aware that this forensic review of the pension was commissioned, as well as paid for, by tens of thousands of participants, with the stated objective of improving management and oversight of the pension. Pension fiduciaries solely concerned with the best interests of participants and beneficiaries should welcome, not oppose, a free independent review by nationally recognized experts in pensions. Further, given the profound fiduciary breaches and disclosure concerns stakeholders (and even STRS’s own commissioned experts) have long raised, it is clear STRS could benefit from an independent review by experts—this time not of its own choosing.
Tellingly, in the pension’s Mission & Vision statement; Current Strategic Goals; Overview of STRS and Its Impact on the State; Statement of Investment Objectives and Policy; and Statement of Fund Governance, the word “transparency” does not appear even once. There is not a single mention of any transparency requirements, no discussion the benefits of transparency and no commitment to it. In our opinion, transparency, which would add not a single dollar of cost to the pension, would (through exposure) swiftly cure all that ails it—excessive fees, reckless risk-taking, unaddressed conflicts of interest, gross mismanagement and potential malfeasance.”
Evidently, Faber either did not read these damning findings in our report issued early June 2021 (and was not aware of our public records lawsuits filed in May, 2021) before issuing his latest transparency award to the pension for fiscal year 2021, or disagrees that withholding fundamental investment information regarding tens of billions in pension assets from public scrutiny is a serious concern. We’ll find out soon enough—when the auditor releases the results of his special investigation in the near future.
Will the state auditor’s rating of the teachers retirement system’s be changed? What about the other four retirement systems in Ohio which also permit Wall Street secrecy regarding their highest-risk, highest cost investments? Will their ratings be reviewed and inevitably downgraded? If so, what are the political implications? Are Ohio voters good with the largest funds in their state gambling stakeholder, including taxpayer, money in secret—free from public scrutiny?
To paraphrase King Mongkut of Siam in the Rodgers and Hammerstein musical The King and I, it is a “puzzlement” to me how a state pension that is supposed to be prudently investing the retirement savings of hundreds of thousands of teachers could refuse to disclose how their money is invested and still be considered transparent—even win a top award from the state auditor! A puzzlement.
As I told his office recently, “In my opinion, for the pension to tout its past transparency awards while under special audit of its transparency at this time is, at best, grossly misleading. I would encourage the auditor to let the pension and/or the public know whether or not, in his opinion, such incomplete disclosure is misleading.”
When I asked Faber’s office what the StaRS rating involved, I was told:
“StaRS was created to gauge how well public agencies are following the state’s open meetings and records laws, awarding single stars for basic compliance with Sunshine law provisions and additional stars for additional best practices agencies implement.
The StaRS portion of any public entity’s audit was never intended to evaluate the contents and legality of every public records response, just that agencies were in compliance with the law. The legality of the responses are left to the courts to determine.”
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.
As a former regulator, I believe the State Auditor should examine whether representations by state agencies—including all five Ohio state pensions—regarding their StaRS ratings may be misleading to the public, particularly in the case of STRS Ohio which fails to disclose it is currently under investigation by the auditor.
The truth is STRS Ohio, as well as the other Ohio retirement systems holding $250 billion in assets, all long ago—as they increasingly embraced secretive private investments—abandoned transparency. If you don’t believe me, request the “alternative” investment documents from any one of the funds and see what you get.