Earlier this month, the 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 have now been reported to Ohio legislators, regulators and law enforcement.
The report concluded the state pension has long abandoned transparency; legislative oversight of the pension has utterly failed; Wall Street has been permitted to pocket lavish fees without scrutiny; investment costs and performance may have been misrepresented; and failure to monitor conflicts may have undermined the integrity of the investment process, as billions that could have been used to pay retirement benefits promised to teachers have been squandered.
Within days of the forensic report’s release, STRS staff hastily penned a response which cited the many experts the pension pays handsomely for guidance, even as it failed to address any of the serious deficiencies noted. For example, the staff did not dispute that a fiduciary performance audit and an actuarial audit of the pension had not been completed in the past 10 years—as required under applicable law—and the two audits were already 5 years overdue. No defense was offered for paying $143 million in investment fees to costly private equity managers on committed, uninvested capital—money for doing nothing. The fact that STRS apparently does not monitor all the investment fees it pays to Wall Street for reasonableness, or external investment consultant conflicts of interest consistent with its fiduciary duties, was ignored.
While STRS staff was quick to broadly reassure pension stakeholders all was kosher at the pension, the majority of the pension board stated at the most recent June meeting they were not prepared to discuss the report because they had not had enough time to even read it.
I’m sorry, but it’s not like 128-page forensic expert reports of $90 billion-plus pensions, commissioned by thousands of stakeholders happen everyday. You’d think all board members would have immediately made time to at least read the report—especially before permitting staff to publicly respond on their behalf.
Surprisingly, one sitting board member and a newly-elected member issued responses indicating they had not only found time to read the forensic report but actually agreed with its findings.
In a letter dated June 17th, board member and CPA, Wade Steen indicated that the findings in the report “were deeply disturbing, but for those paying attention, not all that surprising.”
Said Steen, “I wish I could say the staff are transparent, but they’re not. Most of my requests for information have been flat out ignored. I asked for the inputs to calculate our benchmarks, that was denied. I asked for the inputs to calculate staff bonuses, that was denied. I finally just asked for our historical returns by asset class, and even that was denied.” Steen concluded, “I have completely lost confidence in the staff’s ability to invest money, and even worse, their willingness to tell us the truth about the results.”
When a board member says he’s lost confidence in staff responsible for investing $90 billion-plus in assets securing the retirement security of hundreds of thousands, that’s more than alarming.
Board elect and economist Dr. Rudy Fichtenbaum’s response to STRS’s response to the forensic report candidly stated: “I want to begin my comments by staying that it is apparent that many of us have a trust problem when it comes to STRS… The STRS response (to the forensic report) is long on appeal to authority and short on evidence… Claiming that you are being transparent by counting pages (of documents released to the public) is absurd… Transparency cannot be measured by counting pages… Transparency is not merely about the quantity of information it is also about the quality of information.”
Dr. Fichtenbaum also sent an analysis to various STRS stakeholder groups stating:
“Active management has cost STRS approximately $4.1 billion over the 10-years which is an average of $410.3 million per year. These numbers are totally unrelated to the question of whether STRS accurately reports its expenses. The returns are STRS’ GIPS returns, so in effect this analysis assumes STRS is accurately reporting all expenses. If the GIPS returns are not net of all expenses, because STRS understates its expenses, then the underperformance would be even greater.”
When a board elect lacks confidence that the investment performance of a $90 billion-plus pension is being reported accurately, that’s troubling to say the least.
It’s exceptional when public pension board members take their fiduciary duties seriously and speak out about issues such as lack of transparency and mismanagement of investments. Steen and Fichtenbaum, who, incidentally, both possess financial expertise not characteristic of public pension trustees, are to be applauded.
But they are not alone nationally.
Recently, State Sen. Katie Muth hired a national transparency law expert to provide legal guidance and advice to obtain documents necessary to perform her duties on the board of the Pennsylvania Public School Employees’ Retirement System. Following the denial of multiple requests for information by her transparency counsel, she filed a complaint in the Commonwealth Court of Pennsylvania.
Said Muth: “As a trustee responsible for overseeing the financial security of hard working teachers and school employees, I cannot do my job if I am being blocked at every turn. The teachers, school employees, and taxpayers of Pennsylvania should know how each and every penny of their money is being invested. If I, as a PSERS Trustee, am having difficulty acquiring basic documentation about the fund and various investments and practices, what hope does the public have to know how their money is being managed or invested.”
The best hope the public has for ending mismanagement at our nation’s public pensions is for courageous board members to speak out. Increasingly, as public pensions continue their downward spiral, board members are letting their voices be heard.