Ohio Politicians Rally to Crush Teachers Seeking State Pension Transparency - Private Equity Power Stays In The Shadows
JUN 20, 2024
This battle is all about whether Wall Street private equity managers can continue to loot Main Street public pensions in secret--flouting state laws requiring public scrutiny.
Pension warriors participating in the State Teachers Retirement System of Ohio have done a masterful job over the past 5 years organizing (through their Facebook groups and without union support), investigating and advocating for transparency at their pension. They have fought valiantly to restore integrity to a state teacher fund that has increasingly operated in secret for the financial and political benefit of others, including its bloated, richly compensated staff and Ohio elected officials. That’s not the way pensions are supposed to be run, i.e., for the sole or exclusive benefit of participants.
But this is far more than an Ohio story.
At this moment, STRS Ohio participants are leading a national crusade to eliminate Wall Street secrecy schemes at all public pensions across the nation. (For example, Ohio teachers are currently working with Minnesota teachers to reform that state’s $28 billion teacher plan.)
At this moment, STRS Ohio participants are leading a national crusade to eliminate Wall Street secrecy schemes at all public pension across the nation.
Although disappointing, it is no surprise that Ohio elected officials who depend upon Wall Street for campaign donations to fund their political ambitions have hastily—within days—united to thwart a valid pension board election and oppose overwhelmingly popular teacher transparency reforms. Prompted by bogus claims of a “hostile takeover” of the pension by Governor DeWine, Ohio politicians have predictably rallied to support Wall Street billionaires who have been looting the nation’s public pensions for nearly two decades.
Let’s review what has happened in Ohio in the last few years.
After years of growing distrust, teachers sought out and paid for—with their own funds—a forensic investigation of their pension conducted by the leading pension forensic expert in the world, a former SEC lawyer who has investigated over $1 trillion in retirement plans. Frustrated by lack of answers, they legitimately sought a “second opinion” as to whether the billions set aside for their retirement were being prudently managed.
Who can argue with teachers scrutinizing the fund they depend upon for their retirement security?
The damning findings of that investigation were broadly disseminated to pension stakeholders, including provided to all state officials in Ohio—politicians who implicated in the wrongdoing identified and who did nothing in response to the 127-page expert report. The report was also provided to federal officials at the SEC and FBI.
The Report rightly identified widespread fiduciary breaches, apparent violations of law and mismanagement. For example, the $90 billion pension had not been audited—as required under Ohio law—for the past 16 years. The Ohio Retirement Study Council—as to which Attorney General Yost served as Legal Counsel since 2019—had utterly failed to do its job, leaving the teacher pension and tens of billions in two other Ohio pensions at risk. No Ohio politician disputed this finding—a fiduciary audit was hastily undertaken, entirely in response to the teacher’s forensic investigation. The ORSC actually blamed the 16-year delay on Covid-19 and no state officials, including the Attorney General, was held accountable for this collosal failure.
The forensic audit prompted the State Auditor to conclude it provided a “reasonable basis” for a Special Audit by his office. The Special Audit inauspiciously began by his staff admitting to me they knew nothing about pensions.
True to their word, they knew nothing.
Nevertheless, the Auditor agreed the pension should be fully transparent and that had it been prudently managed, pension assets would have doubled over time from $90 billion to $180 billion today.
There are no secrets here: Since 2021, Ohio teachers have openly fought a “hostile takeover” of their pension by staff, politicians and Wall Street. Looting in secrecy is rampant at public pensions across the nation. Ohio teachers are pension warriors leading the fight against it.
Pension Warriors by Edward Siedle is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
The Greatest Teacher Retirement Crisis in History - John MacGregor, Ted Siedle
(Also, Dean Dennis, Pres. ORTA and two retirement reformer teachers from Minn.)
“JM – Full Disclosure Podcast”
https://www.youtube.com/watch?v=U0XSJwm WU0U&ab_Channel =TheRichDadChannel
What Are We Paying For?
ORTA Stands Ready to Help!
Dean Dennis, ORTA President, addresses the STRS Ohio Retirement Board during Public Participation on April 18, 2024.
The STRS Ohio Watchdogs recently asked retirees to tell their story in 500 words or less about why they had to unretire. Here is the first submission:
“Without the promised COLA from STRS and increasing inflation, I was forced to go back to work to pay my bills. I initially began using my savings to pay for the costs above what my pension covered but soon realized that it wouldn’t sustain me for long. It was at that point that I had to go back to work. I never envisioned having to continue working, probably for the rest of my life, but that is the position I was put in by STRS when they broke their promise to their retirees.”
Retirees can no longer go without inflation protection. Since 2017, inflation has grown to nearly 27%, and this is compounded year over year. Retirees have only had 4% Simple COLA added to their retirement base. Since the Draconian COLA changes in 2012, nearly 50,000 retirees have died without seeing the inflation protection they and their families were promised upon retirement.
Where have STRS lobbyists been? It appears between our outside firm of Calfee, Halter, and Griswold and our internal lobbyist we have a half-dozen lobbyists and are spending easily between a quarter and half million dollars a year. How have members benefited from this annual spending?
In April of 2000, twenty-four years ago, Substitute Senate Bill 190 was signed into law. STRS supported this legislation. Within this legislation was a provision that made sure that retiree benefits were “increased to a minimum of 85% of the purchasing power of the original benefit based on changes in the Consumer Price Index. In twenty-four years we have gone from almost nobody being 15% below their purchasing power, to almost everyone being 15% to 30% below their original purchasing power.
Note, twenty-four years ago, our portfolio was 46% in Domestic Equities and 1% in Alternative Investments. Today, we are 26% in Domestic Equities, and 20% in Alternative Investments. We need another Senate Bill 190, an Employer Contribution Increase, and a revamping of our investments. ORTA stands ready to help!
Dean Dennis, 35 years Cincinnati Public Schools, President of ORTA, Founder of STRS Ohio Watchdogs, and Ohio STRS MOF member.
Why are we allocating capital to risky investments burdened with high fees and subpar performance?
ORTA President, Dean Dennis, addressed the STRS Ohio Retirement Board at the March Board meeting.
With minimal research, Board members should be able to conclude that investment managers lose to the market roughly 90% of the time. No investment staff can beat the market every year. Not even our investment staff, although every year they seem to beat their benchmarks, supposedly tied to the Market. Interestingly, our investing trend is to move away from transparent investments tied to the market, such as Domestic Equity investments, and move towards opaque Private Equity Investments. In 2005, 46% of our investments were in transparent Domestic Equities now only 26% of our investments are in Domestic Equities. In 2005 only 2.6% of our investments were in opaque Alternative Private Equity/Opportunistic investments, now over 20% are in such investments.
Private Equity investments are fraught with non-disclosure agreements and hidden fees. Their performance is sheltered from being audited by pension Board members. This allows the General Partner of PE investments to mask its performance from their Limited Partners. This is a good deal for the General Partner because they essentially can grade themselves and inflate their performance. This can become a good deal for the Limited Partner because this inflated grade passed on to the Limited Partner, is then passed on to their Board members who approve bonuses. The million-dollar question however is, how do the members of the pension plan benefit from the General Partner and Limited Partner relationship? Spending money on the Benchmark Services lawsuit needs to be questioned.
Trustees, with minimal research, you’ll learn Private Equity investments aren’t what they are advertised to be, they peaked nearly a decade ago. When you account for their high fee structure, actual performance, and risks, you’ll rethink their value to our portfolio.
Let’s look at PE investment’s “2 and 20” fee structure. After we commit our capital to the investment, the General Partner charges us a 2% annual fee to manage our investment. When liquidating the investment, the General Partner is entitled to a 20% performance fee skimmed off the top. But, let’s look at just the 2% fee.
In 2005, STRS had 2.6% of our monies, or, $1.5 billion, in PE’s investments. This added up to STRS sending about $30 million in investment fees to Wall Street. STRS has over 20% of our monies, or roughly $18 billion in PE investments. Today we send roughly $360 million in fees to Wall Street. Note, $360 million annually sent to Wall Street equates to nearly $3 billion over a 30-year-funding period, money we could have used towards restoring benefits.
So, trustees, why are we allocating capital to these risky investments, burdened with high fees, and subpar performance? Incidentally, PE investments accounted for nearly 16% of all bankruptcies in the United States last year. I believe we hold nearly 130 such investments.
Dean Dennis
President, Ohio Retirement for Teachers Association March 21, 2024
We deserve better than this!
Why can OPERS continue to pay a 3.0% / 2.3% COLA (depending on date of retirement)? Why can OPERS actives retire with full benefits after 32 years of service? Why can OPERS do this, while STRS can't? These questions have plagued me for a while.
Is if because STRS pays out more each year than they bring in? No. Although that is a problem that will likely precipitate the need for increased employer contributions in the future, that is not the answer. Why? Because OPERS is in a very similar negative cash flow situation.
Is it because OPERS is not as well funded as STRS? No. That is not the answer either. Both STRS and OPERS have been over 75% funded since 2017.
The answer lies in investment perfomance, as the graph shows. There are a couple of important things to note about this graph. 1) It does not start at $0 but rather at $40 billion, and 2) STRS and OPERS have different fiscal years. STRS's fiscal year ends on June 30th while OPERS's fiscal year ends on December 31st. Thus, the fiscal year end numbers are 6 months apart, making yearly comparisons invalid. However, what is valid and important here is the trend over time.
After the great recession of 2008, OPERS had a quicker recovery and continued to grow their Net Plan Assets at a greater rate than STRS. The result is an OPERS fund that has been $20-30B greater than STRS since 2017. This is why STRS retirees have gone without a COLA and actives are working longer and paying more.
Unfortunately, we can't turn back the hands of time. But going forward, we don't have to sit back and blindly accept STRS's strategies for our money. We deserve better than this.
Michelle Flanigan, a former financial analyst for American Greetings, teaches government and economics, including AP government and politics, at Brunswick High School, where she has taught for 26 years. She is an active member of the Ohio STRS Member Only Forum (MOF) on Facebook, where she posts about the investment practices of STRS Ohio.
Ohio teacher pension's private equity secrets may soon be exposed
For over two years, the State Teachers Retirement System of Ohio has been stonewalling a public records request on behalf of teachers to disclose private equity investment risks.
A decision is expected soon regarding a lawsuit led over two years ago on behalf of tens of thousands of members of the Ohio Retirement for Teachers Association demanding that the $100 billion State Teachers Retirement System of Ohio disclose information about its private equity holdings—information which the SEC considers vital to protecting workers’ retirement savings. In complete disregard for regulatory concerns, STRS Ohio and its Wall Street money managers have long been committed to maintaining secrecy regarding tens of billions of state pension assets invested in over a hundred of these costly, high-risk private funds.
Today, the SEC’s website warns private equity investors to be vigilant about fees and expenses, as well as alert to conflicts of interest. In order to better educate investors, the SEC’s website provides an informative discussion of the risks of investing in private equity funds, with helpful links to certain enforcement actions the regulator has brought related to specific industry abuses.
At the outset, the agency notes that although private equity funds may be advised by advisers that are registered with the SEC, private equity funds themselves are not registered with the SEC. As a result, private equity funds are not subject to regular public disclosure requirements.
Private equity funds are not registered with the SEC. As a result, they are not subject to regular public disclosure requirements.
Under What should I know?, the agency specically warns investors about illiquidity, investment fees and expenses and conflicts of interest.
Illiquidity
The SEC warns that because of their long-term investment horizon, an investment in a private equity fund is often illiquid and it may be necessary to hold the investment for several years before any return is realized. Private equity funds typically impose limitations on investors’ ability to withdraw their investment—often 10 or more years.
I’ve seen some funds which I refer to as “cradle-to-grave” that limit investor withdrawals for as much as 50 years. You’ll be dead before you get your money back.
Some private equity funds have “cradle-to-grave” limitations that prevent investor withdrawals for as much as 50 years. You’ll be dead before you get your money back.
Fees and Expenses
When investing in a private equity fund, the SEC notes that an investor usually receives offering documents detailing material information about the investment and enters into various agreements as a limited partner of the fund. These offering documents and agreements should disclose and govern the terms of the investor’s investment throughout the fund’s life, including the fees and expenses to be incurred by funds and their investors. These materials, which the SEC advises all investors (including participants in public pensions) read carefully, are the very same documents which members of the Ohio Retirement for Teachers Association have long demanded to see and STRS Ohio and its Wall Street money managers have steadfastly refused to disclose.
These materials, which the SEC advises all investors read carefully, are the very same documents which members of the Ohio Retirement for Teachers Association have long demanded to see and STRS Ohio and its Wall Street money managers have steadfastly refused to disclose.
Without access to these documents and agreements, it is simply impossible for active and retired teachers, as well as taxpayers, to determine whether STRS Ohio officials and the external private equity advisers it hires are prudently managing pension assets. One has to wonder: if the pension and Wall Street are diligently fullling their fiduciary duties, why the fierce opposition transparency?
Who’s hiding what?
Thankfully, the SEC answers the above question by providing a link to certain enforcement actions the agency has brought involving fees and expenses that were incurred by funds and their investors without being adequately consented to or disclosed. Investors should be vigilant about the fees and expenses incurred in connection with their investment, says the SEC.
Again, STRS Ohio participants cannot be vigilant about the fees and expenses if they’re not allowed to see the “secret” documents related to their retirement savings.
STRS Ohio participants cannot be vigilant about the fees and expenses if they’re not allowed to see “secret” documents related to their retirement savings.
Conficts of interest
Private equity firms often have interests that are in conflict with the funds they manage and, by extension, the limited partners invested in the funds, warns the SEC. Private equity firms may be managing multiple private equity funds as well as a number of portfolio companies. The funds typically pay the private equity firm for advisory services. In addition, the portfolio companies may also pay the private equity firm for services such as managing and monitoring the portfolio company. Afiliates of the private equity firm may also play a role as service providers to the funds or the portfolio companies. As fiduciaries, advisers must make full disclosure of all conflicts of interest between themselves and the funds they manage in order to get informed consent.
Again, information regarding all conflicts of interest—which the SEC advises all investors read carefully—is the very information which members of the Ohio Retired Teachers Association have long demanded to see and STRS Ohio and Wall Street has steadfastly refused to disclose. Without access to this information, it is impossible to determine whether STRS Ohio officials and the external private equity fund advisers are prudently handling pension assets.
Why the fierce opposition to transparency? Who’s hiding what?
Once again, the SEC provides a link to certain enforcement actions, related to an adviser’s alleged failure to disclose certain conicts of interest to the funds it manages. Through its various relationships, including with aliates and portfolio companies, there exists opportunity for advisers to benet themselves at the expense of the funds they manage and their investors. It is important for an investor to be aware and alert about the conicts that exist, or that may arise, in the course of an investment in a private equity fund, says the SEC.
Again, teachers participating in the pension cannot be aware of and alert as to conicts of interest disclosed in documents they are not allowed to see.
Unlimited Leverage
While the SEC website does not include warnings about use of leverage or borrowing by private equity funds, all such fund documents I have drafted as a lawyer, or reviewed over the course of my career, permit unlimited use of leverage. Unlimited leverage greatly increases risk of loss and, worse still, in my experience public pensions universally fail to adequately monitor leverage on a timely basis related to private equity assets. That is, public pensions have no idea just how highly levered their private equity portfolios are at any given moment.
Given that public pensions are already severely underfunded and are increasingly turning to leverage in a desperate gamble to boost investment returns (as well as pension staff compensation), it is critical that participants and taxpayers themselves monitor use of leverage. Stakeholders cannot assume pension officials and Wall Street are diligent.
Given that public pensions are already severely underfunded and are increasingly turning to leverage in a desperate gamble to boost investment returns (as well as pension staff compensation), it is critical that participants and taxpayers themselves monitor use of leverage. Again, STRS Ohio particpants cannot be aware and alert as to leverage levels disclosed in documents they, as well as likely pension ocials, are not allowed to see.
Valuation Uncertainties
Given the illiquid nature of private equity assets, advisers are permitted tremendous latitude in how they value the assets they manage. Basically, advisers are allowed to unilaterally determine values and there is no assurance the assets can or will be sold at those values. Worse still, advisers are subject to a conflict of interest in valuing assets under management because the greater the assigned value, the higher the asset-based fees they are paid.
Since STRS Ohio refuses to disclose to participants the nature and amount of assets held in private equity portfolios, it is impossible for teachers and taxpayers to determine whether the valuations are appropriate or, more likely, inflated, as well as whether pension officials are diligently monitoring portfolio valuations.
It is impossible for teachers and taxpayers to determine whether private equity valuations are appropriate or, more likely, inflated.
Last year, it was reported that the $440 billion CalPERS state pension sold a record $6 billion in private equity stakes to Wall Street at a 10 percent discount. That amounts to a $600 million transfer of workers’ wealth to Wall Street, in my opinion. Discounts on private equity secondary sales can be far greater, as much as 50 percent. In short, private equity assets may be grossly inflated, thus making public pensions appear better funded, i.e., less underfunded, than they really are. For their protection, pension stakeholders need access to information regarding private equity portfolios and corresponding values —they very information STRS Ohio and Wall Street are fighting to keep secret.
As a former SEC attorney, I never thought I’d see the day when government workers and retirees were summarily denied prospectuses, offering documents and agreements related to the costliest, riskiest investments in their retirement plans.
As a former SEC attorney, I never thought I’d see the day when government workers and retirees were summarily denied prospectuses, oering documents and agreements related to the costliest, riskiest investments in their retirement plans.
Investors forced to sue to get these fundamental documents? I never would have predicted it.
Now that secrecy in public pension investing is the “new normal,” I’m hoping state and federal securities regulators will eventually wake up, do their jobs and compel disclosure, as opposed to leaving it up to the courts to restore public accountability.
In the near-term, let’s hope the Ohio Supreme Court decides to end state pension private equity secrecy.
The Columbus Dispatch
Ohio teachers pension fund leaders have no real plan, only propaganda
"What STRS doesn’t admit is the truth: They have no real plan to restore benefit cuts and to provide a COLA for retirees."
The recent article “Ohio teacher pensions: Control of the board, $95B at stake in election” is certainly correct in making the statement that the State Teachers Retirement System of Ohio board election — which is now taking place — is a pivotal moment for the State Teachers Retirement System.
However, the issues in this election centered around an “unproven investment strategy” are incorrect. If anything, the issues center around the current STRS investment strategies, which have failed to deliver the resources needed to keep the promises made to Ohio’s teachers.
Recently, investment expert Richard Ennis, who was hired by Ohio to help clean up the mess at the Bureau of Workers Compensation in the aftermath of “Coingate," wrote a Toledo Blade essay that explained how STRS had “underperformed a passively investable benchmark by 1.62 percentage points per year for ... 13 years...” and “much of the underperformance could be attribute to unrecouped investment expenses incurred by STRS.”
Active teachers are working longer and paying more, but will receive less when they retire.
A large part of what they will not receive is their guaranteed cost-of-living adjustment, which the STRS Board eliminated. How will active teachers fare over time, since they will not receive Social Security in retirement and will also not have a COLA?
Those who are already retired did so with the promise that they would receive a COLA; however, after making that irrevocable decision, they have found over the last decade that the STRS Board reneged on its promise. Retirement for active teachers and for those already retired without a COLA is a formula for impoverishment.
In Ohio, a non-Social Security state, asking active teachers to work longer, pay more, receive less, and retire without a COLA is asking them to take a vow of poverty in their golden years.
This hurts all Ohioans. It will also surely drive the best and the brightest teachers, who are among the most educated individuals in Ohio, to look for work elsewhere or to choose a different profession. That is what is truly at stake in this election.
What also is at stake in this election is a lack of transparency and an investment staff that feels entitled to millions of dollars annually in bonuses while the pension loses billions of dollars each year.
What is at stake in this election is the senior leadership of STRS, which continuously releases a stream of propaganda, telling members, the public, and the Ohio Legislature that everything is okay and that STRS is one of the best pensions in the country.
They paint a picture that members are happy; indeed, they are not. What STRS doesn’t admit is the truth: They have no real plan to restore benefit cuts and to provide a COLA for retirees.
STRS Ohio loses around $320 million a month (approximately $10.7 million per day) because expenses are greater than contributions. This difference needs to be made up from investment income.
What STRS senior management and their Board member supporters don't say publicly is that STRS cannot invest its way out of this crisis. In other words, active teachers will have to continue to work longer, pay more, receive less, and retire without a COLA. Teachers currently retired are left worrying if they can make it without any inflation protection.
The truth is, STRS Ohio needs more money to keep its promises and that money will not come from the proven failed investment strategy that STRS is using. At the end of the day, this election is about transparency and facing the truth. It is about electing Board members that will hold staff accountable. It is about electing Board members who are willing to face up to the problems the pension has and are willing to look for real solutions.
Dean Dennis is a retired Cincinnati Public Schools teacher. He is president of the Ohio Retirement for Teachers Association