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
Mismanagement of investments, skyrocketing undisclosed fees paid to Wall Street, growing secrecy, and, most recently, suspension of the Executive Director, have all created a crisis of confidence.
DEC 1, 2023
https://substack.com/@pensionwarriorsdwardsiedle?utm_source=substack&utm_medium=email
The board of the $90 billion state teachers’ pension, along with stakeholders—including participants and taxpayers—should join together and demand an intervention by the nation’s premier securities regulator.
Recently, the board of the $90 billion State Teachers Retirement System of Ohio reportedly suspended its executive director after staffers accused him of violent behavior and sexual harassment. The STRS board suspended Bill Neville and called for an investigation after an anonymous letter from staff accused him of throwing furniture, making comments about his past relationships and about people’s appearances, and threatening staff whose family members spoke against him at board meetings. In February, the board rejected a motion to declare confidence in Neville, with one board member saying the fund needed a leadership change.
Before assuming the role as director in 2020, Neville served as the fund’s chief legal counsel since 2004. He had been at the center of controversy regarding the pension fund long before the recent allegations against him came to light.
Over the past few years, criticism of STRS has mushroomed as scrutiny of the pension has intensified.
Public pensions, solely by virtue of their size, are considered by regulators to be “sophisticated investors” who can fend for themselves. In reality, these pensions are overseen by lay boards—utterly lacking investment expertise—who are hoodwinked all the time by Wall Street. Worse still, participants whose retirement savings are at risk—teachers, firefighters and police—are not even permitted to see the prospectuses and other documents related to the investments.
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June 2021 Forensic Investigation
In June 2021, the damning findings of my expert forensic investigation of the pension commissioned by the Ohio Retirement for Teachers Association (“ORTA”) were released. Among the key findings in the 128-page report titled The High Cost of Secrecy:
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The pension had long abandoned transparency, opting instead to allow Wall Street money managers to withhold key investment documents from public scrutiny;
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Legislative oversight of the pension had utterly failed, as the Retirement Study Council had somehow failed to perform statutorily-mandated fiduciary audits over the past 16 years;
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Wall Street had been permitted to pocket lavish fees without review;
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Investment costs and performance had been misrepresented, i.e., dramatically understated; and
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Failure to monitor conflicts of interest had undermined the integrity of the investment process, as billions that could have been used to pay retirement benefits promised to teachers had been squandered.
Due to the serious investment management and securities issues identified, a copy of the damning preliminary findings was provided to Ohio legislators, state and federal securities regulators, law enforcement and later the State Auditor of Ohio.
The Ohio Retirement Study Council had somehow failed to perform statutorily-mandated fiduciary audits of the massive state pension over the past 16 years.
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Growing Board Support for Reform of Pension
Immediately upon the release of the above forensic report, one STRS sitting board member and one member-elect indicated their agreement with the findings. In the months following release of the findings, three more candidates supported by ORTA were elected to the STRS board, for a total of 5 in support of reform of the pension.
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Special Investigation by State Auditor
Spurred by participants sending the High Cost of Secrecy report to the Ohio State Auditor which, in his opinion, provided a “reasonable basis” for a special investigation, he launched a year-long review of the pension. His findings were released to the public in late 2022. Notably, the State Auditor called on the pension to increase transparency.
Ohio Governor Mike DeWine openly agreed with the Auditor that the pension should be more transparent.
In 2022, the Ohio State Auditor and Governor DeWine agreed the state pension should be more transparent.
It seemed that the long-awaited pension reform was imminent.
Not-so-fast.
When pension reform seemed imminent, Ohio Gov. Mike DeWine stepped in to thwart the effort.
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Ohio Governor Intervenes in Board Election to Thwart Reform
This past May when Pat Davidson, a reform-minded teacher, was elected to the board in a landslide vote, tipping the balance of power 6-5 to progressive reformers, Gov. Mike DeWine stepped in to thwart the effort.
The night before the election results were announced, he summarily removed a board member he had previously appointed who supported the reforms. That would-be member’s dismissal is being challenged in court at this time. Weeks before, the board mulled over a 30% bonus for investment staff, a move highly criticized by teachers who pointed to the fund’s $5.3 billion in losses the year before.
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Why the SEC Needs to Intervene When State Pensioners Are Harmed
While state pensions are not regulated by the SEC, the money managers and investment consultants these retirement funds hire, are. When public pensions are scammed, Wall Street prospers. Therefore, it is fitting that the SEC should intervene to protect these retirement plans—public pensions regarded as “the dumbest investors in the room” by Wall Street.
The SEC should intervene to protect these retirement plans—public pensions regarded as “the dumbest investors in the room” by Wall Street.
Historically, the SEC has looked the other way when the victims of Wall Street are public workers and pensioners. Public pensions, solely by virtue of their size, are considered by regulators to be “sophisticated investors” who can fend for themselves. In reality, these pensions are oversee by lay boards—utterly lacking investment expertise—who are hoodwinked all the time by Wall Street. Worse still, the participants in these funds whose retirement savings are at risk—teachers, firefighters and police—are not even permitted to see the prospectuses and other documents related to the investments.
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Who Would Oppose SEC Intervention?
Who would oppose SEC intervention? Well, naturally Wall Street. Also, state politicians who receive substantial campaign contirbutions from money managers for steering public pensions into costly, underperforming investment contracts. By the way, my forensic investigations regularly reveal the following obvious truth: long-term damages resulting from hiring corrupt money managers always far exceed any kick-backs or bribes paid to politicians, or influential middlemen. For example, a $1 million bribe in connection with a $100 million asset management contract can easily result in $10 million in underperformance losses over time.
Long-term damages resulting from hiring corrupt money managers always far exceed any kick-backs or bribes paid to politicians or influential middlemen. For example, a $1 million bribe in connection with a $100 million asset management contract can easily result in $10 million in underperformance losses over time.
It may seem like a long-shot to demand an SEC intervention. Nevertheless, I honestly believe that if enough STRS Ohio stakeholders, including reform-minded board members, petition the SEC to investigate, the federal agency may choose to take action.
Better still, imagine if stakeholders in every state pension in America were to sign petitions demanding SEC intervention. In my opinion, such a national outcry would be impossible for the agency to ignore.
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STRS pays its investment staff bonuses based upon gross investment returns, not net investment returns. STRS provided information that showed STRS beat the benchmark with their gross returns by 6 basis points but when expenses and fees are subtracted the investment returns LOST to the benchmark by 7 basis points
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STRS staff, which oppose using net numbers explained that it is too difficult to calculate the net investment returns at the asset class level. The other reason STRS opposes using net numbers is obvious; they would not meet their benchmarks and be eligible for their bonus. What is interesting is that STRS pays an outside consultant (CEM) to provide information on benchmarks and performance. CEM provides net performance at the asset class level as part of their service. STRS chooses to ignore the calculations of their consultant and, instead, calculates their performance using gross performance numbers
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The PBI policy (bonus policy) was revised. The revisions are not substantial and ensure that our investment people will continue to receive lavish bonuses
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The board’s divisions are very apparent. Fichtenbaum, Jones, Sellers, and Foreman are working on behalf of STRS members active and retired. Carothers, Herrington, Bishop, Price, Lanza-Falls, and Hunt are clearly doing what they can to make sure that STRS management are supported and that the status quo of paying bonuses despite performance that fails to meet the benchmarks continue. The reform-minded members voted against the payment of the bonuses and the insignificant changes in the PBI policy. The status quo board members voted in favor of both measures. Mr. Lard also voted in favor of the bonuses, certainly his willingness to support Mr. Neville and the STRS staff weighed heavily in his landside loss in the last election. Mr. Davidson comes on board in September providing another voice for reform. If Wade Steen’s legal challenge is successful, the reform-minded people will hold a majority. Change is coming!
Submitted by R. Rayfield, ORTA Exec. Dir.
ORTA Takeaways from the September STRS Board meeting:
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