Ohio STRS's former recipe for abuse still alive and well in Missouri! I wonder if they pay bonuses during a downturn?

From John Curry, October 19, 2008
Subject: Ohio STRS's former recipe for abuse still alive and well in Missouri! I wonder if they pay bonuses during a downturn?

“It compromises you,” said Paul Nick, chief investigative attorney for the Ohio Ethics Commission, which recently conducted a probe of that state’s teachers pension fund. Six former board members of the State Teachers Retirement System of Ohio were convicted in 2006 of accepting hundreds of dollars worth of tickets to entertainment and sporting events from investment managers and the executive director was convicted in 2005 of improperly accepting gifts.

Sunday, Oct 19, 2008
Posted on Sat, Oct. 18, 2008

http://www.kansascity.com/105/v-print/story/847230.html

Gifts from investment managers have cozy relationship with pension executives

By JUDY L. THOMAS The Kansas City Star

LAKE OF THE OZARKS, Mo. -- Robert Klausner, a lawyer and ethics expert, wrapped up his speech at a conference for pension fund executives and encouraged them to read the material he’d given them. “Given the public scrutiny under which fiduciaries of government plans operate,” according to Klausner’s handout, “it is best to avoid even an appearance of impropriety.” That can be as simple as accepting a gift or gratuity, it noted.

Then his audience of pension fund executives scattered across Tan-Tar-A Resort to play golf, splash around a water park, or relax on a boat excursion — all paid for by their investment managers or other companies. In many states it’s illegal for pension fund board members and executives to accept gifts and gratuities from the investment managers they are in charge of hiring and firing.

But for the Public School and Education Employee Retirement Systems of Missouri, it’s business as usual. In July, reporters for The Kansas City Star observed as companies that handle millions of dollars of investments for the retirement systems entertained its executives, board members and their families at Tan-Tar-A. It’s all part of an annual multi-day conference that included meals, gifts such as cameras and GPS devices, and tickets for Kansas City Royals and St. Louis Cardinals baseball games.

The conference is sponsored by the Missouri Association of Public Employee Retirement Systems (MAPERS), an umbrella organization made up of many of the state’s pension funds and private investment managers.

Teachers retirement system executives said they saw nothing wrong in their relationships with the investment managers. No Missouri law prohibits accepting corporate gifts. And they insist their staff and board members can’t be bought anyway.

“We tell our trustees, you’ve got to treat managers like white lab mice,” said executive director M. Steve Yoakum. “Don’t get too attached to them, because you’re ultimately going to have to kill them.”

State ethics officials elsewhere, however, maintain that accepting anything of value from investment managers is troubling. “It compromises you,” said Paul Nick, chief investigative attorney for the Ohio Ethics Commission, which recently conducted a probe of that state’s teachers pension fund.

Six former board members of the State Teachers Retirement System of Ohio were convicted in 2006 of accepting hundreds of dollars worth of tickets to entertainment and sporting events from investment managers and the executive director was convicted in 2005 of improperly accepting gifts.

A government watchdog group also criticized investment managers’ underwriting of events such as those at Tan-Tar-A. Other critics called it a “recipe for abuse.”

“I am stunned,” said Robert Stern, president of the Center for Governmental Studies in Los Angeles and an architect of California’s conflict of interest law. “It is totally unethical and should be illegal for them to accept gifts.”

But Yoakum said the corporate sponsorship of the MAPERS conference every summer is an inexpensive way to train board members, who are required by state law to attend two educational events a year.

“I think the key from our standpoint is making sure there is no conflict of interest, that our decision-making process doesn’t favor any of these firms,” he said. “If I thought there was a conflict of interest, I wouldn’t be there, our board wouldn’t be there, no one else would be there.” Robert Rust, the teachers retirement system’s assistant executive director for operations and outgoing president of MAPERS, participated in the corporate-sponsored outings at Tan-Tar-A but said no one can be influenced by a round of golf.

“Most of the people, we’re already doing business with anyway,” Rust said.

This year’s conference had 38 corporate sponsors, 10 of which are investment managers for the teachers retirement system. However, Yoakum said in the past two years his system has terminated five other investment management firms that have sponsored the conference. He said that shows the firms aren’t buying influence.

One of this year’s sponsors, Gabriel Roeder Smith & Co., is the actuary for the teachers retirement system. Urdang Securities Management — which last year managed more than $207 million worth of real estate assets for the teachers retirement system — sponsored the Ozark Princess boat excursion.

“All sponsors are recognized for their underwriting of an activity,” states a note on the MAPERS Web site about sponsorship of the conference. “Sponsors may also distribute their firm’s gift or promotional items at the time of their sponsorship.” Sponsors can contribute at various levels, ranging from “Bronze” — the designation given for donating $1,000 — to “Double Platinum” for donating $5,000. The money helped pay for the conference, including door prizes.

Investment managers who sponsored the conference, however, didn’t want to talk about it, citing confidentiality reasons.

“That’s not something I can give you answers to,” said a spokesman for Bridgewater Associates, a “Double Platinum” sponsor of the conference. “Preferably, we like to stay out of the media.”

But the annual conference at the Lake of the Ozarks isn’t the only occasion that the teachers retirement fund has accepted gifts or gratuities from investment managers.

The Star found that the retirement system’s staff and board members took trips to Dublin, Ireland, from 1996 to 2003 to meet with officials from Bank of Ireland Asset Management.

Expense reports revealed that staff, board members and their spouses traveled to Dublin, but no receipts were turned in for meals or lodging. Retirement system officials later acknowledged to The Star that the Bank of Ireland had picked up the tab. Records do not reveal the costs, but officials said spouses paid their own travel expenses.

Teachers retirement system officials stayed at the Berkeley Court Hotel, one of Ireland’s leading five-star hotels, and described in promotional materials as “a natural host to international dignitaries, top business people and leisure travelers alike.”

The trips were made to conduct “due diligence” on the Bank of Ireland, which at one time managed nearly $1 billion of the teachers retirement system’s assets.

But during the last several years that the Bank of Ireland managed some of the retirement system’s money, its investments yielded poor returns.

From fiscal year 2002 to March 31, 2004, the firm underperformed the market by more than $127 million, records show. During that time, the teachers retirement fund paid the Bank of Ireland nearly $6.2 million in management fees.

In fact, the Bank of Ireland underperformed the market in three of the seven full years it managed the system’s investments. But overall, retirement system officials said, it produced an excess return of $111 million. That’s an annualized return of 1.8 percent.

Despite the underperformance, the teachers retirement system stuck with the Bank of Ireland until April 2004.

Cara Satterfield, a social studies teacher at Truman High School in Independence, was bewildered to hear about the pension fund’s relationships with its investment managers.

“This is definitely a concern,” she said. “It makes me wonder what else they’re doing with my money. I’ve got a while before I retire, but still, I expect the money to be there.”

But Yoakum said the relationship with the Bank of Ireland benefited the retirement system.

“They were our first foray into international investing,” he said. “At that time, they were one of the dominant international investors…”

The Tan-Tar-A conference isn’t the only corporate-sponsored event attended by pension fund officials.

For example, the National Council on Teacher Retirement holds an annual convention that relies heavily on money from investment firms. Last year’s was at the Westin Kierland Resort and Spa in Scottsdale, Ariz.

Among the events sponsored by firms such as Standard & Poor’s, Morgan Stanley and Lehman Brothers Asset Management LLC were daily receptions and banquets, a golf tournament, a raffle and a trip to the Phoenix Zoo.

Yoakum, his executive assistant, two other teachers retirement system executives and three board members — along with the board members’ spouses — attended that convention. The cost to the retirement system: more than $13,000.

The Southern Conference on Teacher Retirement also is heavily subsidized by corporate sponsors. According to that organization’s Web site,

“Without commercial sponsorship, SCTR would not be able to meet the educational needs of the trustees and staff of our member states.”

The group acknowledged that such sponsorship raised ethical concerns, but noted that it had found a way to get around them.

According to a note on its Web site: “Due to ethics rules in many states that restrict trustees and staff from participating in activities sponsored by a single company, we have been transitioning SCTR functions to more group level support.”

Yoakum said investment companies backing the Tan-Tar-A conference also create “pools” and form a group sponsorship in an effort to allay such ethical concerns. He doesn’t think it’s a problem.

As conference goers collected their door prizes and headed home, Yoakum said: “It’s just the nature of trust funds.”