John Damschroder: Ohio pension funds are a great deal for the people who manage them as they are getting rich while lowering value and passing the pain on to workers and retirees

Damschroder: OPERS presentation reads like a Hollywood script

John Damschroder, Columnist

Fremont News Messenger

September 24, 2019

The Ohio Public Employees Retirement System Board of Trustees meeting had everything you expect at a good movie, except the popcorn. There was an elaborate slide show of more than 750 pages detailing proposed changes to fund allocation, member benefits, board responsibility and ethics guidelines, and bonus

structure for internal investment managers. But just like Hollywood’s elaborate sets and scripts designed to create an illusion, following the OPERS presentation required suspension of disbelief.

OPERS slides showed high returns for the 31 percent of the portfolio in alternative assets with no public market transparency. But the settlement to my public records lawsuit against OPERS revealed that the state’s largest retirement system has no knowledge of what those assets are and accepts valuations as provided by the contractors they’ve funded.

Trustees protecting an $87 billion fund that doesn’t know what it owns, and can’t confirm what a third of its portfolio is worth, want Ohio lawmakers to freeze retirees' cost of living adjustments, push retirees under 65 off the health care plan, and increase employee contributions while cutting benefits for future OPERS members.

State lawmakers will eventually go along because OPERS-recognized liability will cross the 30-year payoff requirement in Ohio law next year, and it’s a sure thing that the true value of the alternative investment portfolio is well short of the valuations supplied by people pulling in huge fees from OPERS, so the actual shortfall is larger than shown. Then there’s the assumption that OPERS will meet its investment return target. But there wouldn’t be need for cuts if OPERS could perform that mission. The high fee managers are articulate failures.

It’s the fees that are killing OPERS retirement benefit just as a cancer cell kills its human body host. In 2001, OPERS had a $1.3 billion surplus and paid outside fund managers $10.7 million. By 2017, OPERS pay to Wall Street managers had increased by 56.6 times to more than $606 million. Had the $58 billion in OPERS account back in 2001 grown like the fees, OPERS would have $3.2 trillion dollars and be more than four times larger than the Gross State Product of Ohio.

Had the state simply put OPERS and all the rest of the public pension funds, who’ve already made the cuts OPERS wants because unlike OPERS they don’t need the legislature’s approval, on auto-pilot in a 60-40 stock to bond fund everyone would have achieved the needed return on investment. The 10-year annualized return exceeds 9.5 percent, but none of the state fund managers would earn six figure bonuses following that path.

My column detailing bonuses collected through dubious valuations supplied by outside fund managers dependent upon OPERS managers to keep the cash coming, brought records from the State Teachers Retirement System. In 2018, 84 STRS internal investment managers collected bonuses. There was a $416,000 bonus, five bonuses above $300,000, and seven investment managers making more than a half million dollars in combined bonus and salary at STRS.

None of Ohio’s public retirement funds has been able to fully meet obligations to members because none of the funds has achieved their assumed investment returns over the 10-year period and all of the funds pay top dollar to outside managers and richly reward internal managers.

If the pensions truly worked for the benefit of the public employees who’ve paid into the system, the elegant Columbus headquarters would be sold, the retirement fund workforce would be terminated and all of the money would be rolled into a 60-40 index fund provided by the low cost bidder who would also make the monthly benefit payments.

Ohio pension funds are a great deal for the people who manage them as they are getting rich while lowering value and passing the pain on to workers and retirees. A 60-40 index fund is the ultimate no brain investment. It’s unconscionable that public servants are being rewarded and treated as irreplaceable without beating that measure.

There hasn’t been such a low bar since Gordon Gee declared a tie with Michigan to be “one of Ohio State’s greatest wins ever.” If this pension scandal was about something important like Ohio State football, every media outlet in the state would be on the story and the six figure failures would be terminated without delay.

John Damschroder, a Fremont native who worked in Gov. George Voinovich’s administration, writes about business and economic development in Ohio.