John Damschroder: Transformational or delusional, let the debate begin

https://www.thenews-messenger.com/story/news/2021/07/21/damschroder-proposed-investment-strategy-could-benefit-ohio-teachers/8012973002/

Damschroder: Transformational or delusional, let the debate begin

A newly proposed investment strategy could help current and retired teachers

John Damschroder, Columnist

Fremont News Messenger

July 21, 2021

Fremont native Wade Steen has detailed major problems and a possibly brilliant solution in a letter to fellow State Teachers Retirement System of Ohio Board members. Steen released a detailed explanation on how the STRS investment staff is alleged to have improperly secured $7.8 million in performance bonuses using false data. Steen further claims the STRS staff has blocked his ability to obtain information necessary as a pension fiduciary and he’s calling for the appointment of a personal lawyer by Ohio Attorney General Dave Yost to assist him in legal battles with STRS.

But easily the most consequential aspect of the Steen letter is his call for a special STRS Board meeting where he and newly elected board member Dr. Rudy Fichtenbaum will unveil an investment strategy to restore the cost-of-living adjustment (COLA) for retirees, cut the payroll deduction for active teachers from 14% to 4%, and lower the retirement age.

$94.5 billion balance sheet

Steen and Fichtenbaum say STRS can cut investment expenses and weak partner relationships with Wall Street through shrewd use of technology and the strength of a $94.5 billion balance sheet.

Given STRS' current status as a negative return, forced investment by current teachers, with lost COLA cutting retirees benefits by 3% year after year, the Steen-Fichtenbaum proposal is either transformational or delusional.

This is the public pension equivalent of a space mission to Mars announced by Cuba. Instead of looking south, Steen and Fichtenbaum are looking north, where the Healthcare of Ontario Pension Plan (HOOPP) has 119% of the funds needed to pay their pensions after following the same plan since the early 2000s.

Through the use of very sophisticated hedging strategies with derivatives, often created specifically for HOOPP, the Canadian healthcare workers have maximized profits and minimized losses. Even more impressive, HOOPP has made Wall Street the junior partner in these investments, where the pension’s access to cash and exemption from regulatory authority allows them to profit through assets that would throw Wall Street risk reserve ratios out of compliance.

Canadian pension plan limits risks

To create capacity for more trading, Wall Street literally pays HOOPP to trade the high reserve required assets for financial instruments that restore their risk ratio. HOOPP protects itself by requiring a hedged position from the Wall Street firm that exposes them only to risk of collapse by the Wall Street firm. Since these are trades with Globally Systemically Important Financial Institutions (GSIFI's), the Wall Street firms would be saved from collapse through a taxpayer bailout, as these firms have been officially designated as too big to fail.

HOOPP has a 10-year annualized rate of return above 11% despite disadvantages in their tax status and currency conversions that come with executing an investment strategy that only the U.S. markets are equipped to support. Ohio’s exemption from tax and trading in the dollar creates a slight advantage to the HOOPP hedging plan.

The ability to provide cash to Wall Street when they have few other alternatives gives Ohio leverage to force a would-be trading partner to take the STRS illiquid, dark market, alternative investment portfolio at near assumed value for resale in the secondary market to create the liquidity necessary to execute the HOOPP strategy. It is no small advantage to get Wall Street to assume the risk of an STRS alternative investment portfolio, which only recently revealed a 100% loser in the Panda Energy Fund. Moreover, STRS asset valuations cannot be trusted, so evading more alternative investment losers is a huge advantage to the Steen-Fichtenbaum proposal.

Proposal could stimulate Ohio's economy

The HOOPP mastermind who created the program, Jim Keohane, has recently retired and is available as a consultant. Fixing a pension paying $7.5 billion a year in benefits but making no one happy is worth a large contract. Restoring $210 million a year in COLA for more than 150,000 retirees while providing 180,000 plus teachers $1.175 billion more take-home pay would be a massive stimulus to the Ohio economy as this newfound money circulates throughout the state. What would Ohio do for a private company bringing $1.5 billion in new payroll to the state?

Normally it would be imprudent to help Wall Street evade regulations meant to protect the financial system. In this case, it’s Ohio first. A plan that requires transparency, liquidity and safety through hedged positions, with Ohio extracting fees from Wall Street rather than paying them billions, as the pensions are now, is worth serious consideration.

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