Dean Dennis: STRS Fiscal Year Investment Costs Raise Questions of Credibility

 September 23, 2021

STRS Fiscal Year Investment Costs Raise Questions of Credibility

By Dean Dennis, Founder
STRS Ohio Watchdogs

In the August 20, STRS eUPDATE, STRS stated the 2021 Fiscal Year (FY) Total Gross Returns were 29.28% and the Total Net Returns were 29.16% . This is, "after all management fees and costs, including carried interest and other fund expenses." This breaks down to investment costs of 12 basis points (bps). This was a good year, returns were near record highs, bonuses were paid and investment costs were low.

Investment costs were exceptionally low, and our Trustees should be skeptical.

STRS advertises they are one of the top tier premiere pension systems in the United States. They make this claim with the support of many of their paid consultants. One such consultant is CEM Benchmarking. CEM works with over 400 fund sponsors worldwide providing objective actionable benchmarking insight. A pension system would hire CEM to make sure pension costs are reasonable and provide value. CEM, using STRS's numbers, supports the STRS top-tier pension claim.

STRS members question the STRS claim. A top-tier pension system pays a COLA. STRS no longer pays one. A teacher who retired after 2013 has never seen a COLA. All retirees have gone at least 5 year without a COLA. The best pension systems don't rate last in the United States by providing the least value for employee contributions. This disconnect rallied STRS members to raise $75,000 of their own money to hire nationally renowned forensic auditor Edward Siedle of Benchmark Financial Services (BFS), to perform a forensic audit of STRS.

The money was well spent and identified many issues. Top among the issues was money being lost to Wall Street in fees, cost and carried interest. This was detailed in the BFS report titled, The High Cost of Secrecy. Shortly after the release of the Siedle report, STRS Ohio released their own report titled, STRS Ohio Response To Benchmark Financial Services (BFS) Report.

Unintended, the STRS Ohio Response to the BFS report raises red flags about the credibility of STRS Fiscal Year (FY) 2021 investment costs of only 12 (bps). Here's why.

In the STRS report, rebutting the BFS report, on pages 27 and 28, STRS defends their FY 2018 investment costs of 37 basis points. However, these costs were adjusted upwards by their own consultant, CEM Benchmarking, to 40.1 basis points. Making matters worse, the BFS report states STRS investment costs really are around 61.3 basis points and CEM states similar peer pension systems average investment costs are 54.5 basis points.

Clearly, if STRS investment costs were higher than the 54.5 bps average it would challenge their top-tier pension system reputation.

To reinforce their FY 2018 investment cost claim, STRS states in their BFS rebuttal that CEM "correctly reported our actual investment costs as $279.1 million or 36.9 basis points." Digging deeper, embedded in their investment cost claim defense, one of the reasons they were not 61.3 bps as stated by Siedle, or 40.1 bps, as adjusted by CEM, is because they didn't include carried interest arguing, "carried interest is not a fee." STRS held steadfast that their investment costs were 14.5 bps lower than their peers.

So with that, one controversy is now being replaced with another.

Here's why there is reason for skepticism; how can FY 2021 STRS investment costs only be 12 basis points and include carried interest? In 2018 investment costs, thought to be too low, were redacted by their own advisor, CEM. Without including carried interest, investment costs were stated as 36.9 basis points. In 2021, STRS states investment costs "after all management fees and costs, including carried interest and other fund expenses" are only 12 bps.

How is this credible?

Let's hope our Board Chair and other trustees find out and can offer an explanation.

Dean Dennis is a retired teacher from Cincinnati and a strong advocate for the restoration of teachers’ earned benefits, particularly their COLA, from STRS Ohio. He is also a noted leader for the Facebook group Ohio STRS Member Only Forum.