John Damschroder: Answers needed to 'trust but verify'
John Damschroder: Answers needed to 'trust but verify'
Apparently fortunes are turning at the State Teachers Retirement System of Ohio (STRS).
After getting pounded in the press, first here at the Fremont News-Messenger, and shortly thereafter on the website of NBC news and the editorial page of the Toledo Blade, all over the failings of high cost alternative investments, documented by Securities and Exchange Commission (SEC) lawyer-turned-whistleblower Edward Siedle in a report funded by retired teachers, STRS Executive Director William Neville was happy to share news of 45% gains in the fiscal year ended June 30 for the alternative portfolio.
Neville told retired teachers gathered for a presentation last week in Findlay that the $11 billion Private Equity portfolio returned 65% last year, after fees, expenses and the profit sharing deal called carried interest was paid to the hired fund managers.
'Good news' angered retired teachers
Interestingly, this good news did nothing but anger the retired teachers who see the fund managers STRS selects make millions and the STRS investment staff that selects them earn hundreds of thousands of dollars in bonus compensation while the 3% annual cost of living adjustment (COLA) owed to teachers has been unpaid since 2017. The Siedle Report concluded underperformance by the alternative investments has cost STRS more than enough to pay the annual COLA.
Siedle titled his report “The High Cost of Secrecy,” claiming the lack of transparency on both alternative investment holdings and fees is behind returns that seriously lag the performance of a broad-based index such as the Russell 3000. Maybe with good news to share STRS would provide details. Exactly how much did a 65% gain add to the fund, exactly how much did the outside managers make from the carried interest payments and specifically which investments powered these fabulous returns? Like Reagan with Gorbachev, trust but verify is my policy, however, STRS won’t answer those questions.
Inaction is contagious in Columbus. In June, Fremont native and STRS Board member Wade Steen released a letter seeking transparency counsel be appointed for him by Ohio Attorney General Dave Yost, so the certified public accountant (CPA) appointed by Gov. Mike DeWine could perform his fiduciary responsibilities.
In August, that Steen letter, detailing 10 aspects of STRS financial records that appear to show investment expenses shaved so as to alter performance reports and pay $7.8 million in bonuses to STRS staff, went to the Special Investigative Unit in State Auditor Keith Faber’s office. So far there has been no action from the attorney general or the auditor of state.
This morning, Oct.13, the Ohio Retired Teachers Association (ORTA) is trying to keep the STRS pension performance issue alive, with a video presentation from their Columbus headquarters by Siedle and pension expert Chris Tobe, author of the book “Kentucky Fried Pensions.”
Tomorrow, Thursday, Oct. 14, the Ohio Retirement Study Council, slammed hard in the Siedle Report for failure to perform its legal duty to conduct fiduciary and actuarial audits on the five public pension funds every 10 years, meets to hear the investment performance report from their consultant, RVK Inc.
Reports claim Ohio pensions are well managed
RVK reports Ohio’s pensions are well managed. It’s the same message Aon Hewitt delivered upon release of its fiduciary audit showing the Ohio Public Employee Retirement System overpays alternative investment managers $223.4 million a year, despite the assistance of alternative investment consultants, Aon Hewitt.
The normal, adversarial, legal combat to determine the truth between two diametrically opposed positions is closed to all those covered by Ohio’s pensions because the state has sovereign immunity. In a new development, the SEC is asking questions about private equity fees with subpoena’s to the Pennsylvania School Employees Retirement System (PSERS) and with testimony to the U.S. Senate Banking Committee, chaired by Ohio’s Sherrod Brown, indicating the funds should expect scrutiny on conflicts of interest and nondisclosure of fees.
In his most recent Forbes column, Siedle notes the import of the SEC’s new interest in the relationship between public pensions and private equity funds and concludes all the SEC has to do is follow the leads uncovered by the Ohio teachers. It would also be a good idea to send Senator Brown an email and remind him this is a voting issue.
John Damschroder, a Fremont native who worked in Gov. George Voinovich’s administration, writes about business and economic development in Ohio.
posted by Kathie Bracy at 11:10 PM
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