John Damschroder: Ohio STR spells conflict
Fremont News Messengeer
November 24, 2021
Damschroder: Ohio STR spells conflict
John Damschroder, Columnist
This is probably the most important agenda item in the history of the pension system.”
When 12-year State Teachers Retirement System of Ohio Board member Robert Stein, a three-time chairman of the body, began his presentation to former colleagues, framing the issue before them as an existential question, STRS became the site of hand to hand bureaucratic combat.
The long awaited investment proposal from STRS board member Wade Steen, a Fremont Ross graduate, calling for the restoration of the cost-of-living-adjustment (COLA) stripped from pension beneficiaries since 2017 and smaller payroll deductions from active teachers, was finally getting its public explanation.
Steen proposed a proof of concept partnership with $250 million from STRS managed by a start-up Columbus investment company called QED, fronted by Huron native Jonathan Tremmel and former Ohio Public Employees Retirement System board member Seth Metcalf.
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The attack from dissenting STRS board members and STRS staff was intense, probing for illegal connections between presenters Steen, Stein and the newly elected economics Ph.D Rudy Fichtenbaum, and QED. When the recently resigned Stein reported he had an Ohio Ethics Commission opinion on his revolving door and information confidentiality requirements and dealings with QED have crossed no legal boundaries, the attack shifted to the youth and potential enrichment of Tremmel and Metcalf.
It was all about painting the public record with what STRS Chief Investment Officer Matt Worley called “normal due-diligence.” But over time, it was revealed the STRS board and staff has known for months that Robert Goobie, portfolio manager of the Healthcare of Ontario Pension Plan , and Jim Keohane, the recently retired president and CEO of HOOPP, also would be part of the QED company, making the attack on credentials and track record a distortion of reality.
Lack of good faith on full display
As Robert Stein kept pointing out, HOOPP achieved high enough returns to pay full benefits with a 19 percent surplus, while taking much less investment risk than STRS or any other Ohio public pension.
The presence of the chief architects of the plan in Ohio was held close to the vest by the presenters so as to protect Goobie’s employment. His name was made public by board member Jeffrey Rhodes to make sure HOOPP knows a key employee is willing to leave for Ohio and help launch a business startup.
This lack of good faith was on full display when STRS investment consultant, Cliffwater CEO Steven Nesbitt cited “no past experience,” and “lack of performance record,” as reasons not to do business with QED, despite his knowledge of HOOPP’s performance and the experience its top leadership would bring to Ohio.
Nesbit’s conclusion that there is “regulatory risk of significant magnitude,” is true and should have been a springboard to clear explanation of the opportunity Steen, Stein and Fichtenbaum want to test with a quarter billion dollars. The shorthand version is Ohio would wholesale money to Goldman Sachs so they could mark it up to retail clients that would be impossible for STRS to deal with directly.
Idea is called index-plus
The idea is called index-plus, as they would take a small piece of the cash and buy a contract paying STRS the returns from a market index for the $250 million. The rest of the STRS money would be United States Treasury Bills, considered by financial industry accounting regulations the safest investment in the world.
Ohio would help Goldman maintain the capacity to make high profit trades for their clients by swapping the higher risk investment for the T-bills, collecting a significant payment and a contract to buy the risk assets back. Goldman would show very safe assets on their balance sheet, STRS, with none of the regulatory issues Goldman has, would have a new source of cash and a contract Goldman couldn’t escape, to buy back the risk assets, unless they go bankrupt. Regulators follow Goldman Sachs because it’s a Global Systemically Important Financial Institution (GSIFI), officially designated as too big to fail.
STRS CIO Worley says back testing the index-plus concept since 2009 shows it would have brought a 45 percent loss and cost STRS $21 billion dollars. But Worley also claims STRS has been doing rate return swaps like the QED proposal for 3 decades, so he’s already playing with fire.
The irony is that the marked-up money Goldman Sachs sells, is purchased by exactly the sort of alternative investments already stacked in the STRS portfolio. Now, STRS pays that cost, as fees to borrow money are passed on to the limited partners. If Ohio won’t switch from paying fees to collecting fees, Dr. Fichtenbaum says some other state surely will.
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 8:31 AM
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