Damschroder: Pensions. Will the cure be worse than the disease?

Fremont News Messenger

John Damschroder

Columnist

December 8, 2021

Damschroder: Pensions. Will the cure be worse than the disease? 

Boulders have started rolling down Ohio’s mountain of malfeasance. The “rock solid” pensions former governor and Lehman Brothers mortgage backed securities salesman, John Kasich, campaigned on as a reason to elect him president are suddenly making news for their obvious instability. Oblivious Ohio citizens may soon become angry Ohio voters as the pensions position for millions more in taxpayer dollars.

The Ohio Police & Fire Pension Fund is first to move with a couple of clueless lawmakers introducing legislation for massive increases in the employer contribution to the retirement plan for cops and firefighters. But, as I have pointed out in this column before, all of the pensions want more money from Ohio taxpayers because the result of years of pathetic investment performance is upon us

At the State Teachers Retirement System of Ohio, board members Wade Steen and Rudy Fichtenbaum advocate an entirely new investment strategy as an alternative to the current market trailing portfolio and resulting benefit cuts. They propose a partnership between STRS and Columbus startup company QED.

The initial $250 million proof of concept investment was presented as a glide path to reallocating $65 billion, to be loaned to Goldman Sachs, to mark up the cost and lend it to hedge funds and private equity managers who boost returns by using leverage. STRS would earn a significant fee for helping the too big to fail bank conceal the actual risk on its books. The money first, money only professionals call this regulatory arbitrage.

Collecting up front, rather than paying back end

The proposal basically puts STRS in the position of collecting fees at the front of the process rather than paying fees at the back end as they do now through their alternative investment portfolio. It’s how the Healthcare of Ontario Pension Plan-HOOPP achieved thought leader status with 119 percent of the funds needed to pay all retirement benefits.

The hands-on architect of HOOPP’s system to manage this complex strategy is Robert Goobie, who also is the chairman of the board at Global Peer Financing Association, a body composed of pensions with assets over $9 trillion. The Ohio Public Retirement System-OPERS was a founding member.

Goobie’s participation as a partner in QED is the only thing protecting Steen and Fichtenbaum from laughingstock status for the ludicrous proposal to give $65 billion to a two-man company with zero performance history. Goobie is a Hall of Famer while QED principals Jonathan Tremmel and Seth Metcalf have never played the game. 

In a long telephone conversation with Goobie last week he told me he has no intention of leaving HOOPP and is not part of the QED startup. Tremmel and Metcalf “decline the opportunity to comment on QED personnel;” Fichtenbaum and Steen simply say “it’s about the idea not the company.”

In reality, the idea is worthy of consideration with world class investment professionals, but its beanie babies and Coingate crazy with two total rookies running the show

Metcalf does have a record on Ohio pensions. He was a trustee on the OPERS board appointed by former state Treasurer Josh Mandel. As regular readers will recall, OPERS may be the biggest sucker of all American pension systems, paying $223.4 million a year more than the excessive fees paid by peer group pensions

Compounded mismanagement

To compound the mismanagement, when a year’s late fiduciary audit finally revealed the excess payments, nothing was done about it. Metcalf may lack fund management experience but he knows how easy it is to fleece an Ohio pension.

If all the investment staff at all of the pensions was locked out of the building and the funds were simply parked in the $48 trillion market cap Russell 3000 index, the cumulative 10-year return would be 339.27 percent. Since 1995 the index is up nearly tenfold.

If Ohio pensions had simply achieved index returns paying index fees there would be no need for benefit cuts or tax hikes. Economics PHD Fichtenbaum says STRS is in such deep financial trouble indexing alone will not solve the problem, explaining his support for an index plus concept.

Ohio’s pensions are a near perfect reflection of Ohio’s government. A massive bureaucracy, actively destroying value while acquiring substantial personal wealth. The fight STRS presages is whether the cure will be worse than the disease.

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