The key finding of the investigation was that redesign of the pension system that was supposed to save taxpayers $4 billion over 25 years, had already—in the first four years— cost the pension $1.4 billion. Total preventable losses identified in the report amount to over $2 billion. As noted by the SEC staff early on, our effort demonstrated that “crowd-funding”—despite concerns of regulators regarding its potential to give rise to a new type of internet-based scamming—could actually be an effective means to expose fraud, mismanagement and other malfeasance related government workers’ retirement monies.
Later that same year, the findings of a forensic investigation of the Jacksonville Police and Fire Pension Fund commissioned by the Jacksonville City Council was submitted to the SEC. Key findings included: Board poor investment decision-making had resulted in at least $370 million in underperformance losses. Board failure to scrutinize investment management fees had resulted in excess fees of $6 million annually or $36 million over the past six years. The Board failed to heed credible warnings of conflicts of interest at a former investment consultant, eventually settling with the firm for $273,696 without analysis or evaluation of any harm caused to the pension. Such conflicts (according to a U.S. Government Accountability Office analysis) might have cost the pension almost 30 percent of its value—$300- $500 million over two decades.
In 2016, my firm successfully completed a second crowd-funded campaign to investigate the causes of the dismal performance of the real estate owned by the Rhode Island state pension and submitted our findings to the SEC. This time, 107 members of the public pledged funds to the project. Our investigation entitled Beyond Bad: A Generation of Mismanagement of Employee Retirement System of Rhode Island Real Estate reported that since 2005, the real estate investments had returned a mere 2.83 percent versus 10 percent for the pension’s current recently-adopted, more forgiving benchmark. Since inception of ERSRI’s real estate investing, over 27 years ago in 1989, the portfolio performed far worse—wretchedly—as the legal duty, known as fiduciary responsibility, to invest assets for the exclusive benefit of participants and beneficiaries had time and again been ignored. Targeting local development and paying rich disclosed and hidden fees of over 4 percent a year to real estate managers netted the pension a mere .69 percent. By way of comparison, Treasury Bills over same period would have provided an annualized return of 3 percent—incurring zero risk. Wall Street had prospered—taking virtually all real estate profits from the pension and leaving the asset-owners next to nothing—as the retirement security of an entire generation of Rhode Island pension participants had been undermined. Real estate underperformance had cost the pension over $500 million based upon the benchmark the pension recently adopted and losses may have amounted to as much as $1 billion.
The findings of forensic investigations of smaller public pensions, including in the cities of Chattanooga, Tennessee and Cranston, Rhode Island, commissioned by the pensions have also been filed with the SEC in recent years by my firm.
In addition to the ongoing investigations in Pennsylvania, this year there have already been two forensic investigations of state and local government pensions commissioned by pension participants, the findings of which have been released to the public. (I am also aware of other public pension forensic investigations which have not been disclosed to stakeholders.)
My investigation of the $90 billion-plus State Teachers Retirement System of Ohio commissioned by the 19,000 members of the Ohio Retired Teachers Association was completed in June. The damning preliminary findings have now been reported to Ohio legislators, regulators and law enforcement.The report concluded the state pension had long abandoned transparency; legislative oversight of the pension had utterly failed; Wall Street had been permitted to pocket lavish fees without scrutiny; investment costs and performance may have been misrepresented; and failure to monitor conflicts may have undermined the integrity of the investment process, as billions that could have been used to pay retirement benefits promised to teachers have been squandered.
Immediately following release of the report, two STRS Ohio board members, Wade Steen and Dr. Rudy Fichtenbaum—both unique in possessing financial expertise—issued statements supporting its findings and calling for further investigation by the pension and law enforcement into the disturbing revelations.
An investigation of the Chicago Policemen Annuity and Benefit Fund was funded by members of the Chicago Police Department Pension Board Accountability Group. According to the report, the CPABF is one of the worst funded public pension plans in the U.S. today with a funding ratio at year-end of only 23%. According to the report, “The toxic mix of defunding the police pension, conflicted and high-risk investments, and poor management of the pension cry out for greater transparency and accountability.”
As Arthur Levitt, Chairman of the SEC stated back in 1999 in connection with the Commission’s review of pay-to-play practices at public pensions, “Today, public funds hold more than $2 trillion of assets. These assets do not belong to the elected officials, and they do not belong to the trustees. They belong to the tens of thousands of firefighters, ambulance drivers, city clerks, bus drivers and other public employees who make our communities work. "Their interests," as my father said twenty years ago, "must be paramount in investment of that money."
The tremendous importance of public funds demands that they be managed with complete honesty and integrity and for the sole benefit of their beneficiaries.”
Twenty years later, honesty and integrity continue to be sorely lacking at our nation’s public pensions. These pensions are by no stretch of the imagination managed for the sole benefit of their beneficiaries. To the contrary, the management of investments and disclosure practices are routinely influenced by Wall Street, often through contributions to elected officials. Investment performance is undermined by pervasive industry conflicts of interest and abuses. Pension staff incompetence and self-interest are also profoundly harmful.
The SEC is uniquely positioned to ensure that pensions relied upon by state and local government workers for their retirement security are fully transparent and not plagued by widespread Wall Street abusive practices. Pension board members, including State Sen. Katie Muth on the PSERS board, and Messrs. Steen and Fichtenbaum on the STRS Ohio board (and others known only to me and the SEC), as well as millions of participants nationwide are not only urging the SEC to do its job, but also commissioning/funding investigations of their own to provide a roadmap for the federal regulator.
All the SEC needs to do is follow their lead."
Read the full article here.
Edward Siedle,
Pension forensics expert and record-setting whistleblower award
winner, is a former SEC attorney, investment banking and securities
industry professional, and longtime Forbes writer. He is the nation's
leading expert in forensic investigations of money managers and
pensions, focusing upon excessive and hidden investment fees and
risks, conflicts of interest and wrongdoing. He was named as one of
the 40 most influential people in the U.S. pension debate by
Institutional Investor Magazine for 2014 and 2015. His preliminary
report on his forensic investigation of STRS, The
High Cost of Secrecy, was released June 7, 2021.
