https://www.cleveland.com/news/2022/03/retired-ohio-teachers-want-to-look-documents-in-strs-pension-theyre-fighting-in-court-to-get-them.html
Retired Ohio teachers want to look at documents in STRS pension; they’re fighing in court to get them
Retired Ohio teachers want to look at documents in STRS pension; they’re fighting in
March 7, 2022
COLUMBUS, Ohio -- Retired Ohio public educators haven’t received a cost-of-living adjustment for the past five years.
Unsatisfied with the pension system’s answers as to why, a group of teachers hired a nationally renowned pension expert who has been battling the State Teachers Retirement System of Ohio for information to obtain a clearer picture about management and activity in the pension.
The fight could result in Ohio Supreme Court rulings and changes to state law that would force more disclosures and transparency from all five public employee retirement systems that serve 485,000 retired state officials.
However, no other retirement system has been as beset by strife lately as the teachers’ pension.
The State Teachers Retirement System of Ohio, called by its acronym STRS and pronounced as “stirs,” is one of the largest public pension funds in the U.S. It has just under $100 billion in investment assets and serves about 500,000 working and retired educators of Ohio public schools. STRS officials told retirees withheld cost-of-living adjustments from 2017 to 2022 to shore up cash for roughly three reasons:
The pension lost money after the recessions of 2001 and 2008. People live longer these days, and it needed more money to cover teachers’ longer lifespans. The overall contributions from teachers and the state into the pension dropped from what was previously projected due to fewer people contributing to the fund or salaries being lower than expected, STRS spokesman Nick Treneff said.
But Robin Rayfield, executive director of the Ohio Retired Teachers Association, which represents about 20,000 retired teachers, questioned why these problems came to a head during the recent bull market.
“The stock market has never done better in the history of the stock market,” he said.
Rayfield said that retirees had mapped out their futures with cost-of-living adjustments in their financial plans.
“I worry about those most elderly and most vulnerable,” he said.
This year, the STRS board is considering a one-time, 2% cost-of-living adjustment for eligible recipients and may vote on it as soon as later this month, Treneff said.
Enter Ted Siedle
Last year, the Ohio Retired Teachers Association raised $75,000 through crowd fundraising to hire Edward Siedle, a Boca Raton, Florida, attorney who used to work for the U.S. Securities and Exchange Commission and now investigates the management of public pensions.
On Feb.19, 2021, Siedle said he requested a prospectus of every stock, bond and mutual fund in which the pension invests. Prospectuses are documents investors file with the SEC that show opportunities, risks and other financial details about an investment.
Siedle also asked for documents on the pension’s “alternative investments,” including hedge funds, venture capital, private equity and real estate. Alternative investments make up at least 27% of the pension’s investments, he said.
“They haven’t given us a single document,” he said. “Not one.”
STRS disputes that characterization.
“Over a period of three months, from February to May 2021, STRS Ohio sent 24 emails and a thumb drive to (the attorney representing Siedle) amounting to 812 documents and over 22,000 pages,” it said in a document responding to a preliminary report Siedle wrote for the retired educators. STRS also said that the February 2021 public records request didn’t use the word “prospectus.” It said that the requests in most cases were overly broad. STRS employees provided Siedle with several links to financial reports on the STRS website so he could understand how its documents were maintained and organized and to amend his request to get the information he needed.
Sometimes, journalists and members of the public, when they get an understanding of how public information is maintained, reach out again to the state agency and amend their public records requests. Siedle never did that, STRS said.
Siedle said the documents produced were not what he requested.
“You don’t measure transparency by counting paper,” he said. “You give me 20,000 pages of documents I didn’t ask for. Then you make me go to court.”
Former Ohio Attorney General Marc Dann represents Siedle in a public records case before the Ohio Supreme Court. Dann is working on a contingency, meaning he will get paid if Siedle and the retired teachers are successful.
The first public records case Dann brought was against STRS and a Toronto, Canada, firm that helps STRS develop benchmarks to measure how the various funds in the pension are performing compared to the market and similar funds.
Dann said that STRS and the firm ultimately turned over the benchmark after mediation. It is the first of what Dann anticipates will be several public records cases before the state’s high court.
Dann has contemplated suing STRS over how it managed the funds.
“If I sue the pension, all they have to pay with is the money of the members, of the participants,” Dann said. “That would be a circular enterprise. I think the remedy here is political in that the legislature needs to put better guidelines and guardrails on STRS and other pension funds. The investment funds need to be more transparent.”
Fees
Last June, Siedle sent the retired teachers a preliminary report about his findings. However, it won’t be final until Siedle gets all the outstanding documents and can draw conclusions, he said. The report identifies several potential fees that STRS may have paid to Wall Street for hundreds of millions of dollars, including a potential $143 million that STRS might have paid investors to manage money that it hasn’t received yet, he said.
Siedle determined that STRS has entered into agreements for alternative investments in which it only paid part of the total investment but has “committed” to pay the rest in the coming years. He said the total committed but not yet paid amount is $7.1 billion.
It’s relatively common for private equity and other alternative investments to charge investment management fees on that committed amount. He assumed that STRS paid 2% in fees on total unfunded commitments, which is an industry average. He said that that totals $143 million a year, or enough to restore the cost-of-living adjustment to 2%.
“Fees on committed, uninvested capital amount to paying managers for doing nothing -- no service whatsoever is provided in exchange for the lavish fees,” he wrote in his preliminary report. “In our opinion, such fees add insult to injury since these types of investment funds already charge exponentially higher fees than traditional stock and bond managers.”
He noted that in 2014, the SEC announced research saying that there were too many “hidden fees” in private equity and other alternative investments that were unjustified. Most investors are not aware of them, it said. Siedle suspects STRS is paying the fees since most pensions pay them. Only a minority of pensions have employees who are savvy enough to recognize they’re going to be saddled with those fees and to negotiate to eliminate them before they begin investing.
“There’s no question the staff has been complicit with Wall Street,” he said. “Where do these arguments come from? They come from Wall Street, where secrecy is a good thing.”
STRS, however, shot back in its response to Siedle that it is not paying Wall Street for “doing nothing.” With committed funds, fund managers watch investments and determine the best time for the investor to get in. This takes market research, travel and due diligence. These activities require upfront fees, it said.
“Actual management fees paid on unfunded committed capital during calendar year 2019 were $59 million,” it said, or just 0.8% on the $7.9 billion in uncommitted capital, below Siedle’s estimated 2%.
STRS said in its counter-report that this is just one of several allegations in Siedle’s report that aren’t supported by evidence.
“Many of the conclusions in (Siedle’s) report are offered with little support other than the Author’s opinions,” it stated. “In fact, the phrase ‘in our opinion’ is used approximately 60 times throughout (Siedle’s) report.”
STRS said it follows Ohio’s public records law, but there are exemptions under Ohio’s Uniform Trade Secrets Act. The act says business and financial information that generates independent economic value by generally not being known to others can be exempt from public records laws. An entity, such as a money manager, can assert a trade secret claim, and the public office cannot release the trade secret unless the entity consents. Motivated by findings in Siedle’s report, retired Wright State University economics professor Rudy Fichtenbaum got elected to the STRS board in September. Through his own analyses, he said that STRS is paying higher U.S. stock brokerage commissions than paid by the state’s biggest retirement system, Ohio Public Employees Retirement System -- which has 1.2 million members who are elected officials, state and some local government employees and $114 billion in assets.
He also compiled data to show that salaries at STRS are higher compared to OPERS salaries.
Treneff, the STRS spokesman, said the agency set its employees’ salaries by comparing it to comparable work in the finance market where STRS employees could work, such as Huntington National Bank and Merrill Lynch. It has found its salaries are aligned with the market rate.
STRS’ average salaries appear higher than OPERS, Treneff said, because STRS found it’s more cost-effective to employ real estate experts internally. OPERS’ real estate experts are outside contractors, he said.
$525 million loss
Dann, the attorney representing Siedle, expects he’ll next have to go to court to get more information from STRS about Panda Power Funds.
Between 2011 and 2013, STRS invested $525 million in Panda Power Funds, a Texas-based private equity firm that invests in natural gas and solar projects.
The investment now has a value of zero, Siedle said.
Treneff, the STRS spokesman, said that Siedle is cherry-picking certain investments to highlight while ignoring the success of others.
The Panda “investments were negatively impacted by the decline in energy prices during the mid-2010s and decreased in value beginning in fiscal 2017, as reported quarterly to the board,” he said. “The Panda investments were valued at $0 as of June 30, 2020. While the Panda investments lost value, it is worth noting that over 85% of STRS Ohio’s alternative investments have had positive returns.”
Pension oversight
After Siedle released his report, he said that Ohio Auditor Keith Faber’s office started an audit into the pension system. A spokeswoman for Faber confirmed an audit is ongoing but said the office doesn’t discuss unfinished work.
STRS began cost-of-living adjustments in the 1970s. They were recently fixed at 3% a year until 2012 when they were reduced to 2% a year. Then in 2017, they went away, Treneff said.
In 2012, the legislature passed a law that changed how the pension was managed, including allowing the STRS board the flexibility in determining the cost-of-living adjustment, Treneff said.
The board requested the changes in the bill, he said. STRS officials proposed the changes first with the Ohio Retired Teachers Association, the Ohio Education Association, the Ohio Federation of Teachers and others.
“They agreed to that package of changes,” he said.
Many public pensions were overhauled across the country after the 2008 recession, he said.
“I don’t think the board or our constituents ever assumed we would have to eliminate the (cost-of-living adjustment,)” he said. “But unfortunately, that’s where we were by 2017.”
Before the 2012 changes, the pension had 58 cents for every dollar it expects to pay out in the future. Since then, the fund has rebounded to nearly 88%. Estimates showed that without the changes in 2012 and 2017, the pension would be about 57% funded, Treneff said.
The Ohio Retirement Study Council comprises members of the legislature and board members of the five public pensions and oversees the five pensions. It’s supposed to perform two audits every decade of each pension: an independent fiduciary performance audit, which studies how the pension’s management, and an actuarial audit, which studies whether and how the plan can deliver on its promises to current and future retirees.
Both audits are overdue, Siedle said.
Rep. Brigid Kelly, a Cincinnati Democrat who sits on the Ohio Retirement Study Council, said the audits of the STRS pensions are underway.
Kelly said she understands the concerns of the retirees, who thought they were on track to retire, but the rules changed in the middle of the game.
“The fact that so many people felt compelled to spend their own hard-earned money in a study indicates there’s an issue,” she said. “I think transparency, especially when you talk about taxpayer money, is a good thing and a necessary thing.”
Kelly is sponsoring with Republicans three bills that she believes will go a long way in providing retirees and taxpayers transparency and accountability.
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