Blade Editorial: The coming crisis is a manmade disaster by imprudent Ohio lawmakers. Simply requiring state pensions to make the terms of their investment contracts transparent would be enough to keep them out of one-sided deals like Panda Power.

Toledo Blade

October 18, 2024

Prudent person fallacy

Now, after nearly 30 years of ‘prudent person’ investing with hundreds of deals totaling tens of billions of dollars with terms like those in the Panda Power fund, STRS wants a 28.5 percent increase from taxpayers to bailout the fund.

THE BLADE EDITORIAL BOARD

Since 1997 Ohio’s public pensions and the Bureau of Workers’ Compensation have used the Orwellian “prudent person” standard to make the most risky, ill-fated investments in state history.

Rare coins and Beanie Babies in the portfolio managed by Toledoan Tom Noe, with such independence he was able to steal millions from the fund, was possible because of the Ohio legislature’s bad judgment. It’s a mistake the General Assembly has not corrected.

A $525 million loss by the State Teachers Retirement System of Ohio in a private equity investment called Panda Power is revealing for the imprudence the “prudent person” law allows. STRS lost the entire investment. News of the investment debacle leaked from STRS in 2021.

The offering documents for the Panda Power fund shows the need for reform. The prospectus provided to the Ohio Retirement for Teachers Association’s pension consultant Edward Siedle is just like hundreds of other private investments in all of the Ohio pension fund portfolios.

The document demands secrecy. STRS was forbidden to share the document or disclose the information in the document without Panda’s written permission.

Panda warned that the investment in merchant power would bring “no significant returns for a substantial period of time.” The deal tied up the pension investment for 10 years with an option allowing Panda to extend the terms two more years.

The management fee of 2 percent on $525 million of committed capital is $10.5 million a year. If Panda produced more than an 8 percent return, the managers got 20 percent of that profit. Taxes and expenses were also borne by STRS. Panda warned they would be substantial.

The risk factor tied to the 20 percent profit share for Panda was red-flagged from day one. The agreement “creates an incentive to make more speculative investments than would otherwise be the case,” Panda warned in the prospectus for the fund. Panda told STRS they would be investing in “companies that have a checkered financial history.”

Panda warned they would be using leverage and investing in leveraged companies bringing an opportunity for enhanced returns or a large loss of capital.

The value of the investments would be solely determined by Panda with the warning that there could be a material difference between carrying value and market value.

Now, after nearly 30 years of “prudent person” investing with hundreds of deals totaling tens of billions of dollars with terms like those in the Panda Power fund, STRS wants a 28.5 percent increase from taxpayers to bail out the fund.

The prudent investors at the Ohio Public Employees Retirement System and the Ohio Police & Fire Pension Fund also want much more money from taxpayers for the same purpose.

Since 1997, the S&P 500, which used to be the staple of Ohio pension funds, has increased 1,073.11 percent, or 9.40 percent a year. This easily beats every Ohio pensions’ annual assumed rate of return.

The coming crisis is a manmade disaster by imprudent Ohio lawmakers. Simply requiring state pensions to make the terms of their investment contracts transparent would be enough to keep them out of one-sided deals like Panda Power.