Tuesday, October 01, 2019

Is THIS what's been going on behind our backs?


Damschroder Column: Good work if you can get it
John Damschroder, Columnist
Published 10:45 a.m. ET Oct. 16, 2018
The Pew Charitable Trusts have come to a conclusion long held by this column: State public pensions are overpaying investment managers for under-performance. Moreover, Pew concludes most of the billions in fees collected by these pension-funded investment managers are not included in the Comprehensive Annual Financial Report (CAFR) required of the funds.
It’s not just Ohio. No state met the targeted return on their alternative investment portfolio over a 10-year measurement. With the benefit of an Ohio Public Records Act request for all five state public pension systems, I’ve been able to piece together the contract terms that are standard in these pension system deals, despite record redactions that claim nearly every important detail in the contract as a “trade secret,” exempt from disclosure.
Thankfully, some of the exact contracts provided by Ohio retirement systems, after heavy redaction by their investment partners, were available to me in full detail, as they were produced during discovery in lawsuits over performance by the investment managers.

An example of the redacted documents provided through public records requests (on left).
To illustrate how wonderful it would be to manage a small portion of each Ohio public pension alternative investment portfolio under the contract terms I have read for existing state agreements, assume I am penniless but connected. If my buddy the governor helped each of the Ohio funds see the wisdom in contracting with me to manage $100 million, I would be instantly rich.
To manage an alternative investment fund for Ohio I only need 1 percent of the total equity stake. Since my $500 million fund comprised solely of state pension money will pay me 2 percent a year for at least 10 years, the $10 million a year I will collect for a decade guarantees me $100 million and easily collateralizes a loan for my necessary $5 million.
The contract allows me to charge Ohio for any normal business expenses, such as an office and a staff, I can collect millions more for expenses tied to investment research, like conferences in idyllic settings, and I can establish my business in some wonderful foreign location with strict bank secrecy laws to keep prying eyes like mine away from the details. I can even establish an advisory committee with meetings in more places I’ve dreamed of visiting, also paid for by the funds.
Because of my incredible investment expertise — it must be that because I have none of my own money in the fund — I will collect 20 percent of any profit I generate. Had this deal been in place from October of 2008 to October of 2018 and I simply parked all of the money in an ultra-low cost Standard & Poor’s 500 index fund with dividends reinvested, I would have turned $500 million into more than $1.8 billion and pocketed another $260 million profit share on top of my $100 million management fee.
But wait, I took advantage of the ability the Ohio contract gives me to leverage the fund with borrowed money; who wouldn’t when they have no risk and all reward? With the leverage I made an even $300 million. With a governor who sees my genius I could go from zero to $400 million in 10 years. So could you! But it’s not all profit, however. I will be expected to tithe through hard-to-trace ways that send campaign money to the wonderfully visionary public servants who gave me this change to show my investing prowess. And I would be widely seen as a genius, since the plan I’ve laid out more than doubles the return of the best pension performance in the Pew study.
Given that Ohio public pensioners have all had benefits cut during that 10-year period, it’s not politically wise to share the standard details of the incredibly one-sided deals the state pensions have willingly entered. But political considerations are not cause for exemption for public records act disclosure under Ohio law.
“I compared a redacted copy of a private equity partnership provided by OPERS to an unredacted copy and found the redactions had nothing to do with trade secrets of the firm," said Chris Tobe a former Kentucky public pension trustee and author of "Kentucky Fried Pensions." "The redactions seem to be areas that allowed excessive hidden leverage and risk, excessive secret fees and expenses, breaches of fiduciary duty by the general partner, offshore locations for custody and hiding advisory committee membership. These redactions in my opinion appear to cover up violations of state pension and fiduciary laws and have nothing to do with trade secrets.”
Good thing for Ohio politicians that the fiduciary auditor examining these alternative investment contracts is also the alternative investment adviser helping OPERS pick the funds. Otherwise some of the facts I’ve detailed might emerge.
John Damschroder, a Fremont native who worked in Gov. George Voinovich’s administration, writes about business and economic development in Sandusky County.
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