Thursday, March 04, 2021

Dean Dennis: Why STRS retirees do not have a COLA

Dean Dennis to Rudy Fichtenbaum
March 4, 2021
Subject: Re: STRS investment returns
Rudy, thank you for your dive into how STRS manages our investments. I can only echo Bob's response.
The majority of our Board doesn't take the time to question STRS. STRS is set in their culture and protects their huge bureaucracy. This in turn leads to unnecessary expenses, fees and risks. This is exactly why retirees do not have a COLA.
Bob mentioned Nevada. Nevada has a streamlined investment model that out-preforms STRS in both their returns and fee structure. Nevada's teachers retire after 30 year at any age with a 2.5 formula. Once they retire, their COLA kicks in at year 3, but then receive a compounded COLA. The COLA starts at 2% but increases each year until it is capped at 3%. Again this is a compounded COLA. 

Rudy Fichtenbaum on STRS investment returns

From Rudy Fichtenbaum
March 4, 2021
Subject: STRS investment returns
It is very hard to find a long time series on STRS rates of return. Annual reports on the STRS website are available only back to 2016 and they lock them so you cannot cut and past numbers or text. The same Annual reports on the Auditor’s website only go back to about 2000. They are unlocked i.e., you can cut and paste but the early reports don’t show investment rates of return. STRS started showing rates of return in 2002. So much for transparency.
I have taken the rates of return published in STRS Annual Financial Statement and compared them to what they would have been if STRS had invested 60% in the S & P 500 and 40% in AAA Corporate Bonds. I know staff and some board members may claim that such a simple portfolio with such a high proportion in stock would be too risky. But the expected returns for Alternate Investments is about the same as Equity investments and the standard deviation for my hypothetical portfolio is lower than the standard deviation for STRS’s actual rates of return.
I calculated that the difference in the compound annual rate of return for my portfolio and the STRS actual returns is 0.52%. I know that seems small but when you compound the differences the extra 0.52% adds up. Assuming this extra 0.52% were added to the actual percentage increase in the Fiduciary Net Position (the denominator in the funded ratio) The funded ratio in 2020 would have been 83.2% instead of 75.5%.
Here is a graph showing how the differences grow over time. To make it easier to see the differences I started the graph at 40% instead of 0. (Starting at 0 doesn’t change the result but it makes it harder to visually see the difference in a graph.)

I have another series using the Total Vanguard Stock Fund for Institutional Investors and the Total Bond Market for Institutional Investors and the difference is even greater (again with a 60/40 portfolio). But I haven’t had a chance to make all of the calculations to make a graph using this data. In the future I plan to add international data, although international equities have lagged domestic equities for nearly 20 years. Working with Vanguard data is a little more complicated because it is annual data so I had to estimate returns for fiscal years. The other data that I used for the graph is actually for fiscal years that start July 1 and end June 30.
What this says is that if STRS had done a better job investing, e.g.,using index funds instead of trying to “beat the market”, our funded ratio would likely would have been nearly at the level needed to restore the COLA, under current STRS Board policy. 
Rudy Fichtenbaum is Professor Emeritus of Economics at Wright State University and a candidate for a retired seat on the STRS Board.

Dean Dennis and Bob Buerkle: Will Our Trustees Treat Us Right?

By Dean Dennis and Bob Buerkle

March 4, 2021 (STRS Watchdogs)

Will Our Trustees Treat Us Right?
STRS began this Fiscal Year on July 1, 2020 with $79.8 billion in assets. As of December 31, 2020, due to the performance of the stock market, the STRS assets have increased by nearly $7 billion dollars and stood at $86.6 billion. This near record of unprecedented growth could be good for STRS members because our Board could use it towards paying a COLA or to approach legislators to consider reducing the Employee Contribution level while raising the Employer Contribution.
If this increase in assets holds until June 30th when our 2020 Fiscal Year ends, it will move the STRS Funded Ratio nicely towards the Board's unnecessary 85% funding goal which they have stated is when they will review our COLA. Our guess it might put STRS in the 82-83% range. Again, the STRS goal of being 85% funded for considering a COLA is ridiculous because STRS can easily afford a COLA. STRS is wrong to make our generation of retirees their sacrificial lambs so they can right their wrongs. When will our Board show some compassion?
Let's hope STRS Management doesn't pressure our Board into lowering the Investment Return Assumption from 7.45% to say 7.25% in order to get out of paying retirees a COLA. Doing this would add several billion dollars of more debt to the system and once again provide cover for the Board and management by moving the funded ratio lower. At the last Board Meeting (which was supposed to be recorded) Board President Rita Walters, up for re-election, dropped a hint this might be in play. Our Board President could then report that a COLA is still unaffordable because STRS would not have reached the stated 85% funded ratio goal for considering a COLA. Being over 85% funded has only happened 4 times in 53 years and all 4 years were during the dot-com-bubble. Yet at the present time we are inching closer.
There would be no acceptable reason to lower the Investment Assumption rate since the 2020 CAFR states on page-5 that the last 5-year investment return average through 2019 was 8.2%. Last fall, the STRS Investment Director also told us that the 10-year returns averaged over 10.4%. Also, since our legislators look at a 30-year funding period, know our 30-year investment returns are above 8.4%. There is an argument STRS should increase the Investment Rate Return. If STRS Management decides to pressure our Board to lower the Investment Assumption Rate again, after having a super-six-month period of returns, it will only because of hints they have dropped stating, “because that’s the level that most retirement plans are now assuming.” STRS wants to join the average. Doing this would fly in the face of their claims they are a top-tier pension system. They love to make this claim, while they reward their investment staff lavishly with bonuses. Yet, they want to be average with the other pension systems when it comes to setting their goals for investment returns. They can't have both ways. This is like the management of the Super Bowl Champions telling their quarterback Tom Brady, to set a goal of throwing fewer completed passes so he more closely matches the average of other NFL quarterbacks. The average pension system also provides some form of a COLA.
Let's watch how our STRS Board responds if STRS management tries to move the goal posts on its members. Our member have gone more than half a decade without a COLA. What are the better odds are this year, STRS members finally getting a COLA or, STRS staff receiving millions in bonuses? Will our Trustees do what is right?
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The STRS Ohio Watchdogs is a grassroots organization of teachers in Ohio advocating for prudent and transparent management of STRS Ohio.
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Wednesday, March 03, 2021

Dean Dennis re: How much money did STRS lose in Panda investment?

By Dean Dennis

March 3, 2021

(See Article: Ohio Teachers Pension Mauled by Panda - March 3, 2021 by John Damschroder)
In July of 2012, STRS Ohio jumped into a risky investment and lost. The company went bankrupt in 2017, yet it appears from STRS CAFR reports we still hold this investment. Our Trustees need to protect us from these investments with hidden fees if we are ever going to get our promised COLA.
Below is an excerpt from John Damschroder's recent article:
"STRS has recent evidence that alternative investments come with the risk of massive losses. The Ohio teachers’ pension was one of the first investors in Dallas-based Panda Power. Panda is a merchant generator building plants run by cheap shale gas to produce more profitable electricity. The business model collapsed when utility regulators did not approve anticipated rates. Panda’s bankruptcy filing showed debt of $400 million against cash on hand of $2,000." Here is the rest of the article:

John Damschroder: Ohio teachers pension mauled by Panda

John Damschroder, Columnist

Fremont News Messenger

March 3, 2021 
The Ohio Retirement Study Council (ORSC) revived oversight theater, a suit and tie simulation of supervising the $200 billion state pensions. In the first act, ORSC started the process for fiduciary audits of the teachers and police and fire pensions a mere five years after their legal deadline.
Meanwhile, the New York State Common Retirement Fund showed the enormous power pensions wield, in a further embarrassment to Ohio. The New York pension forced FirstEnergy to disclose direct and indirect political spending along with lobbying expenses, twice a year, to keep the pension from putting the proposal to a shareholders vote. Thus, the company on the receiving end of a billion dollar Ohio Statehouse bailout the U.S. Department of Justice alleges passed with the help of $60 million in political bribes has reform imposed from New York rather than Ohio.
The star at ORSC’s first meeting in seven months was Jim Voytko, President of RVK, Ohio’s investment  performance adviser covering all five public pension funds. Voytko told the ORSC that the State Teachers Retirement System (STRS) had better investment returns with lower risk than most of their peer group pension funds. Risk, as defined by RVK, is volatility or price fluctuation. This transforms investments in alternative investments, without a transparent market setting valuations, from the highest risk to the safest part of the portfolio. When fund managers instead of markets establish values they do not fluctuate. On paper.
In reality, STRS has recent evidence that alternative investments come with the risk of massive losses. The Ohio teachers’ pension was one of the first investors in Dallas-based Panda Power. Panda is a merchant generator building plants run by cheap shale gas to produce more profitable electricity. The business model collapsed when utility regulators did not approve anticipated rates. Panda’s bankruptcy filing showed debt of $400 million against cash on hand of $2,000.
The STRS investment loss comes as a complete surprise because the pension’s Comprehensive Annual Financial Report (CAFR) shows no impaired alternative investments, despite Government Accounting Board Standards (GASB) requiring disclosure of fair market value. STRS has not responded to my Friday morning questions on the size of the Panda investment and the apparent GASB violation that conceals the loss.
STRS beneficiaries lose but STRS staff win as Panda’s non-performance made the internal metrics for bonuses easier to reach. Fremont native Wade Steen, the only Certified Public Accountant on the STRS Board, has consistently asked STRS to explain how bonuses are calculated. “We don’t have enough information to provide oversight,” Steen said. Steen’s push for 60 days to consider bonus payments rather than the current yes or no vote for immediate payment failed to win board approval. 
Six-figure bonuses totaling between $8 million and $9 million a year go to STRS investment staff using a system Steen says he cannot verify or even understand.
As for STRS Comprehensive Annual Financial Reports, Steen said, "It’s very significant if we are not following GASB rules.” But Steen says in an $80 billion fund such as STRS it is possible to get a legal opinion that even a $300 million loss is immaterial, too small to require disclosure. 
Newly appointed ORSC member Rep. Brigid Kelly, D-Cincinnati, told me, “We will be meeting with STRS to see what is going on.”  Kelly is co-sponsor of legislation forcing full disclosure of fees and expenses paid by the Ohio pensions. “We need a clear picture,” said Kelly, who tells me she “fought to get appointed to ORSC.”
Ohio pensions have $66 billion invested in assets such as Panda. According to the CAFR’s there are no losers.  Representative Kelly intends to make the pensions prove that’s true.
John Damschroder, a Fremont native who worked in Gov. George Voinovich’s administration, writes about business and economic development in Ohio.
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