Edward Siedle's Forensic Audit of STRS

Preliminary report: The High Cost of Secrecy

https://82781d1e-9774-4c42-8beb-47ead2a438eb.filesusr.com/ugd/ed1884_cb39f322009c4c8aa4189e

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Robin Rayfield reports on the June 2021 STRS Board meeting and more

From ORTA June-July Newsletter

June 30, 2021

Robin Rayfield's report

STRS News

The STRS board met on June 17, 2021. The meeting was long lasting over 8 hours. Although there was significant discussion in such a lengthy meeting, a few major issues or topic were of greatest interest to me.

• The STRS board agreed to lower the discount rate (this is the assumed rate of return STRS uses to calculate investment income) from 7.45% to 7%. This may not seem like a significant change, but this change is quite significant. Lowering the discount rate by 45 basis points adds tremendous liabilities to our pension system. In other words, our COLA is much further away than it was because of this change.

• Another interesting topic of discussion at the meeting was really an absence of discussion. Board member Wade Steen asked the board to add the topic of ORTA’s Forensic Audit to the agenda. Yoel Mayerfeld agreed that the Forensic Audit should be discussed but the STRS board voted 9-2 against having a discussion of the Forensic Audit. Trustees offered one primary rationale for not discussing the audit such as ‘we have only had 10 days to review the document’ or ‘I need more time to understand this document’.

• Mr. Steen also suggested several changes to STRS policy that were ‘shot down’ by STRS Board members. One policy change suggested that seemed to anger the STRS board is that the word TRANSPARENCY should be included. STRS board members voted to NOT include the word TRANSPARENCY in their policy. For an organization that often touts itself as being transparent in all matters, I am surprised that there was such hostility to inclusion of the word transparency in their policies. As a side note, Mr. Siedle’s attorney has filed two separate legal challenges to STRS’s lack of transparency. Mr. Siedle has asked that STRS provide information on where STRS money is invested, how much is invested, what the fees and costs are with those investments, and what the current value of those investments are. STRS will not provide the information requested.

• Mr. Stein has resigned from his position as STRS trustee. This is especially, troubling as he was just reelected to a trustee position beginning in September 2021. STRS did not indicate what will be done with this position, however, it seems appropriate that an election for the seat be held.

Forensic Audit

The Forensic Audit is complete! You can read it at www.orta.org ORTA will also post additional information about the audit on the front page of the ORTA website. Several key documents related to the Forensic Audit are linked in this newsletter. Please make sure you are using the pdf version of the newsletter and click on the links to learn more about how STRS is managing our retirement.

[Go to www.orta.org for the four items below]:   

• STRS Response to Edward Siedle’s Report

• Siedle’s response to STRS Criticism of Forensic Audit

• STRS Trustee Wade Steen’s Letter Regarding STRS

• STRS Trustee-Elect Rudy Fichtenbaum’s Letter

[Go to www.orta.org/advocacy for the two items below]:   

• The Forensic Audit titled The High Cost of Secrecy

• Forensic Audit Findings

Dr. Robin Rayfield,

ORTA Executive Director

As you might expect, there are many ‘moving parts’ to the forensic audit and what we have learned through this process. One thing is clear, STRS is not transparent and has never been transparent. The culture at STRS seems to be that the less known about the organization the better off everyone is. ORTA is meeting with elected officials in Ohio attempting to let our representatives and senators know that there are many issues at STRS that require legislative intervention. As retirees, your assistance in asking your elected officials to take a close look at what STRS is doing will strengthen our message. We have some momentum, lets remain vigilant with our efforts to force change at STRS.Robin Rayfield reports on the June 2021 STRS Board meeting and more

Dr. Robin Rayfield is Executive Director of the Ohio Retired Teachers Association.

Rudy Fichtenbaum: How Do We Bring Change to STRS?

                    How Do We Bring Change to STRS?

                                        Rudy Fichtenbaum

"We are constantly told that we need to pay bonuses to attract talent otherwise people will leave. Well, that means the people who work investing our pension money have alternatives if they are not happy working at STRS. But members getting pensions have no other choices. They don't have any other pensions, they are subject to the Windfall Elimination Provision if they get Social Security at all, and many cannot just go out and get a job. This is serious stuff and literally there are lives at stake."

The following is (in italics) a short excerpt from an email I received from an individual who I believe truly cares about our pension but feels that the tactics I am using, mainly being openly critical of senior staff and some Board members, is a mistake. What follows is a lightly edited response (mainly correcting a few typos which seem to be the bane of my existence).

"[name deleted]'s comments echo my concern with how your investment ideas are being promoted. Wade Steen posting an open letter on Facebook, that in essence called everyone at STRS a bunch of liars, is not helpful. While pleasing to the critics of STRS, your last sentence in an otherwise excellent report, has, in my opinion, a similar effect."

"I know you are serious about exploring these investments ideas. To accomplish that, a change of focus may be necessary, concentrating on opening the minds of those who really matter - your fellow Board members - rather than forcing them into a defensive position that resists change."

"I would like to see a full airing of these ideas, with fact-based pushback from the other side. I believe that sharp facts are more effective in changing minds than blunt-force name-calling. Donald Trump might disagree with that observation, but I'm sticking with it, even if only to maintain a little optimism about the country and STRS. Allow your "ends" to guide your approach, not simply justify your 'means.'"

As an academic, I would much rather be arguing over facts. And frankly, I believe that I have put out more facts than most of the other people engaged in this "conversation", including the STRS senior management staff. The staff have a tremendous information advantage and they have been unwilling to share that information. They also present misinformation and misrepresent certain facts. If one side plays dirty, withholding information and misrepresenting facts and uses appeals to authority as the main vehicle for making their arguments, then we end up where we are today.

Honestly tell me if you were Wade Steen and were treated the way he was treated at the last Board meeting, not to mention having basic information that he requested as a fiduciary withheld, how would you react? If we want a debate in accordance with the Marquess of Queensberry rules, then the senior staff and the Board for that matter, are going to have to take the initiative because they hold the power. I would be happy if we had the same access to information and if the Board would be willing to hear from members. But from what I can see, they don't really want to hear from members, and they are certainly not sharing information, at least not the kind of information that is needed to make an honest assessment of the performance of the pension fund.

Again, the fact that members had to pony up $75K when we already made our pension contributions, because members felt that STRS was hiding information and not be straight with members, is truly an insult.

When you are the underdog, you must use all the tools at your disposal. By that I don't mean lying or misrepresenting facts. But at this point we are involved in a political battle and that inevitably leads to questioning people's motives, which I know is uncomfortable terrain. So, unless STRS senior staff want to change how they treat members and Board members who raise questions, those of us who want to get to the bottom of what has happened and how we can fix it are going to have to use all the tools at our disposal. And again, just so what I say is not misrepresented, I am not talking about lying, misrepresenting facts, or withholding evidence. If I make a mistake in the presentation of facts and it is pointed out to me, I am not afraid to own up to my mistakes and offer a correction. But beyond that my suggestion is STRS senior staff and Board members, who are standing in the way of trying to fix the pension, just need to put on their big boy pants. What is at stake here are the lives of members who depend on their STRS pension to pay their rent or mortgages, to buy food, to pay for medical bills, to visit their grandchildren and live a dignified life in retirement.

Think about it this way. We are constantly told that we need to pay bonuses to attract talent otherwise people will leave. Well, that means the people who work investing our pension money have alternatives if they are not happy working at STRS. But members getting pensions have no other choices. They don't have any other pensions, they are subject to the Windfall Elimination Provision if they get Social Security at all, and many cannot just go out and get a job. This is serious stuff and literally there are lives at stake.

Dr. Rudy Fichtenbaum is Professor Emeritus of Economics at Wright State University.  In May, 2021, he was elected to a retired seat on the STRS Board, effective September 1, 2021

 

Edward Siedle: Forensic Investigation Of Ohio Teachers’ Pension Reveals Widespread Failures And Mismanagement

Forbes

Jun 29, 2021

Forensic Investigation Of Ohio Teachers’ Pension Reveals Widespread Failures And Mismanagement

By Edward Siedle

Billions that could have been used to pay teacher retirement benefits were squandered.

Forensic investigation of State Teachers Retirement system of Ohio reveals billions that could have ... 

Earlier this month, the forensic investigation of the $90 billion-plus State Teachers Retirement System of Ohio commissioned by the Ohio Retired Teachers Association and performed by my firm, was completed. The damning preliminary findings have now been reported to Ohio legislators, regulators and law enforcement.

The report concluded the state pension has long abandoned transparency; legislative oversight of the pension has utterly failed; Wall Street has 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.

Within days of the forensic report’s release, STRS staff hastily penned a response which cited the many experts the pension pays handsomely for guidance, even as it failed to address any of the serious deficiencies noted. For example, the staff did not dispute that a fiduciary performance audit and an actuarial audit of the pension had not been completed in the past 10 years—as required under applicable law—and the two audits were already 5 years overdue. No defense was offered for paying $143 million in investment fees to costly private equity managers on committed, uninvested capital—money for doing nothing. The fact that STRS apparently does not monitor all the investment fees it pays to Wall Street for reasonableness, or external investment consultant conflicts of interest consistent with its fiduciary duties, was ignored.

While STRS staff was quick to broadly reassure pension stakeholders all was kosher at the pension, the majority of the pension board stated at the most recent June meeting they were not prepared to discuss the report because they had not had enough time to even read it.

I’m sorry, but it’s not like 128-page forensic expert reports of $90 billion-plus pensions, commissioned by thousands of stakeholders happen everyday. You’d think all board members would have immediately made time to at least read the report—especially before permitting staff to publicly respond on their behalf.

Surprisingly, one sitting board member and a newly-elected member issued responses indicating they had not only found time to read the forensic report but actually agreed with its findings.

In a letter dated June 17th, board member and CPA, Wade Steen indicated that the findings in the report “were deeply disturbing, but for those paying attention, not all that surprising.”

Said Steen, “I wish I could say the staff are transparent, but they’re not. Most of my requests for information have been flat out ignored. I asked for the inputs to calculate our benchmarks, that was denied. I asked for the inputs to calculate staff bonuses, that was denied. I finally just asked for our historical returns by asset class, and even that was denied.” Steen concluded, “I have completely lost confidence in the staff’s ability to invest money, and even worse, their willingness to tell us the truth about the results.”

When a board member says he’s lost confidence in staff responsible for investing $90 billion-plus in assets securing the retirement security of hundreds of thousands, that’s more than alarming.

Board elect and economist Dr. Rudy Fichtenbaum’s response to STRS’s response to the forensic report candidly stated: “I want to begin my comments by staying that it is apparent that many of us have a trust problem when it comes to STRS... The STRS response (to the forensic report) is long on appeal to authority and short on evidence... Claiming that you are being transparent by counting pages (of documents released to the public) is absurd... Transparency cannot be measured by counting pages... Transparency is not merely about the quantity of information it is also about the quality of information.”

Dr. Fichtenbaum also sent an analysis to various STRS stakeholder groups stating:

“Active management has cost STRS approximately $4.1 billion over the 10-years which is an average of $410.3 million per year. These numbers are totally unrelated to the question of whether STRS accurately reports its expenses. The returns are STRS’ GIPS returns, so in effect this analysis assumes STRS is accurately reporting all expenses. If the GIPS returns are not net of all expenses, because STRS understates its expenses, then the underperformance would be even greater.”

When a board elect lacks confidence that the investment performance of a $90 billion-plus pension is being reported accurately, that’s troubling to say the least.

It’s exceptional when public pension board members take their fiduciary duties seriously and speak out about issues such as lack of transparency and mismanagement of investments. Steen and Fichtenbaum, who, incidentally, both possess financial expertise not characteristic of public pension trustees, are to be applauded.

Read the rest of the article here. 

Edward Siedle 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.

Rudy Fichtenbaum: How We Can Restore the COLA and Reduce Member Contributions

From Rudy Fichtenbaum

June 28, 2021

"So why are STRS senior staff are standing in the way of this solution that could restore the COLA, reduce member contributions, and potentially restore other pension cuts? The answer appears to be that senior management seems to care more about the well-being of the investment staff than it does about STRS members."

How We Can Restore the COLA and Reduce Member Contributions
Dr. Rudy Fichtenbaum

STRS needs to reduce its expenses and increase its returns without increasing market risks. In the most recent Board meeting, Governor appointed investment expert Wade Steen, indicated such a solution exists but he also told us that the senior management staff are preventing the Board from even discussing the solution. The solution that Mr. Steen alluded to would result in STRS earning an additional $4 billion per year. For perspective, $4 billion is more than the current employee (14%), employer (14%), and healthcare contributions- combined. It is easily enough money to restore the COLA for retirees and cut contributions for active employees and begin rolling back some of the other cuts that came with pension reform. 

What is the proposed solution? Let's think for a moment about banks, the building block of our financial system. What is a bank? A bank is a business that accepts deposits and makes loans. Pretty simple right? Traditionally banks made money by making loans and charging borrowers more in interest than they paid to depositors. When you make a loan, you are a "taker" or an "investor" who takes risk and hopes to make money when interest is paid on the loan. Banks can reduce their risk by selling the loans they make. Each time they make a loan they charge a small fee and when the loan is sold the bank has the money to make new loans. So today banks make most of their money not from the interest they charge on loans but from the fees of making loans. If a borrower defaults the bank is protected because they don't own the loan. In this case the bank is acting as a "maker." 

STRS current investment strategy is to be a taker. The investment staff take risk by trading and investing in nontransparent alternative investments (hedge funds, private equity, and venture capital) and thus, implicitly believe they are smarter than Wall Street. The graphs below show the odds of beating the market.

Think about it this way, beating the market means that you are above average. In a zero-sum game, half will earn a gross return above the market and half will earn a gross return below the market. But investing is not free and once trading costs and investment expenses are deducted there is automatically less than a 50/50 chance of earning a return that is above average. If we were in Lake Woebegone things might be different, but we live in Ohio.

What is the alternative? Combining passive investing and being a maker allowing STRS to earn fees by using its balance sheet will dramatically increase returns and reduce risk. This is precisely what the Healthcare of Ontario Pension Plan has done for more than twenty years.

Unlike a bank, a pension has a permanent capital base which means there are no depositors who can withdraw their money and pensions are not subject to the same types of restrictions as banks when it comes to managing their balance sheet. This allows a pension to partner with banks as a maker and collect fees by helping banks better manage their balance sheet.

STRS has assets. To become a maker, STRS will exchange its risky assets like stocks for safe assets like Treasuries. STRS will then use a portion of the Treasuries to buy the rights to the returns (or losses) of an index (for example the S&P 500), which amounts to passive investing. STRS can then take the remaining Treasuries and exchange them with a bank for stocks the bank wants to get off its balance sheet for a fee. STRS will in effect be creating a warehouse for these stocks and can lend them out for additional fees. STRS will still get the interest from the Treasuries, and the bank continues to get the capital gains (losses) and dividends from the stocks. Each time the stocks come back they will be lent out again for another fee. So, because STRS will get the S&P 500 returns (or losses) plus the fees it earns for warehousing and the fees for lending its inventory, it will always be able to beat the market. This strategy, of being a maker and getting the benefits of passive investing, also lowers risk because fees, associated with warehousing operations, are negatively correlated with stock market returns.

Are there risks with this strategy? The two major risks are counterparty risk i.e., the bank you are dealing with goes bankrupt and operational risk. Counterparty risk can be managed by only engaging with banks that are 'too big to fail'. Operational risk is keeping track of all the transactions, so you know who has the stocks from your warehouse. This type of risk can be mitigated using advanced technologies.

So why are STRS senior staff are standing in the way of this solution that could restore the COLA, reduce member contributions, and potentially restore other pension cuts? The answer appears to be that senior management seems to care more about the well-being of the investment staff than it does about STRS members. 

Dr. Rudy Fichtenbaum is Professor Emeritus of Economics at Wright State University.  In May, 2021, he was elected to a retired seat on the STRS Board, effective September 1, 2021

Dean Dennis to elected officials: The problem at STRS can no longer be ignored

From Dean Dennis

June 28, 2021 

Please visit  https://www.strsohiowatchdogs.com/ and read the frustration expressed in an open letter by a STRS Board member who happens to be the Governor of Ohio's Board appointee.

Dear Elected Official,

By way of introduction, I serve on the Ohio Retired Teachers Association (ORTA) Legislative Committee and am the founder of STRS Ohio Watchdogs website. ORTA's Executive Director, Dr. Robin Rayfield,  serves as one of the Moderators for the STRS Ohio Watchdogs. We have concerns we need to share.

Please visit  https://www.strsohiowatchdogs.com/ and read the frustration expressed in an open letter by a STRS Board member who happens to be the Governor of Ohio's Board appointee.

The problems at STRS no longer can be ignored.  NBC News, Yahoo Business News, Bloomberg and Forbes have written about STRS Ohio. Ohio's active teachers Employee Contribution is 14% but they only receive an actuarial value defined benefit of 10.5%. During the past 37 years the STRS Employer Contribution has remained stagnant while the Employee Contribution has increased 9 times.

Where is the COLA promised upon retirement? In 2012 COLA was reduced, next it was frozen for a year. Since 2017, it has disappeared. This is due to the Legislature turning control of the COLA over to the STRS Board.  Using language that permitted the Board to "adjust the increases," the Board eliminated the COLA.  Representative Bill Seitz has since questioned if this was the intent of the language, or even legal.  Additionally, no one seems to care that the retirees who rushed to retire in order to beat the 5 year waiting period for a COLA, stated in the 2012 legislation, have now gone 8 years without a COLA. It should be notable that over 30,000 retirees have died since their promised COLA was eliminated 9 years ago.

Meanwhile, our pension plan has gone over 15 years without having the required Legislative 10 year fiduciary audit. Know that many of the important recommendations outlined in the 2006 fiduciary audit were ignored by STRS management. During this time period, our STRS attorney has become the STRS Executive Director. Still, STRS senior management states to members that STRS is one of the top pension plans in the United States.

There appears to be  solutions to the above, but apparently they're being ignored by senior management.

If you would like more information please contact Robin Rayfield at  rrayfield@orta.org or Dean Dennis at ddennis1111@gmail.com.  

Sincerely,

Dean Dennis

ORTA, Legislative Committee

STRS Ohio Watchdogs, Founder