Saturday, September 04, 2021

John Damschroder: Hedge fund managers can't lose with public pensions (Flashback from one year ago)

Fremont News Messenger

John Damschroder, Columnist

September 1, 2020

If I don’t do this no one else in Ohio media will. So begins yet another column on the transfer of wealth from beneficiaries of the five state public pension systems with combined assets of $204.4 billion, to the fund managers entrusted with protecting and growing that ocean of capital.
For perspective on the size of Ohio’s public pensions, the large banks have less than half the in-state deposits as the pensions do. Drilling down to the asset category of hedge funds, Ohio pensions' $17.6 billion in this investment would make it the seventh largest bank in the state.
Seemingly this would make it hard to ignore an Ohio State University news release proclaiming “hedge fund investors get a raw deal from incentive fees.” Following the study of nearly 6,000 funds for more than 20 years, two Ohio State University finance professors find 64 cents of every investment dollar earned in the hedge funds lands in the manager’s account. Professor Itzhak Ben-David said in the release, “as a hedge fund manager you cannot lose.”
The Ohio State-driven study for the National Bureau of Economic Research quantifies the results of management fees paid all the time, incentive fees paid when the fund earns money, and the inability of claw back payments when the fund loses money. The research finds rather than give back gains and keep trying, hedge funds simply close when they lose, making shared risk a fool's promise.
I asked the Ohio pension funds for comment on the OSU news release but none responded.
I reached out to professor Ben-David asking if the 1.12% higher management fee the Ohio Public Retirement System pays hedge fund managers makes it an even worse performer than other investors,or whether the change in Ohio law that opened the door to public investment in hedge funds was a bad decision. I was met with a prompt and polite reply devoid of answers or useful policy prescriptions.The descent from 50,000 feet view of the industry to real applications on the ground in Ohio is apparently too dangerous.
But in reality the answers are pretty obvious. A look at the OPERS website indicates the powers that be ought to be thinking about the capital they’ve lost to optimistic assumptions since 1994.
The hedge funds that are supposed to reduce portfolio volatility and enhance returns have instead lost more than 8% so far this year. And of course that is before the 2.52% management fees OPERS pays is added to the loss.
Thanks in large part to a 5,660% explosion in fees paid by OPERS to Wall Street fund managers since 2001, when the state’s largest public retirement fund had a surplus, the fiduciary audit released last fall gives OPERS less than a 50 percent likelihood of meeting the investment return assumptions needed to pay full benefits.
The elements of a perfect financial storm are coming into formation. Ohio is one of the dozen states where public employees don’t pay into Social Security, where tens of billions of dollars are invested through fund managers in unobservable, illiquid markets and where sovereign immunity protects officials making these dangerous investments from lawsuits claiming breach of fiduciary duty and from criminal provisions of the federal Employee Retirement Income Security Act-ERISA.
In opening the door to hedge fund managers “who can’t lose,” Ohio has created retirement funds that cannot win. Why would any politician put Wall Street money managers over public system retirees spending on Main Street in Ohio? John Kasich’s presidential campaign finance reports tell us why. The largest source of funds by far came from “can’t lose” money managers. It won’t stop until someone besides me and the Fremont News-Messenger make it more than an academic issue.   
John Damschroder, a Fremont native who worked in Gov. George Voinovich’s administration, writes about business and economic development in Ohio.

Tuesday, August 31, 2021

Edward Siedle on the Ohio Retirement Study Council (ORSC)

"The Council is merely responsible for picking up the phone every ten years and hiring outside firms to do the work. It’s that easy. Yet even making those calls to prospective auditors once a decade has apparently long proven to be too burdensome for the Council’s 14 overworked members. Despite the statutory requirement of fiduciary and actuarial audits at least every 10 years, it has been approximately 15 years since the last such audits of the State Teachers Retirement System commissioned by the Council."

~ Edward Siedle

Robin Rayfield's STRS report to ORTA members in August, 2021 newsletter following August 19 STRS Board meeting


By Robin Rayfield,
Executive Director
Ohio Retired Teachers Association
August 27, 2021
The STRS board met on August 19, 2021. The meeting began at 8:00 and lasted until about 5:00 PM. There was an abundance of retirees in attendance. Due to COVID 19 social distance measures the people in attendance were split into the board room area and an overflow room 4 floors below the board room. The crowd was present to observe and, many to voice concerns about the situation at STRS. All 15 public participant spots were filled with people that wanted to voice concerns with the leadership at STRS. Of course, many of the comments voiced concern over the reduction in benefits retirees have experienced over the last 5 years. Some asked the question, ‘Since the system has met the 85% threshold for COLA reconsideration, when can we expect our COLA?’The board acted in a predictable and expected manner throughout the day.
Biggest takeaways:
1. The board responded to the Edward Siedle Forensic Audit As expected, STRS disagrees with everything in the report. As Mr. Siedle commented, people that have been allowed to behave in a manner that rewards themselves for poor performance for decades will not stop that behavior just because someone objects.Consider that STRS has spent millions hiring companies that only say nice things about STRS. When STRS pays companies like Callan, CEM, Cliffwater, and ACA the amounts they pay, of course those companies say positive things. Remember the story about the emperor and his clothes? ORTA will offer a response to the STRS report soon.
2. The board also awarded bonus payments of nearly $7,000,000 to its investment staff. These payments were approved even though the report from the group charged with evaluating whether the benchmarks were met has not been completed. The crowd was very unhappy with the decision to pay bonuses to the staff.
3. The board also selected Rita Walters to serve 1 year of the term Bob Stein was elected to in May of 2021.You may recall that Bob Stein ran for re-election and resigned shortly after winning his seat.
4. One thing that was reinforced was that the board does not provide any level of oversight to the STRS staff. Outside of Wade Steen none of the STRS board members question the actions of the staff. The OEA-backed members of the STRS board simply approve any measure proposed by the STRS staff. If you get the chance check out the ORTA YouTube channel recording of the first part of the meeting. Of specific interest to retirees, you will notice that board member Wade Steen asked several questions with the remainder of the board asking very few questions.
5. Something else that was obvious to all who attended is the fact that the active members of the STRS board vote for any proposal that the STRS staff present. They ask few questions, only questions that strengthen the proposal. Consider Mr. Rhodes (active OEA member) who informed everyone that STRS does not pay bonuses to its investment staff. Mr. Rhodes let everyone know that the investment staff are paid what they have earned, it is not a bonus. Unfortunately, for Mr. Rhodes, Executive Director Neville made a comment about the bonuses. He said that ‘No bonuses would be paid until the ACA report had been completed and submitted’.Then he apologized to Mr. Rhodes for using the term bonus. Even the Executive Director understands that receiving extra pay for a job that some consider exemplary is a ‘bonus’. Webster’s defines bonus this way:money or an equivalent given in addition to an employee’s usual compensation.
Forensic Audit
Now that the preliminary report of the forensic audit has been released and the STRS board of trustees have responded, some folks have asked ‘What happens now’? The answer is that ORTA will continue to advocate for retirees seeking changes at STRS that will restore the benefits to the level promised.
The fact that STRS did not accept the report is not surprising? When you consider that STRS staff have mismanaged and poorly performed for decades and the STRS trustees have paid bonuses for that poor performance each year for decades, it is not strange that they would disagree with Mr. Siedle’s assessment. If you consider that STRS brought in the best witnesses money can buy to support their response to Mr. Siedle’s report, it is somewhat surprising that the response was not sharper. After all, STRS has 20 plus managers bragging about their own performance, along with the highly paid consultants at Callan, CEM, Cliffwater, and ACA who are paid a great deal to say nice things about STRS. Millions are paid so that everyone involved can get paid again, and again.Everyone associated with this get paid a great deal, except for the people that paid into the system. Actives pay in 14% for a 10.5% benefit. Retirees have had benefits reduced from promised levels. STRS fails to meet benchmarks, but still receive bonus pay. Where are the trustees? Where are the unions? ORTA will be in this fight to the bitter end. Mr. Siedle is not done.
We have two legal actions seeking records that STRS refuses to provide. Last week, again the STRS board was asked to provide simple information:
• How much is invested in each of the 135 alternative investment external accounts?
• What are the total costs (fees, expenses, and other costs) associated with those investments?
• What are those investments worth today?
We are optimistic that the courts will require STRS to provide investment information to the investors (the STRS members, active and retired). As I mentioned in my comments at the meeting, if STRS will simply provide the information related to our investments and the costs of making those investments, much of the controversy will be settled and some level of trust between STRS members and the STRS pension system can be reestablished. If STRS continues to hide information, members will continue to ask, ‘What are they hiding?’
STRS Appoints Rita Walters to STRS Seat
The STRS board voted to fill the vacancy left when Bob Stein resigned his seat after winning reelection this spring. Ms. Walters is a strong supporter of STRS staff and opposes all measures or proposals suggested by board member Wade Steen. ORTA intends to identify and support candidates for retiree seats beginning with the election to be held next year.

Want to take control of your pension system? Join ORTA! The numbers TALK, folks! You are needed to be part of those numbers! Remember, ORTA is "US", not "THEM"

From Cindy Murphy on STRS Ohio Watchdogs public Facebook page:
Please share this message from ORTA! We can't stress this enough.
Here's a statement from our Executive Director: A note from ORTA Executive Director Robin Rayfield Regarding the STRS Forensic Audit and STRS’ Response:
"Greetings STRS Members Only Facebook Forum Members! As the Executive Director at ORTA, I read the majority of threads that appear in this forum. I probably don’t ‘drill down’ as deeply as some observers, but I do read many comments made by forum members. I have read several comments made by people that traveled to Columbus to attend the STRS meeting on August 19, 2021. What is interesting for me is to read the comments from the dozens of people that attended the meeting and compare those comments to STRS’s depiction of the events of the day. It seems like STRS and the retirees in attendance have two distinctly different perspectives of what happened at the meeting.
Of particular interest to me was the STRS response to the Edward Siedle Forensic Audit Report ‘The High Cost of Secrecy’. The board responded to the Edward Siedle Forensic Audit as expected, STRS disagrees with everything in the report. As Mr. Siedle commented, people that have been allowed to behave in a manner that rewards themselves for poor performance for decades will not stop that behavior just because someone objects. Consider that STRS has spent millions hiring companies that only say nice things about STRS. When STRS pays companies like Callen, CEM, Cliffwater, and ACA the amounts they pay, of course those companies say positive things. Remember the story about the emperor and his clothes? ORTA will offer a response to the STRS report soon.
Consider the fight that we are engaged in with STRS… ORTA has hired Edward Siedle to investigate the STRS system. We collected $75,000 from ORTA members, non ORTA retirees, active STRS members, local chapters, and the OFT. Although that seems like a good-sized army to go to battle with, we must consider who we are doing battle with:
STRS Staff – over 105 investment staff that will do anything to hold on to their bonuses. Remember, they have all the information, and refuse to share information about our pension system. Employees that collect bonus pay despite failing to prove that they hit any benchmark (other than the actual performance benchmark), and a majority of the board that is supposed to provide oversight.
STRS External Consultants – Companies that are large corporations with unlimited budgets that receive huge payments from STRS to support STRS. Is it any wonder that these companies are hired year after year by STRS when these same companies only offer positive assessments? STRS has the best witnesses our money can buy. When an alternative perspective is provided by someone that does not receive money from STRS, it is easy to see why STRS opens the checkbook to discredit and discount the Siedle report.
ORSC – The legislative body charged with providing oversight for the STRS pension system. This group of people ignored their responsibility to conduct audits of the STRS system since 2016. A ten-year audit was due at that time. With the last ORSC audit conducted in 2006, its not like the audit due in 2016 ‘snuck up on them’. They knew in 2006 that an audit was due in 2016. But instead of doing what we elected them to do, they ignored their responsibilities. STRS was only too happy to not be audited, so everyone simply ignored the timelines. Now, some 6 years late and 16 years after the last audit, the ORSC has hired the firm of Funston to perform the audit. The choice of Funston is suspicious for several reasons. There appears to be a close connection between a current STRS external consultant and Funston. Funston is also at the heart of a controversy with the Pennsylvania State Employees Retirement System. And Funston’s quote was double the quote submitted by two other audit firms. From an outside perspective it appears that ‘pay to play’ is alive and well in Ohio’s political scene.
How can we win this battle? ORTA is committed to fighting this battle on behalf of STRS members, both active and retired. We can NEVER outspend STRS, nor can we match their ‘experts’ that are on the STRS payroll. But we can win this battle. We can win because we are RIGHT! It is right that the people who put the money into the system should have access to information about their investments. We should know how much is invested in each of the alternative investment accounts, what are the total costs associated with these investments and how much these investments are worth. We have a few legislators that are becoming interested and asking questions of STRS.
I ask that all interested people join ORTA in this battle to take control of our pension system. Retirees need to receive the benefits that were promised, not some reduced amount. Actives need to receive a pension that is equal to the amount they are contributing, not an amount reduced by 3.5%. ORTA is doing all we can, and we are not shying away from this fight. We are asking every retiree that reads this post to join ORTA. The cost is only $30 per year. Our pathway to success lies in our strength. Our strength is in our numbers. Join ORTA and become involved in this fight. ORTA is offering a special membership to our ‘active educator allies’ who are also STRS members. Active educators can join ORTA for $10 per year. ORTA is committed to ensuring that active educators receive a pension that is worth their contributions.
You can join at ORTA’s website or call our office 614-431-7002.
~     ~     ~     ~     ~
 According to Dr. Robin Rayfield, Executive Director of the Ohio Retired Teachers Assn. (ORTA),  "Anyone can join; active, retired, or interested people like spouses, friends, and family of STRS members." Robin can support us best if we give our full  support to ORTA. He talks to STRS and he talks to legislators. They NOTICE the numbers, and the greater the numbers, the greater the clout we have! There is STRENGTH in numbers, and you are needed to be a part of it.

That STRS mysterious -3.35%

From John Curry
August 31, 2021 
That mysterious -3.35% that showed up behind the tremendous 14% figure that active teachers have deducted from their paychecks for their retirement contributions to STRS. WHAT IS THAT -3.35%?????? 
Well, thanks to a fellow Watchdog, we have it explained to us. Below is what they had to say about the "Normal Cost" column:
"Normal Cost" is the percentage of a teachers salary needed to provide total lifetime pension benefits using current formulas and career lengths. 
For actives, who are paying too much and working too long for too little and are charged 14% of their income in contributions, while they only receive a benefit worth 10.65%. This is why the -3.35% shows up in the "Employer Contribution" column, because even though the Employer is also contributing 14% to STRS, none of those contributions are being used for the benefit of active teachers. Please note that Ohio STRS is the only pension plan, of all 87 listed in this study, that has a negative employer "Normal Cost." This means current teachers are paying one-dollar for a retirement benefit that is only worth seventy-six cents.
For retirees, STRS has broken their promise by stealing their COLA, which is part of their already paid for and earned pension. Without a COLA retirees will lose between 30% and 40% of their promised lifetime pension income.
Finally, nearly all of this pension manipulation which has occurred since 2012, has been caused by the STRS's lowering the "Discount Rate" from 8%, to 7.75%, to 7.45% and now 7% over the last decade. These changes increased our debt by over 25 billion dollars. With a stated goal of becoming 100% funded, along with this added debt, STRS has made this goal twice as hard as it was 10-years ago. STRS Management believes that their goal is more important than fulfilling their fiduciary obligation for your financial welfare. 

Monday, August 30, 2021

August 19, 2021 STRS Board meeting: Summary by a retired stakeholder

August 22. 2021

The STRS Board meeting was held on August 19, 2021. The meeting was well attended: ORTA and OFT members, the public, attendees probably numbered over 100, plus all who attended virtually. Signs, and a live Facebook feed, thanks to ORTA, were some features of the day. STRS needed an overflow room to house everyone. Chair Walters had to chastise the crowd for reactions to some of the Board’s productions.
This meeting was a production. STRS had all its consultants present and accounted, in person, with more on line - ACA, CEM, Cliffwater, Callan, Crowe. No way was STRS going to take crap from a forensic audit report. Our STRS is a perfect organization that does everything correctly. From the beginning to the end, close to 9 hours after starting, the only negative came from outsiders, the attendees that spoke during Public Participation.
I hope all of you, wherever you live, can see the glow from Columbus, because our STRS staff and their consultants are enlightening. Board member Steen tried to poke holes, but the dam held; meanwhile Board member Jeffrey Rhodes played the clarifier at the end of each act, making sure the public, present and listening, fully understood that all questions were answered, and all finger pointing was heard and were wrong.
Promptly at 8 a.m. the Audit Committee met. STRS is in the process of having its financial statement “audited” by Crowe LLP. By Ohio law, this is to happen every ten years, but the last was in 2006. Of course, this was not STRS’s fault, the state allowed the delays.
Crowe will be performing substantive testing in the key audit areas such as “existence and fair value of investments,” “total pension liability,” “contributions,” “potential management override of controls.” Their report should be ready December, 2021. ACA then defended its “verifications” of the general fund over many years.
There was push and pull amongst the Board about questions asked now and in the future. Steen feels he doesn’t have the information he needs as a fiduciary. The audit committee lasted until 9:37 a.m. The Board meeting began at 9:45. The first major item was CEO Neville’s report, “STRS Ohio Response to BFS Report.” This response is available at
Neville and his leadership team and the consultants then destroyed Edward Siedle’s Forensic Report findings until 11:19 a.m. Steen would point out inconsistencies, but staff and consultants always had an answer.
The Executive Director report followed with 13 accolades of services being provided or awarded to STRS.
During Public Participation 12 people spoke, almost all on the loss of COLA. One presenter, a Columbus retired teacher, pointed out that STRS changed its health plan and a PAP smear now is only covered once every 3 years effective 01/01/2021, retroactive to the last smear. Also, Bob Buerkle of Cincinnati pointed out that 37,000 members have died since the COLA was eliminated in 2017.
In the afternoon, the Investment Department reported FY21 closed at approximately $94.8 billion with a net asset increase of $17.7 billion dollars. It was pointed out that the investment department actually earned close to $21.7 billion, but that extra $4 billion went to benefit payments. Remember, about $7 billion in benefits are paid yearly but active/employer contributions add $3 billion to the general fund. July’s investment asset had the fund at $95.3 billion.
A number of other reports were presented, including Callan’s annual performance review as of June 30 and Cliffwater's annual review as of June 30, 2021. STRS Ohio came out glowing with these reports. An Asset-Liability study is starting with the study to be completed and adopted by March 2022. The Benefit Department then had a CEM Benchmarking report showing that amongst our peers we stand out above most of peers.
Routine Matters authorized $6.7 million to be paid for PBI's to the investment department [Performance Based Incentives]. [The public attendees went crazy with signs being held up against the glass wall. I must admit that I did not go crazy. Our investments department created $21 billion in additional wealth.] The Board meeting ended at 4:27 with no old or new business.
The next Board meeting is September 16, 2021. The Ad Hoc Committee for Board Education & Planning then commenced and ended about 4:45. This committee addressed the Board’s yearly training in ethics, fiduciary duties, self-assessment, and other topics for the November Board workshop.

Some insight from Edward Siedle.....

"I think the rebuttal to STRS makes it clear staff doesn't know what they're talking about when it comes to transparency, Wall Street business practices, investment fees, the federal securities laws, ERISA... well, that just about covers everything a pension staff should know."

~ Edward Siedle


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