Saturday, March 04, 2023

What? Corruption among public pension fund officials? Read it and weep!

How Private Equity Bribes Public Pension Fund Officials: Subsidized/Fund-Paid Lavish Travel and Entertainment

Yves Smith
March 1, 2023
Neil Weinberg peels back yet another layer of the soft corruption that pervades private equity dealings with modestly-paid pension fund officials in a new article, Tuscany for $200? Private Equity Pays for State Pension Funds’ Luxury Trips.
We’ve repeatedly mentioned the universal practice of limited parters like CalPERS and CalSTRS sending private equity staffers to meetings hosted by the general partner at glamorous destinations with lavish wine and food and often, top tier entertainment (as in Elton John/Rolling Stones level). The excuse for these meeting is for the limited parters to get briefed. The reality is that these meetings are marketing events; these private equity staffers would know vastly more about the funds they’ve invested in if they actually read the documents the general partners provide. Instead, running around to dog and pony shows is oversight theater. 
And no one questions the fact that these meetings are not paid for by the general partners, but are billed to the fund….as in the investors! So the expensive drinks and meals and shows are paid from your state and local taxes.
Weinberg has found another element of this corrupt practice…that of general partners subsidizing the travel and often lavish accommodations connected with the so-called limited partner advisory committees. These committees are chosen by the general partner and supposedly get more information than garden variety limited partners and have some say so.
As we’ll explain, the limited partner advisory committees are yet more oversight theater and serve general partner interests by having an inside group of high-profile investors seemingly bless the inner workings of the fund.
Weinberg exposes bribery at the advisory committee level. And before you depict that as an overstatement, recall that social psychologists have found that a gift as small as a can of soda predisposed a buyer to a sales pitch. Some companies prohibit outside parties from paying any expenses on behalf of employees.
Two Michigan pension fund officials attended a 2018 Apax Partners event at the Four Seasons Hotel in Florence, Italy, that featured “custom tailored activities and itineraries,” including tours of the Tuscan countryside on vintage Vespa scooters and a gala dinner at the 17th Century Villa le Corti. 
The bill for the state: less than $200 for each official, according to public records obtained by Bloomberg. And Michigan is hardly alone in letting private equity firms foot most of the bill for luxury travel and trips by state pension fund managers, who are public employees.
Capital paid for most of the $21,127 business-class airfare for an Illinois fund official attending its 2018 meeting at the Renaissance Resort in Okinawa, Japan — the state paid just $392. Florida officials visited Milan, Rome and Paris last June, courtesy of JPMorgan Chase & Co. funds…
Those trips were all for officials to attend meetings as members of private equity firms’ limited partnership advisory councils, which have developed a reputation for taking place in posh, far-flung destinations…
Such LPACs are supposed to be a means of giving state officials a voice in how the firms invest public money. But some worry that the luxurious trips may unduly influence the officials who are treated to them.
“The cost of junkets is peanuts compared to other fees,” says Jeff Hooke, a finance professor at Johns Hopkins University and a critic of private equity. “I’m more concerned that these officials spend hours hearing one side of the story. They’re not hearing from the index fund managers.”
The line at CalPERS over 20 years ago, when $100 million was worth more than now, was that a $100 steak dinner would buy a $100 million commitment, is testament to the long-standing recognition of the soft corruption problem. Needless to say, the idea that going to Tuscany and getting feasts and fancy tours will enhance the ability of the public pension employees to do their job is ludicrous on its face. 
Note that the article is not able to establish whether these advisory committee junkets are paid for by the investment managers or the funds, as in the investors. Given industry norms, you can be highly confident that the great majority of fund managers shift these costs to their investees.
Weinberg is forced to publish industry blather about the supposed value of these advisory committee meetings. It’s nonsense. From a 2015 post in the wake of a CalPERS workshop on private equity:
The Utter Powerlessness of Limited Partner Advisory Committees
Former SEC examination chief Andrew Bowden singled out limited partnership post-investment supervision as particularly weak in his famed 2014 “sunshine speech” (emphasis original): “…investor oversight is generally much more lax after closing.”
Yet when CalPERS CIO Ted Eliopoulos mentions limited partner advisory committees, one of the few post-closing supervision channels, you can hear him crank up the warmth in his voice. It’s as if he wants to make clear to the board that these groups are a big deal and the board should respect the special role that CalPERS enjoys by participating in them.
Sadly, the presentation failed to address how little power private equity limited partner advisory committees actually have.
First, the general partner selects who sits on the advisory committee. Needless to say, they almost always ensure that a majority of the committee consists of friends and allies. For example, the funds of funds sponsored by the big investment banks are significantly over-represented among advisory committee members. This is the case because general partners collectively pay investment banks billions in fees, which makes it almost impossible for the funds of funds to vote against general partner interests. 
Second, the purview of the Advisory Committee is quite limited, typically to approving conflicts of interest and, sometimes, portfolio company valuations. But, even then, the deck is stacked against investors like CalPERS. The limited partnership agreements that we’ve published, like Blackstone’s, show that the advisory committee needs to go through a very cumbersome process to object to valuations. And, in the case of Blackstone, the issue ultimately ends up arbitrated by the New York Stock Exchange, where it is safe to assume that Blackstone has many friends.
Third, the existence of the advisory committee can actually work against the limited partners as a whole by providing a pretense of LP governance that is ultimately a sham. For instance, as was discussed in CalPERS’ investment committee meeting in October, Blackstone was engaged in an abuse called “termination of monitoring fees” which basically means charging monitoring fees to portfolio companies after the deal was sold. As JJ Jelincic pointed out then, Blackstone had notified the dozen or so members of the advisory committee about this practice, while hundreds of other investors were left in the dark. Yet apparently none of the advisory committee members did anything about it. Had the limited partners as a whole been informed, the odds of opposition would have been greater.
Finally, there are well-known stories in the limited partner community of the rare instances where a limited partner representative asked tough questions at an advisory committee meeting and, before he even got back to his office, his boss had received a call demanding that the individual never be sent to another advisory committee meeting.
As a result of these power dynamics, there is an underlying reality that, for the vast majority of limited partners, participating on advisory committees means little more than an excuse for a trip to New York or London, a nice meal, and socializing with other limited partners and the general partner. It’s a mistake to view it as anything more.
Back to the current post. We have been revealed to have not been sufficiently well informed (or alternatively, imaginative) about how lavish these private equity perks were. As JJ Jelincic says in the new Bloomberg account:
“I can’t remember an advisory committee meeting that wasn’t in a nice place,” says Joseph John “J.J.” Jelincic, a retired staffer and director of the California Public Employees’ Retirement System. “Probably the worst was Manhattan.”
Read more here.

STRS pooh-poohs another outside expert's findings (of course their own "experts" are handsomely paid to say all the right things so they can keep their jobs, right?)

Toledo Blade
March 4, 2023  
Saturday essay: STRS investment performance measure flawed
MAR 4, 2023 
Retirees of the State Teachers Retirement System of Ohio are hopping mad over $10 million in bonuses paid to the STRS staff for its performance in managing the STRS investment portfolio. I believe their concerns are justified.
One of the fund’s trustees, Rudy Fichtenbaum, retired professor of economics at Wright State University, reached out to me for help in gauging how well the fund has performed through the eyes of a disinterested investment expert. (At the time, I was unacquainted with Professor Fichtenbaum or anyone else connected with STRS.)
STRS reports its performance using a nontransparent benchmark of its own devising. It claims to have outperformed its benchmark consistently over time.
The payment of bonuses is triggered by this measurement. But the benchmark itself has been questioned inasmuch as no one apart from STRS and its external investment consultant, Callan Associates, has ever reproduced it, let alone attempt to validate it.
Professor Fichtenbaum’s request seemed reasonable, so I performed, pro bono, an analysis of the fund’s performance over 13 years, dating from the Global Financial Crisis of 2008 through its 2021 fiscal year.
I used the widely recognized methodology devised by Nobel laureate William Sharpe, which is applicable when a fund’s benchmark is unavailable or in dispute. The methodology identifies the combination of stock and bond indexes that statistically mimics the portfolio’s past return as closely as possible. It attempts to determine how the fund has performed compared with simple index investing with the same level of risk and overall asset allocation as the fund itself. It is an objective approach.
My analysis indicated that the STRS fund underperformed a passively investable benchmark by 1.62 percentage points per year for the 13 years, a margin of underperformance that could not reasonably be attributed to bad luck, statistically speaking.
I opined at the time that much of the underperformance could be attributed to unrecouped investment expenses incurred by STRS. An opportunity cost of that magnitude on a portfolio averaging, say, $60 billion in value over time, adds up to nearly $12.5 billion.
During the recent STRS trustee meeting, Brady O’Connell of Callan Associates dismissed my results. He was quoted as saying, “I think it’s good to evaluate different ways to look at things from time to time, but in no way is [the methodology used by Ennis] a convention that’s been widely adopted in the industry.”
Learning of this I wrote to the STRS trustees as follows:
Mr. O’Connell is a fine man, and he is absolutely right that returns-based style analysis [the common term for the Sharpe methodology] used by academics and serious practitioner-researchers to evaluate portfolio performance when the benchmark is unknown or in dispute, is not a convention that has been adopted in the industry in the design of performance benchmarks.
The convention among large public pension funds like Ohio STRS is for the staff and consultant to work together to contrive a benchmark that no one else could reproduce if their life depended on it: one that is opaque, complex, and purely subjective; one that is tweaked regularly by the staff and/?or consultant; One that demonstrably understates a fair return for the risk assumed; and one that invariably gives the misleading impression that the fund is outperforming passive management — adding value — when it is not. That, unfortunately, is today’s convention.
In writing to the trustees, I stood by my assessment of STRS performance. I believe the retirees have a legitimate beef.
The author, Richard M. Ennis, CFA, managed money at Transamerica and pioneered quantitative investing in the early 1970s. Mr. Ennis co-founded EnnisKnupp, the first consultancy to be recognized as a professional services firm. He served Ohio Public Employees Retirement System for many years and the Ohio workers comp insurance fund during a difficult period when the value of its assets was in question.
Read the article here

Cleveland's Channel 5 reports on teachers' concerns re: STRS pension fund 

Ohio teachers, both current and retired, share concerns over STRS Ohio pension fund
Ohio Retired Teachers Association continues call for reform after $5.3 billion in fund losses in 2022
By: Joe Pagonakis 
March 2, 2023 
CLEVELAND — Some of Ohio's current and retired teachers continue to ask serious question about the financial health of the State Teachers' Retirement System of Ohio, better known as STRS.
Teachers like Terry Caskey, who has worked 25 years with the Parma school system, told News 5 she was appalled to learn state data indicated STRS posted a $5.3 billion fund loss in 2022, while issuing $10 million in staff bonuses.
Caskey said the data was even more concerning when considering the cost of living adjustments, or COLA's were suspended for more than 150,000 retired Ohio teachers for five years starting in 2017. In 2012, the qualifying retirement number was moved from 30 years to 35 years.
“They explained to us moving the qualifying age to 35 years was more about the baby boomers and they were living longer so we had to kick in, but really I believe it has come down to mismanagement of funds over time," Caskey said. “STRS is a fiduciary and they have a responsibility first to the teachers, the actives and the retirees. If they’re not okay, then nobody should be receiving any bonuses.”
The announced $5.3 billion in STRS losses again had the Ohio Retired Teachers Association Executive Director Robin Rayfield demanding reform. Rayfield testified at the Feb. 14 State Board of Education meeting, calling for change on how STRS bonus benchmarks are determined. Rayfield has also asked for more investment transparency from STRS after he said it refused to release crucial documents on how it's investing teacher contributions.
“It’s an unequivocal fact that Ohio teachers have the worst pension deal in America," Rayfield said. “The loss wasn’t $3 billion it was $5.3 billion. So we pay bonuses before the numbers have been verified, then numbers come and they’re always worse and the bonuses have been paid.”
Rayfield told News 5 the Ohio Retirement Study Council which provides STRS oversight needs to do a better job, even though its 2022 report gave STRS passing performance grades for how the retirement fund is being managed. Rayfield pointed out the council was several years late in making its recent 10-year evaluation.
Daniel MacDonald, a former Cleveland Heights-University Heights teacher who retired 2006, and told News 5 the 5-year interruption in cost of living adjustments cost him more than $20,000, agreed STRS needs to be more forthcoming with records when reporting losses.
“They aren’t transparent, things happen and they tend to hide what happens," MacDonald said. “If the fund doesn’t make money, if it isn’t more money than it was the year before, I question whether there should be incentives given.”
Edward Siedle, President of Benchmark Financial Services, was hired by the retired teachers association in 2021 to perform an audit analysis of the $100 billion teachers fund. Siedle said STRS refused to produce key investment documents, so a lawsuit was filed against STRS for alleged violation of Ohio's public records act.
“Ohio retired teachers reached out to me because I had written this book called 'Who Stole My Pension,'" Siedle said. “These state and local pensions are not being transparent, they are misrepresenting their investment performance, making it look better than it really is, and the risks that they’re taking are much greater than the teachers are aware.”
Siedle agrees reform is needed in how bonuses are issued at STRS.
"The benchmarks here are hysterical, because they’re not benchmarks at all," Siedle said. “The pension fund investment staff is judged against their own performance so they basically can never lose.”
STRS defended its performance, Dan Minnich, Chief Communication Officer at STRS Ohio issued the following statement for our story: 
In a recent special audit, of 29 allegations reviewed, the Auditor of State found only two with merit. Both were related to audits commissioned by the Ohio Retirement Study Council. Quoting from the special audit report, “STRS’ organizational structure, control environment and operations are suitably designed and well monitored, both internally and by independent experts.” 
Over the past five years, STRS Ohio’s total fund annualized net return was 6.98%. 
Over the past three years, the total fund annualized net return was 6.51%. 
So far this fiscal year (2023), STRS Ohio’s total fund net return is 4.5%. 
STRS Ohio investments ranked in the top 10% of public funds examined by an independent consultant for not only the past three and five years, but for the past seven- and 10-year periods—all at lower average risk than its peers. 
The average new STRS Ohio retiree is 63 years old, receives a pension of nearly $55,000 a year, and he or she has access to the STRS Ohio health care plan. STRS Ohio continues to diligently—and successfully—partner with our members in helping to build retirement security 
News 5 asked Minnich that since a one-time 3% COLA was approved in May 2022 for retired Ohio teachers, will a COLA be permanently restored. News 5 also asked why did STRS choose to withhold requested documents connected to its investment decisions, but both questions were not answered.
Instead, Minnich released the following statement from Carol Correthers, Chair of the STRS Ohio Retirement Board, concerning the performance of STRS Executive Director Bill Neville who was the subject a split 5 to 5 and one abstention no confidence vote on Feb. 16. 
Bill Neville has my complete confidence. During the two-and-a-half years Mr. Neville has led STRS, retirees have received a 3% COLA; STRS retiree health care plan enrollees have received premium rebates of $250, $300 and $600, and 95% of enrollees are paying less in premiums in 2023 than they did in 2022; additionally, active teachers will no longer be required to work to age 60 to receive their pension. Importantly, STRS has maintained strong funding in both the pension fund and health care fund 
Meanwhile, Andrew Engel, Director of Litigation with Advocate Attorneys LLP, which is part of the team which filed the lawsuit against STRS, which is now in appeal, told News 5 the case filed against STRS on behalf of Ted Siedle is for violation of Ohio's public records act.
Read the full article here

Wednesday, March 01, 2023

ORTA: It’s time for Bill Neville to save Ohio public education from further embarrassment and resign his position


March 1, 2023

At this February’s board meeting, the STRS board rejected a motion of confidence in STRS Executive Director Bill Neville and the long-time direction of the fund.

Director Neville failed to gain the support of the 11-member board in a vote of confidence that was introduced during a robust discussion about his failures in leadership and STRS’ dishonest reporting of investment performance used for million-dollar staff bonuses.

Click video below to watch. [Photo only below; click here instead.

STRS mismanagement has resulted in lost COLAs and broken promises for retired teachers while active teachers are being forced to pay more and work longer for less benefits.

ORTA is grateful for each board member who is taking the steps necessary to rebuild trust, bring needed transparency and deliver on the promise to provide a safe and secure retirement for our educators.

It’s time for Bill Neville to save Ohio public education from further embarrassment and resign his position.

Please consider lending your voice to our army of active and retired educators by clicking here to to submit a letter to the editor in your local newspaper calling for real leadership change at STRS and the end of the Neville administration.

Your voice matters.  Together we are making a difference.


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