It’s time for an independent review of Ohio’s state teachers’ pension system and other public employee pension funds in the state.
Fees and expenses charged by professionals paid by the funds should be verified. This review should include a determination of the value of investment funds and direct investments made on behalf of pension funds.
Why? The answer is Panda Power. This investment lost $525 million. A big zero remained from the initial investment. The right person to oversee this investigation is the state auditor. The independence of the auditor’s office to dig into the numbers is the only way taxpayers and pension fund contributors know they’re not being cheated.
For its part, the STRS is moving quickly to implement the key recommendation of a recent fiduciary audit. The nearly $100 billion retirement fund is seeking outside professional help to validate fees, expenses and profit shares across 430 investment funds and 50 direct investments. It’s a beginning. More, however, remains to be done.
Verification of the asset values of the $21 billion STRS alternative portfolio, also requested in the fiduciary audit, is not included in the pension fund tender. Alternative investments contrast with the usual investments in stocks and bonds. They could include hedge funds, private companies, real estate and infrastructure, according to the CFA Institute, an organization of financial analysts.
Together, the five Ohio pensions have about 20% of their $266 billion portfolio in alternative investments where the returns from those investments are in the hands of outside fund managers. The pension fund investment teams that select outside funds have a financial interest in the highest possible valuations.
They receive performance bonuses based on results. These bonuses usually exceed their salaries.
It is a conflict of interest when consultants paid by the funds provide performance reports on investments. These reports often paint a rosy picture of reality. The S&P 500 just posted the worst first-half performance since 1970. With stock indexes down nearly 12% for the June 30 financial year, the value of much less liquid alternative investments is suffering heavy losses. This is why it is essential to obtain the fair value of investments.
Ohio law gives the state auditor the power to demand documents and witnesses related to public funds. An external vendor working with the auditor has more authority to acquire investment data and far more credibility than the individuals paid by the funds. So far, the listener doesn’t want any part of it.
“This type of activity goes well beyond the nature of an audit. Collecting this information and data would involve daily accounting service plus validation, which requires full-time accounting staff. This activity is a retirement system management function under the supervision of the Ohio Retirement Study Council,” said auditor Keith Faber.
Ohio law gives the auditor exclusive authority to establish the “standards, guidelines, and procedures” used for financial review. The expense is paid by the audited body. STRS plans to pay for verification of private capital expenditures. Other pension plans must do the same. The best possible way to oversee these controls is for the auditor to hire and oversee independent vendors to review the fees and returns charged to Ohio pension plans.