A Single State Pension--Ohio Teachers--May Trigger A Collapse In Values At All Others

The State Teachers Retirement System of Ohio is poised to adopt transparency reforms that could expose rampant overvaluation of private investments, triggering a collapse at all state pensions.

Since all state pensions invest in many of the same private or “alternative” investment funds and all have agreed with Wall Street to keep the values of these funds secret, if a single—even one—state pension opens its books and records to public scrutiny exposing rampant overvaluations, it may trigger a massive collapse in values at all state pensions.

Over the past two decades, all public pensions in America have moved like a lumbering herd, investing ever-greater sums of state and local workers’ retirement savings into high-cost, high-risk so-called “alternative” funds, including private equity, hedge, venture and real estate. Worse still, our nation’s public pensions have invested many of the very same alternative funds.

Over the past two decades, all public pensions in America have invested ever-greater sums in many of the very same alternative funds.

The explanation for this phenomena is simple and has absolutely nothing to do with superior investment performance: Due to the rich fees related to these investments, a handful of Wall Street firms with tremendous marketing budgets—capable of making virtually limitless donations to politicians, as well as labor unions, which influence public pension decision-making—dominate the public sector. It’s “pay -to-play” on steriods involving investment fees paid to Wall Street that are exponentially (10x) greater than those related to traditional assets which were common in the past.

Since 2001, state and local government pension funds significantly increased allocations to alternative investments (from 9 percent to 34 percent in 2022) while reducing exposure to more traditional asset classes like public equities and fixed income. According to the Center for Retirement Research at Boston College, more than 80 percent of state and local government pension plans allocated 20 percent or more of their assets to alternative investments in 2022. That is a sharp increase from 2001, when only about 10 percent of public pension funds had a similar level of allocation.

As I note in Who Stole My Pension? my forensic investigations reveal that all public pensions intentionally mislead the public by under-reporting their risky alternative investment holdings. The true percentages of assets allocated to alternatives is significantly greater than disclosed. Today, many state pensions are likely approaching 50 percent in alternatives. That amounts to nearly $3 trillion at risk.

All public pensions intentionally mislead the public by under-reporting alternative investment holdings. The true percentages of assets allocated to alternatives likely amounts to nearly $3 trillion.

In connection with this migration to alternative investments, all public pensions have agreed with Wall Street to withhold from public scrutiny the investment strategies, fees, portfolio holdings and valuations of the alternative funds in which they invest.

All public pensions have agreed with Wall Street to withhold from public scrutiny the investment strategies, fees, portfolio holdings and valuations of alternative funds.

While all 50 states have public records laws, like the federal Freedom of Information Act, designed to ensure public scrutiny and accountability with respect to public monies, Wall Street—with more than a little help from local politicians and unions—has succeeded in eviscerating these laws. Today, alternative investment records are always withheld from pension stakeholders—including pensioners and taxpayers.

Today, alternative investment records are always withheld from public pension stakeholders.

Public pension stakeholders are universally prohibited from seeing how almost half of all the money ($3 trillion) is invested. The justification for withholding from state pension stakeholders prospectuses widely distributed to thousands of wealthy investors worldwide is that these documents somehow contain “trade secrets” exempt from disclosure under public records laws. Again, wealthy investors gambling money they can afford to lose are allowed to see the prospectuses—government workers and retirees whose retirement security is at risk, as well as taxpayers contributing to these pensions are not.

Worst still, the managers of these high cost, high risk secretive alternative funds have been permitted to unilaterally value portfolio holdings. Private equity insiders jokingly refer to manager valuations as “mark to make-believe.”

Managers even go so far as to disclose the values they assign to assets may bear no resemblance to the values at which the assets are ultimately sold. That is, the manager discloses that the assets may not be worth as much as the manager claims. And, since managers are compensated based upon the value of the assets they manage, when they unilaterally determine portfolio values, they are likely inflating their own compensation. Self-valuation of assets under management involves a profound and insurmountable conflict of interest.

While state pensions keep secret the values of their alternative portfolios, it’s no secret that these funds are grossly overvalued. Both the SEC and Warren Buffett have warned the public of rampant private equity overvaluations, as well as bogus and excessive fees.

While all state pensions keep secret the values of their alternative portfolios, it’s no secret that these funds are grossly overvalued.

The widespread overvaluation of perhaps 50 percent of all public pension assets—nearly $3 trillion—amounts to a fraudulent scheme impacting the lives of far more Americans than Madoff ever did.

In light of the above, if any single state pension successfully restores full transparency and releases alternative investment information to the public revealing widespread overvaluations, all participants in all public pensions which have invested in these very same funds, as well as taxpayers, will be detrimentally impacted.

The State Teachers Retirement System of Ohio is poised to be the single state pension which triggers the collapse in values at all the other state funds.

By way of background, in 2021, I released the preliminary findings of my forensic investigation of the State Teachers Retirement System of Ohio, entitled “The High Cost of Secrecy” commissioned by the Ohio Retired Teachers Association. As stated at the outset of the report, the pension refused to provide any of the key investment documents I had duly requested under state public records law. Not a single prospectus or offering document related to the pension’s investments—documents required to be provided to all investors under our nation’s securities laws—was provided in response to my public records request.

My conclusions included that STRS had long abandoned transparency; legislative oversight of the pension had utterly failed, as statutorily mandated critical audits had been inexcusably neglected; Wall Street and investment staff had been permitted to pocket lavish fees without scrutiny; investment costs and performance had been misrepresented, and failure to monitor conflicts had undermined the integrity of the investment process. Tens of billions that could have been used to pay retirement benefits promised to teachers had been squandered.

A month prior to the release of the report, I filed a complaint for a writ of mandamus with the Supreme Court of Ohio seeking the investment documents I had been denied —pension records which would ultimately prove (or disprove) my preliminary forensic findings. STRS has to this day refused to release to the public the key documents which would reveal the truth.

Subsequently, based upon complaints received from the public related to my forensic investigation, Ohio Auditor of State Keith Faber launched a special investigation of the pension, the recently released conclusions of which included that the pension should restore much-needed transparency. Ohio Governor DeWine recently stated, when defending his interference with an election that would have shifted control of the STRS board to reform-minded members earlier this month, that he agreed with Faber the pension should be fully transparent.

It would seem there is broad consensus at this time that STRS Ohio should stop operating in secrecy.

If the veil of secrecy hanging over all state pensions is finally pierced at this single fund, the long-overdue reform may trigger the collapse in values at all other state pensions.

While private equity may lead to the demise of all state pensions, public pension transparency may eventually result in the demise of private equity.