Did Ohio Teachers State Pension Really Just Say That?
Public pensions generally and the State Teachers Retirement System of Ohio, in particular, regularly misinform the public about investing fundamentals. Call it Financial Illiteracy.
When lips move at the State Teachers Retirement System of Ohio, the public is about to be misled about investing. Count on it.
This Friday, let’s have a little fun at the pension’s expense (for a change).
Which of the following ludicrous statements about public pension investing has the State Teachers Retirement System of Ohio actually said?
Public pensions are not allowed under state law to invest in index funds because index funds do not provide diversification.
Performance fees paid by investors to hedge fund and private equity managers are not investment fees.
Paying Wall Street money managers millions in fees for doing nothing (fees on committed, uninvested capital) is comparable to paying teachers over the summer months when they’re not in the classroom.
It is unrealistic to demand transparency… investment firms would not risk doing business with government entities if they had to disclose all their dealings.
STRS complies with the fiduciary standards under Ohio law which mirror ERISA fiduciary standards.
A benchmark which a public pension does not meet, or beat, swiftly becomes its “old benchmark.”
Items 1, 2, 3, 4 and 5 are outrageously wrong statements about public pension investing that STRS Ohio has actually uttered to stakeholders in the past. Just yesterday, Karen Kasler at The Statehouse News Bureau in Ohio reported:
STRS has said state law requires it to diversify its investments to minimize the risk of large losses, so it can’t invest solely in an index.
Sorry, STRS, there are index funds across all asset classes which provide the ultimate in low-cost diversification. If you don’t believe me, ask legendary investor Warren Buffett who has long advised public pensions to use index funds. Maybe you think you’re smarter than Buffett?
In 2021, STRS Ohio wrongly advised the public that millions paid to Wall Street in “carried interest” or “performance fees” were not investment costs or fees and did not need to be disclosed. As a former SEC attorney, I pointed out at the time this statement by STRS was contrary to the following SEC pronouncement:
Carried interest is a type of performance fee. Investors should consider all fees and expenses prior to investing.
And, yes, STRS actually told teachers at a board meeting in 2021 that paying millions to Wall Street on committed uninvested capital was comparable to paying teachers over the summer months when they’re not in the classroom. Of course, the pay teachers receive over the summer months is not millions for doing nothing—it’s for hard work done during the school year. Teachers were not amused.
That same year, STRS defended the secrecy scheme it had entered into with Wall Street by arguing that investment firms would not do business with public pensions if they had to submit to public scrutiny, as required under state public record laws. This outrageous admission naturally begs the question: Why would a pension established to provide retirement security to government workers ever want to do business with an investment firm that was not willing to be fully transparent, as required by law?
Why would a pension established to provide retirement security to government workers ever want to do business with an investment firm that was not willing to be fully transparent, as required by law?
Faced with the undeniable fact that it was not required to conform its conduct to fiduciary standards mandated by ERISA, STRS in 2021 sought to minimize the immense significance of STRS participants' lack of ERISA coverage (noted in the findings of my 2021 forensic investigation), and to assuage its participants' legitimate concerns for the lack of such protections. STRS stated:
"[t]he [State Teachers Retirement] Board complies with the fiduciary standards stated in ORC 3307.15, which mirror the ERISA fiduciary standards, and the system maintains adequate fiduciary liability insurance."
While it is true that under the cited statute, "[t]he members of the STRB have a fiduciary duty to act as trustees of the funds deposited," the Ohio Supreme Court's affirmance of that decision never once uses the word "fiduciary." Moreover, ORC 3307.15 says nothing about ERISA-imposed fiduciary obligations and duties. And the statutory penalty provisions provide no penalties for anyone's violation of ORC 3307.15. The sparse statutory and common-law plan-management performance requirements that Ohio offers its STRS participants substantially pale when compared to those that ERISA, a "comprehensive and reticulated statute," provides. And these performance requirements under ERISA are given teeth by ERISA's enforcement provisions, which are markedly missing from Ohio's statutory schema.
Sorry, STRS, but the ERISA legal analysis you provided to the public in 2021 was less-than-rigorous, to say the least.
As to item 6 above, no public pension has ever openly admitted that it changes its benchmark for measuring performance the very second it fails to meet, or beat it. But they all do it.
It’s the oldest joke in the money managment business:
Q: What do you call a performance benchmark you fail to meet?
A: Your old benchmark.
