By The Blade Editorial Board Ohio State Teachers Retirement System Executive Director Bill Neville deserves a lot of credit for traveling to Maumee and spending time in the lion’s den of irate educators who are angry over their pension’s performance (“Area educators sound off on Ohio teacher retirement fund,” Wednesday). Some 500,000 teachers see 28 percent of their compensation devoted to the STRS pension system (half of it paid by taxpayers). That is way more than the 12.4 percent paid to Social Security. Ohio is one of seven states that assume total retirement risk and does not participate in Social Security. Retired teachers are angry because they see STRS investment staff collecting millions in annual bonuses even when they have gone without cost of living adjustments. An $11 million staff bonus is up for a board vote in August. STRS is one of the largest pensions in the United States because it collects $4 billion a year from teachers and their school districts. But the fund pays more than $7 billion a year in benefits, so investment performance is crucial. Because STRS has not consistently earned enough money to close the gap, the teacher’s retirement fund is asking to increase taxpayer contributions to the pension by 28.5 percent. STRS is not alone. The Ohio Police and Fire Pension Fund is seeking a 22 percent hike in the taxpayer contribution to the retirement fund. It is fortunate that STRS reports investment results for their last fiscal year of 7.5 percent and did not add to the gap between obligations and assets. OP&F, with a risky, high leverage portfolio The Blade red-flagged in September, lost $2.1 billion on a negative 8.73 percent investment return last year (“Ohio’s out of the box public pension,” Sept. 18). Storm clouds are gathering over these Ohio pensions that will hit every taxpayer or place more cuts on public retirees as years of political neglect become evident. Wall Street investment managers reap hundreds of millions from Ohio, pension employees pocket six-figure bonuses, and politicians collect campaign contributions laundered through organizations created for that purpose. Benefits to retirees and costs to taxpayers are the last priority at the Statehouse. STRS retirees have repeatedly spoken out in opposition to the lavish fees collected by Wall Street whales from their pension and the bonuses to STRS employees. Their voices will surely be joined by Ohio taxpayers when the process begins to try for massively increased pension contributions. The ignorance-is-bliss malfeasance of state politicians will end if taxpayers join beneficiaries in awareness that Ohio pensions have been overserving insiders and creating a monumental liability for future generations. The STRS retirees seeking a change in the investment portfolio to fully transparent index funds are precursors of the coming debate. The activist teachers are right, regardless of sophisticated sounding claims made by STRS investment experts to defend the status quo. Mr. Neville claims STRS cannot move the 31 percent of the investment portfolio devoted to high-cost alternative investments because the fund needs to be diversified. Nationally recognized public retirement fund expert Richard Ennis has recently released a white paper concluding these investments are “highly correlated with stocks” but cost 10 times more on average. Because of the high costs, the alternative investment portfolio actually causes STRS to fall short of potential return by 1.2 percent every year. That is about a billion dollars and far more than the cost of an annual 3 percent COLA to STRS retirees. The investment expense monitoring company used by STRS, CEM Benchmarking, has written that only half the true costs of alternative investments are known to their pension clients. The Securities and Exchange Commission is attempting to change their regulations to force alternative investment managers to reveal all of their costs and STRS is supporting the effort. But it begs the question, why is Ohio investing with firms that aren’t trusted by the SEC or investment industry experts? A portfolio filled with alternative investments doesn’t diversify the fund but it does allow asset values to be set by fund managers without input from a market. Accounting fiction — fraud — lets the pensions claim asset values supplied by fund managers who use unsubstantiated performance claims to dupe more pensions into investing. The Equable Institute, a think tank devoted to public pension research, recently concluded “valuation risk” from alternative investments is a clear and present danger to most of America’s public pensions. Excess optimism helps pensions perform on paper but there will be a crisis if a third of the portfolio cannot be sold for the assumed value. In the key issue of dispute between disgruntled teachers and their retirement system the educators are right. Alternative investments don’t cut risk they just add cost. Ohio voters need to know this before the battle over more tax money for a bailout begins.
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