Like Father, Like Son

The next major scandal is reflective of Party ethics set by the State Central Committee

The Ohio Republican State Central Committee sets the example of ethics for the Party. The lower the bar is set is directly proportional to the scandals Republicans will experience.

THE NEXT BIG OHIO SCANDAL IS BREWING

The Ohio Retirement Study Council was created by the Ohio Legislature to provide legislative oversight of Ohio’s $200 billion-plus statewide public pension systems. Absolutely like the Ohio Republican State Central Committee, for decades, it has epically failed to perform its limited statutorily-mandated duties.

The Ohio Retirement Study Council (ORSC) was created by the Ohio Legislature in 1968 to provide legislative oversight of Ohio’s statewide public pension systems. The five retirement state systems have combined assets of approximately $203 billion with approximately 2 million members, beneficiaries and recipients. The ORSC is comprised of three senators, three representatives and three governor’s appointees.

REPUBLICANS SHOULD NOT BE AFRAID OF AUDITS

The ORSC is statutorily required to have conducted by an independent auditor at least once every ten years a fiduciary performance audit of each of the pension systems and actuarial audits of the pensions. The purpose of a fiduciary performance audit is to critically review and evaluate the organizational design, structure and practices of the systems. An actuarial audit provides an independent review of the systems’ consulting actuary. The ORSC also reviews the annual operating budgets for each of the pensions. In addition, the ORSC hires its own independent investment consultant to perform the statutorily required semi-annual performance review of the policies, objectives and criteria of the systems’ investment programs.

INEXCUSABLE AND UNETHICAL CONDUCT

Despite the statutory requirement of an independent fiduciary performance audit and actuarial audit at least every ten years, it has been approximately 15 years since the last such audits of the $93 billion State Teachers Retirement System (STRS) commissioned by ORSC.

When statutorily mandated, critical audits designed to protect the integrity of a $90 billion retirement plan are not commissioned, and delayed year-after-year, it is inexcusable.

Any mismanagement or malfeasance which could have been exposed years earlier through timely audits has been allowed to persist, potentially resulting in great risk and cost to the plan. Worse still, the last fiduciary performance audit in 2006 revealed multiple serious deficiencies which have never been addressed over the past 15 years.

YOU WON’T SEE ORP (OHIO REPUBLICAN PARTY) CHAIR PUSH FOR AN AUDIT BECAUSE THE PARTY’S OWN BOOKS HAVE NOT BEEN AUDITED FOR 16 YEARS. This is not how a company or a state is supposed to be run. The ORSC’s failure to audit is especially troubling because it indicates a lack of diligent legislative oversight potentially impacting all $200-plus billion in Ohio public pensions and millions of citizens. The fiduciary audit for Ohio Public Employees Retirement System was not performed by an independent auditor (as required under applicable law) and was three years late; the Ohio Police & Fire Pension Fund is only now requesting proposals for the fiduciary audit due 2016; and the actuarial audit of the Ohio State Highway Patrol Retirement System is 21 years overdue.

Clearly, legislative oversight has been compromised for decades.

That’s bad news for Buckeyes.

According to ORSC, “decisions about public pension plans typically involve significant long-term costs, such as 30-year pension obligations. If not made carefully and with foresight, such decisions can seriously threaten the budgetary stability of state and local governments years later when the pension obligations become due. Those decisions can also result in an unfair burden on future generations of taxpayers and adversely affect the credit rating of the state or local government’s debt.”

When asked recently why the audit is already five years late, State Rep. Rick Carfagna, the assistant majority floor leader of the Ohio House and the new chairman of the ORSC said in a statement to NBC News that the delay was due to state pension reform in 2013 and Covid-19.

OHIOANS ARE STANDINGUP AND DEMANDING REFORM!

It seems, on the one hand, no one with authority over pensions wants to see improvements and, on the other, participants whose retirement security is at risk have no say as to how their savings are invested.

As Ohio Republicans are banding together to demand better of their State Central Committee, Ohio promises to be the first state where citizen reform may be realized, to end decades of pay-to-play, good ole’ boy backroom sweetheart deals.

Through a grassroots donation campaign that began late last year, the Ohio Retired Teachers Association (ORTA) engaged a forensic auditing firm to conduct an independent expert forensic review of the $90 billion-plus State Teachers Retirement System of Ohio. According to ORTA, the decision to engage in this project was driven by a lack of trust between retirees and those managing their pension system. The investigative findings, The High Cost of Secrecy were released June 2021 and were widely reported in NBC News, Bloomberg and local media. David Sirota’s The Daily Poster hour-long podcast detailed the wealth transfer. The purpose of the high-impact limited forensic review was to readily identify, at a reduced cost, deficiencies which would significantly improve investment management and performance results.

The party in charge cannot be proud that this is the only participant-funded investigations of state pensions ever undertaken. It goes to the unprecedented unethical behavior being exhibited in the Ohio Republican Party - this needs to be fixed.

WHAT WAS DISCOVERED IN THE AUDIT?

Ohio STRS (State Teachers Retirement Systems) have some of the highest and outrageous compensation in the nation among public pension employees despite a lower cost of living and private salary competition in the Columbus Ohio area. On top of the highest salaries in the nation is a thoroughly disgusting bonus program, that these overpaid public employees actual help set and control, with little oversight or transparency.

The latest Ohio Checkbook website maintained by the Ohio State Treasurer and Budget office, only shows STRS salaries for 2019. Other Ohio plans have disclosed 2020 salaries. This is a major violation of transparency that should not be tolerated.

The Ohio Retirement Study Council (ORSC) which is supposed to provide legislative oversight has not in this case, but this general lack of accountability is not unusual and is broadly documented in the ORTA Forensic Audit of June 2021.

For 2019 for total compensation STRS had seven investment officers making over $500,000 a year. Another seven made between $400 - $500,000 a year. Sixteen making between $300 - $400k a year. Thirty-five make between $200k-$300k a year. STRS has sixty-five people making over $200 thousand a year which is at the top of US public pensions compensation.

In adjoining states - Michigan has only five investment officers making over $200 thousand a year. Indiana and Kentucky have only two (CIO & ExDir) making over $200 thousand.

STRS 2019 base salaries are much lower but still way above national averages.

The Chief Investment Officer (CIO or Dep.Ex.Dir Investments) base salary was $381,390. Five others make over $300k in base. Nine more make $250-$300, in base, 17 from $200-$250. This means over Thirty staff making over $200,000 a year in base salary. While the CIO base (most have no bonus) is not out of line the next level of high salaries is extremely unusual.

There are few national public salary databases, but a group called Pension360 collected them in 2014. They found a lot of Chief Investment Officers making in the $200-$250 like Illinois Municipal, Illinois State, Louisiana State, Los Angeles Fire & Police, Maryland Public, Texas Municipal.

Georgia Teachers CIO made $144 thousand a year. South Carolina CIO made $178 thousand a year, Iowa $159 thousand, Arizona $189 thousand. And of course, lower-level investment staff almost all made under $200,000.

Another academic study released in 2021 looked at Chief Investment Officer salaries at the top 100 public plans in the U.S. Their mean total compensation salary plus bonus is $263,043, with mean salary is $237,207. Given STRS size the 75th percentile could be found appropriate given Columbus cost of living. So total compensation for the 75th percentile was $318,362 with salary being $300,132 for CIO. 90th percentile which are large coastal plans with mean total compensation of $504,854 the mean salary was $408,983

There are no indications that STRS staff are any more qualified than average in public plans. Many are CFA charter holders but few if any seem to have any national stature or publications in the investment industry, or any indication that they are sought after by the private sector. In fact, private sector investment salaries in Columbus area seem to be much lower than those at STRS as indicated by staff moving from JP Morgan and Nationwide. STRS with over 65 people making over $200 thousand a year in total compensation may make it clearly the highest paid (with possible exception of much larger CALPERS).

Experts agree that a salary cap of $300,000 for the top 2 STRS employees with a $200,000 cap for rest of employees would be a reasonable rate for the region.

The bonus structure of STRS is unique in its size and lack of transparency. STRS has still not reported to the Ohio Checkbook for 2020 bonus.

The prior academic study released in 2021 looked only at Chief Investment Officer bonuses. In the 75th percentile in plans the mean bonus was $18,230 or 6% of salary.

In the 90th percentile in plans the mean bonus was $95,871 or 23% of salary. These bonuses are way out of line with national norms for public pensions.

In 2019 the last year STRS provided data one officer William Shurman got a $280,847 bonus at 97% of his salary. STRS had 8 officers making over $200,000 in bonus.

Another 24 made a bonus between $100-$200 thousand most around 75% of salary.

The conflicts of interest given the power of staff over their own bonuses are extremely

disturbing. How much is subjective by the CIO based on his perceived worth which may include areas like personal loyalty. How much is supposedly objective on investment performance.

The 2021 Forensic Audit strongly suggests that both investment performance and benchmarks were manipulated by staff.

The staff has a strong incentive to manipulate performance numbers to enhance their own bonus.

Their ability to create bonus of 4 times the other top public plans is especially troubling.

Alternative investments especially Private Equity and private debt are valued by their managers with little or limited outside independent valuations. These alternatives many with performance-based fees means managers have a vested interest in higher performance to enhance their own bonus.

The Ohio STRS commented that they have advisory seats on most of these alternative partnerships. Therefore, both Private Equity staff and Ohio STRS staff share an interest in showing higher performance numbers to increase their own compensation.

These extreme conflicts of interest combined with the Forensic Audit may attract some attention from the SEC and/or FBI if not immediately addressed.

The expert recommendation would be to go with national norms, close the potential conflicts and eliminate the bonus. At least it should be capped at $75,000 a year or 25% whichever is less.

CONCLUSIONS

With Republicans in charge, this type of activity has been allowed to continue unabated. Proud Ohio Republicans are hanging their heads low and wondering how did this happen and who let this happen? - how many of those at the STRS have made contributions to the campaigns of Republicans? The answer is: a lot! This makes the scandal even worse - it threatens to top the First Energy/Householder/DeWine scandal.

Yes, the ORP (Ohio Republican Party) needs reform and needs an ethics code and a whistleblower policy. The ORP absolutely needs to audit its books - you cannot sit on the Republican State Central Committee and claim you did not know what was happening, when you refuse to put pressure on the chairman of the party to complete an audit in a timely fashion. You cannot use the excuse that it was a tradition to not do audit. You cannot come back with a straight-face and claim you were duped because you trusted the party chairman. Money is missing, money is being spent without approval and in violation of the bylaws, whistleblowers are being retaliated against. Where is the reprimand of the Chairman for his unethical conduct?

This unethical conduct is a reflection on every person on the State Central Committee that does not standup in protest. The State Central Committee must set an example for the party.