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With inflation on the rise, more than 150,000 retired Ohio teachers have less money to spend because they're not getting an annual cost of living adjustment, and the decision to suspend that has sparked lawsuits and a special state audit into the teachers pension fund.

We'll explore that this week in the state of Ohio.

Welcome to the state of Ohio, I'm Karen Kasler.

The pension fund set up for Ohio's teachers is the second largest in Ohio and the 61st largest in the world, according to the website Pensions and Investments.

There are more than half a million investors in that fund.

157,000 of them retirees.

There's about one retiree drawing benefits for every member paying into the fund, which comes from teachers contributing 14% of their salaries matched by their employers.

There's nearly $80 billion in the State Teachers Retirement System and a paid out more than $7 billion in benefits last year.

The fund offers health care coverage, but retirees do not get Social Security, and for the last four years, retirees have not gotten a cost of living adjustment either.

By contrast, Social Security recipients get a 1.3% cola this year and 5.9% next year.

Frustrated by the answers they were getting from stress, a group of retired teachers raised $75,000 to hire former SEC lawyer Ted Satel, who's examined several public pension funds to his company Benchmark Financial Services.

His 128 page report concluded that stress quoting here has long abandoned transparency.

Choosing instead to collaborate with Wall Street firms to eviscerate Ohio public records laws and avoid accountability to stakeholders.

Predictably, billions that could have been used to pay teachers retirement benefits have been squandered over time as transparency has ceased to be a priority.

That was disputed by Strauss, which said in a 55 page statement to its eleven member board that the fund is committed to transparency and accuracy, has appropriate oversight and quote does not pay lavish fees to Wall Street for doing nothing.

And it notes that now is not an attorney or an accountant, and that his report, which it says is not a forensic investigation or a forensic audit quote, contains numerous misstatements and allegations which are unsupported by evidence.

But last week and a story broke about the Statehouse News Bureau.

State Auditor Keith Weber's office said it got numerous complaints from the report, so it's launching a special audit into stress.

I talked with Ted Siddall about his reaction to the response from IRS.

I am the leading expert on pensions in the world.

I'm a former SEC attorney.

I've done over 1,000,000,000,000 in forens I've regularly found violations of law, hidden fees and conflicts of interest.

All of that is true.

Absolutely true.

But to say that I'm not a CPA, but lawyers do forensic investigations all the time.

Just ask the Mario Cuomo are the former mayor of New York.

Lawyers do forensic investigations all the time.

And of course, since I'm not a CPA, it's preposterous to suggest that I should apply, that I should be in compliance with CPA standards .

But by the same token, I could say that stress is not a pension fund because the pension fund is defined by a prudently manage, well regulated investment.

This is neither prudently manage nor well-regulated, so it's not a pension fund so we can play those games.

But the fact is, I know more about how to manage a pension than anybody at stress does.

My credentials are beyond reproach so they can question when the participants in these funds 19,000 school teachers go out for a second opinion that they disagree with.

No target of any investigation I've ever done has ever agreed with my findings.

And if they did, I'm probably not doing my job.

But to suggest that I'm not the most formidable critic of pensions is again unconscionable.

When you talk about the money, the wealth transfer to Wall Street.

Your report talks about the investment management fees, the private equity and alternative funds charge on committed capital.

The money that they have that's committed there.

Would you say, is paying money for nothing?

You don't get any services for that money that's being paid.

You say that amounts to $143 million.

And you also said that would be enough to restore the COLA, the 2% cola.

Well, first of all, is that correct?

Am I correct with what I'm saying there?

Yes.

Paying Wall Street.

Fees for money they don't manage is paying millions for doing nothing.

And now stress has countered there, experts have said, well, that's the same as paying school teachers over the summer, but that's preposterous.

School teachers get paid over the summer because they allocate their pay over a twelve month period instead of a nine month period.

They're getting paid over the summer for the work they did during the school year.

What Wall Street is doing is not is getting paid for doing nothing at all.

And if those funds were recouped, 2% of the 3% cola could be restored.

And how would those funds be recouped?

I mean, isn't some of that cost allowing for outside money management, which SARS has said they need to have to appropriately value some of these alternative funds and some of these things that they don't have the resources and the capacity to do in-house?

Well, what SDR is said in response to my report was, first of all, that they are now negotiating some of these fees away and they're paying less for doing nothing than they ever have.

Well, that's great news, but the point is they shouldn't ever be paying firms for doing nothing.

So these fees are avoidable, negotiable.

They should have been eliminated decades ago, and it just shows the incompetence of this staff to go to Wall Street and say, No, we will not pay you for work.

You don't do so again.

These fees can be avoided, and the quality of the investment doesn't change at all.

This is not fees for value, it's just fees for nothing.

So if you eliminate the fee, the value doesn't change at all.

But don't funds like SARS and others need outside money managers to really look at how to manage these alternative funds, these private equity?

All this, this basket of other things, they.

Need to pay fees on invested capital they need.

If you're a money manager and I give you $100 million to manage my money, if not, I'm sorry.

If you're a money manager and I give you 100 million of my money to manage, you deserve to get paid a fee for that.

This is not that case.

This is where you're getting paid a fee, and I'm not giving you any money at all.

So yes.

Wall Street money managers need to get paid when they actually manage money.

They don't need to get paid for doing nothing.

That $143 million that you talked about here, it's nowhere near what stress says it would cost to actually restore the COLA for a one time cola restoration.

2% said that would add $1,000,000,000 to the system's liability at permanently restoring the 2%.

Cola will be close to $13 billion.

So how do you make those numbers work?

You say that you could restore the COLA if those fees were race as committed capital fees were erased.

But as Tara says, that's not nearly enough to restore the COLA.

No, the cost of the call is about three, $210 million a year.

So when you talk.

About $1,000,000,000 added to the liability.

What the long term liabilities of the pension is not the issue.

The issue is what is the cost of restoring the coal and the cost is about $210 million a year.

Stress plays with numbers all the time, and the best proof that they're not doing it with integrity is they refuse to make the records available.

Any time anybody says to you that there is a need for secrecy when managing public money.

Your ears should perk up.

There's never a need for secrecy when it comes to managing public money.

And one of the key problems, it says, is they've lost the trust of their participants.

Schoolteachers don't trust them anymore.

They hired me because they don't trust the R's.

So if you want people to trust, you stress.

Be forthright, be fully transparent, then we can see whether your numbers are correct or not.

But to play this game where I have a hand and I'm not going to show you what it is, but any, any card you say I hold, I'm going to deny you can't play that game.

It's dishonest.

You co-wrote a book called Who Stole My Pension and my conversations with stories about your work.

I heard this statement.

Yes.

Oh, sure.

Sorry.

All right.

All right.

OK, here we go.

So you co-wrote a book called Who Stole My Pension?

Well, my conversations with stress about your work.

I heard this statement.

And there's a quote.

There's definitely a point of view of that author that the pension fund should not be investing in private equity.

And some of these assets that are a little more expensive to manage and may be a little harder to value and determine the fees for.

Is that a big part of this that you don't think pension funds should be invested in this basket of funds that includes private equity and alternative funds, which, yes, they cost more to manage, but they and there is a lot higher risk there.

But there's a lot more potential for return, and they're part of portfolios for individual investors as well as institutional investors.

What individual investors and institutional investors do is with their own money is irrelevant.

Public pensions are required to be fully transparent.

Any investment which refuses to be fully transparent.

Any Wall Street money manager who tells you he has got to have secrecy over how he handles public money should be inappropriate.

So the fees, the risks are irrelevant.

We're not.

The first issue is, are you willing to be fully transparent in handling 1,000,000,000,000 of the public's money?

Well, that's what Wall Street is doing in these secrecy accounts.

So when you talk about the Pandora papers and money being in offshore secret accounts, their secret accounts right here in the state of Ohio, billions tens of billions held in secret accounts right here in the state of Ohio, where nobody knows where the money is.

Who's managing it?

How much?

And what the what the money is being invested in even now.

If indeed, you didn't invest public money in these alternative funds and private equity in these sorts of areas, you said they had their best return year since 1983 last year, and they said.

They still radically underperformed the market.

I was just going to ask, so if you just eliminated those as options and just perform or just invested, where.

Index funds fully transparent, low cost index funds would have significantly outperformed stress performance every single year.

That's stress is draining money from the from the Ohio economy and.

State pensions, about 250 billion of state pensions is probably the most significant driver of the overall Ohio economy, stress and indeed the other state pension funds are wasting squandering billions annually by investing in high cost, high risk secret accounts.

I was just going to ask, what do other investment funds, other state investment funds?

I mean, I know that there are pension systems all over the country.

Many states have multiple, like Ohio has five.

What do they invest in?

Are they investing in index funds or aren't they really investing more in these alternative funds?

They are investing in index funds and they are investing in alternative funds.

The secrecy movement across the country has has swept the entire country.

Every state, every city, every county is now involved in secret investments that didn't exist 15 years ago.

There was no such thing 15 years ago.

Why secrecy?

Because Wall Street understood 15 years ago that to manage public money, you had to be accountable to the public.

That's why they're called public funds.

That's why we have these special laws.

But they change the laws they went across the nation.

Have the laws changed to enable all this money to be swept from fully transparent, low cost investments into highly secretive, high cost investments?

So yes, a lot of pension funds across the country are investing in these alternative investments, but that doesn't mean it's right.

That's the initial question that the public should always ask is why would you oppose transparency?

And there's no justification ever for keeping public money in secret accounts.

This week, I sat down with State Teachers Retirement System Executive Director William Neville to ask him about the report, which the fund disputes and the special audit it launched.

So my understanding of the audit is is limited really to, I believe, the notification letter that you also have, which you also have a copy.

The auditors office, as I understand it from that letter, received complaints stemming from the benchmark report.

The auditor has decided to have a special audit as a result of those complaints.

We take that audit very seriously and we will fully cooperate with the audit.

The cost of living adjustment again eliminated in 2017, the benchmark report says billions of dollars have been squandered that could have paid for the restoration of the COLA.

For instance, the report says SDR has paid $143 million per year on fees on uncommitted capital, which Ted Seidel says amounts to money for nothing because no services are delivered for that.

That's just fees on money that's not been committed.

He says those fees would come close to restoring the COLA, but he also says the COLA would cost 100 and $210 million a year.

So how much would it cost to bring back the COLA and why can't you bring it back?

So let's take a look at the COLA.

A 2% cola is somewhere between 110 and $120 million a year per year, but it's a cola, so it lives on.

So in the first year round out first year, $100 million second year, that first hundred plus a second hundred, the third year, first hundred plus a second year plus a third hundred, the average Cheerios retiree lives 18 years.

So your north in your 18, you're north of $2 billion.

Cash out the door for that cola.

Now we we look at our liabilities that cola that 2% cola results in additional liabilities, the system of roughly $14 billion.

So this idea that it's a one time shot, it's not a one time shot.

Even if you restored it for just one year, it would still live on.

That's correct.

There are other fees, though, too, not just these fees on and committed capital.

There's transaction costs, performance fees.

Bonuses are, though, is still ours paying too much in those because that's kind of an allegation here.

So let's look at the last word you use, which is bonuses.

We pay our investment staff only our investment staff, only our investment professionals, performance based incentives.

I do not receive a performance based incentive.

No member of a senior management team receives a performance based incentive except for my chief investment officer.

Those performance based incentives are based on the performance of the fund.

In some cases, asset class, in some cases, portfolio in some cases, portfolio asset class and total fund.

They're purely mathematical, no subjective component to them.

Last year, we paid between six and 7 million, I think, in performance based incentives.

We save approximately $100 million a year through internal management over what we would pay if we sent those same assets to Wall Street.

So we manage about 70% of our roughly $95 billion in-house.

PBIS were about 7 billion.

7 million.

I apologize not 7 million, $7 million.

The return the last number I saw for a return on that savings is about 13 times multiplier somewhere.

Around $100 million.

Now it's not in the report, but in March, SARS acknowledged it lost $525 million in investing in panda power, which is now involved in a lawsuit involving the Texas power grid.

Benchmark report does say, however, that SARS has had significant losses over the last 14 years and that you've measured the fund's performance against its own past performance, which is not a standard measure.

Has the fund lost?

Has the fund had significant losses over the last 14 years?

No.

In fact, the alternative investment portfolio of which Panda is apart has returned over any timeframe.

You would look 135 7:10 has been additive to the total fund performance.

So the alternative investment performance has been in over and above the total fund performance last year alone.

For it to be probably too precise 44.99% Now that 44.99% is after we pay all external fees, including management fees, including fund expenses and including carried interest so that 45% number is a net number.

The fund is invested in hedge funds and private equity, and it looks like from what I was looking at.

For instance, if you compare it to CalPERS, which is the largest pension fund in the country out in California, it's invested about 7.7%.

SARS has invested a lot heavier.

I think 18% was the figure I saw in his report.

Hence, it seems to have a view that pension funds should not be invested in hedge funds and alternative funds, and saying that really index funds is where hedge funds should be because they're more transparent, they're lower cost.

They're also potentially lower returns here.

Should SARS just invest in index funds, why don't they invest in index funds?

So we have a statutory duty to diversify our investments as bond returns have come down, going back to the eighties and nineties, where you might have gotten something in twelve or 13% out of bonds in the ten year bond today said somewhere around 1.6 or 1.7, I think.

So as bonds have come down, but our obligations have stayed roughly the same, so we need to generate about 7% to meet our obligations long term.

We have invested more heavily in alternative investments as a way to gain returns while having a reasonable risk return portfolio.

But investing in just the Dow or the Russell 3000 or the S&P wouldn't those?

Don't those have better three and five year returns than what you've seen in the trust fund.

So again, we have a statutory duty to diversify.

I wouldn't think a fiduciary council would tell you that an S&P 500 index is a reasonable diversification for a public pension fund.

But you also have to look at the risk return profile of what that S&P typically would have versus versus our diversified portfolio and the correlation among all the assets on the S&P 500 versus the correlation we have among the assets in our portfolio.

Back to the Saddle report, you note that he's not an auditor or an accountant.

He's a former SEC attorney claims that he's the leading expert on pensions in the world.

He asked for thousands of documents.

You turned over thousands of pages of documents, but he says that none of those worthy investment documents that he wanted to see that, he says, would show some of these things that he claims are not being transparent about.

Why not give him these documents that he asked for?

Well, important to realize that we went back to Mr. Sidles, attorney 24 times seeking clarification, so we received no clarification.

Despite the fact we received no clarification.

We still produced, as you've indicated, over 800 documents, over 2000 pages.

There is a separate issue of the independent audit that's commissioned by the Ohio Retirement Study Council, supposed to be every ten years.

The last one was in 2006.

Now, the Retirement Study Council has commissioned an auditor to do this audit.

Why is it taken so long for this to happen when it's supposed to happen every ten years?

I think the chair of the Council in Public Session stated that the fiduciary audit has been delayed by pension reform.

So some of the changes that we made in 2012 and 2017 in all the systems made some changes and also covered.

So I believe that's what the council has stated.

Even though Covid's only been going on for two years and it's been a little bit longer than that.

When you talk about some of the changes is one of those changes how you are changing the way that you measure the foreign fund's performance because you're not supposed to measure it against its past performance, you're supposed to measure it against other benchmarks, right?

So the changes to which I'm referring are the changes in our benefit plan designed not not measurement of fund performance.

And how do you measure your fund performance now?

Well, fund performance.

The total fund is a blended benchmark of of all the benchmarks of all the components of the fund.

And finally, one of the things Siddall said to me when we talked was that one of the key problems is that SARS has said that it's lost, that SARS has lost the trust of their participants.

Schoolteachers don't trust them anymore.

They hired me because they don't trust us.

Why should teachers trust?

You now.

Well, if you look at the system, I work with 500 associates that are fiduciary to our members, very dedicated CPAs, MBAs, lawyers, actuaries, chartered financial analyst, staff, financial analysts.

We report to a board of eleven members, seven of whom are either active teachers or retired teachers.

They are a fiduciary to our members.

That board is advised by an independent investment expert, also a fiduciary actually to one for alternate investments, one for general investments.

Also, fiduciary is our actuary acts as a fiduciary to the board, to our members.

Our funds are custody at Treasurer of State.

Our financial statements are audited annually by the auditor of state or by an independent CPA firm hired by the auditor of state, the Higher Retirement Study Council, in addition to the fiduciary audit you've referenced.

In addition to that, the actuarial audit where we're going right now retains an independent investment expert and an independent rated, advises the Legislature through their Hire Retirement Study Council throughout throughout the years.

And we provided a host of reports to the c So teachers, I would say as I go around the state, both in person and virtually anecdotally, I would tell you that the overwhelming majority of teachers do trust the system.

Our surveys would show that's true.

North of 90% have have confidence in the system, have a positive view of the system.

About 67% of retirees say the board is going in the right direction.

So certainly we understand that the many, many members, many, many retirees, most, if not all, would like to have a cola.

But I don't.

I'm not sure that I would say that this desire for a cola equates to a lack of trust in the system .

Do you think the system could be more transparent and be more be less opaque about what you're investing in and how much it costs?

Well, I think the important notion, again, is that we report our costs at a total fund net of all internal and external fees.

And whenever you see an alternative investment return that's already netted, the external fees are already netted.

Management fees, fund expenses and carried interest are are already netted out those returns.

When might teachers get that cola back?

Good question.

When the board reduced the COLA from 2% to 0% in 2017, I believe the motion said something along the lines of they would review that decision not later than the completion of the next actuarial experience review, which we anticipated would be in 2022.

That kicks off this month, and I think it will be completed in March of 2022.

Last week at our meeting, the board looked at the health of the fund.

I believe when we have our asset liability study done in March of 2022, so we'll set the new asset mix.

Maybe the most important thing the board does.

We look at the quinquennat review of the actual experience review.

That's the time I think the board will have the most accurate and timely data available to them to determine if any change the benefit plan design can be made prudently.

By the way, I stress as its target wait for alternative assets, meaning private equity and opportunistic diversified investments is 17% of the portfolio and that it's slightly overweight in that asset class.

Now, a lawsuit over stress records, Siddall says our public is mostly settled, but other lawsuits over other records are expected.

A lawsuit over the COLA was filed this week in Franklin County Common Pleas Court after the US District Court of the Southern District of Ohio determined it did not have jurisdiction in a lawsuit filed there in 2019.

And that's it for this week for my colleagues at the Statehouse News Bureau of Ohio Public Radio and Television.

Thanks for watching.

Please check out our website at State News dot org, and you can follow us and show on Facebook and Twitter.

And please join us again next time for the state of Ohio.

Support for the statewide broadcast of the state of Ohio comes from medical mutual, providing more than 1.4 million Ohioans peace of mind with a selection of health insurance plans online at Med Mutual dot com slash Ohio by the law offices of Porter, Wright, Morris and Arthur LLP, now with eight locations across the country.

Porter Wright is a legal partner with a new perspective to the business community.

Moore and Porter Wright dot com and from the Ohio Education Association, representing 124,000 members who work to inspire their students to think creatively and experience the joy of learning online at OGA Dawg.