A recent editorial by the Toledo Blade:

An audit of the State Teachers Retirement System of Ohio told some stories, yet failed to tell the whole story.

We’ve waited six years beyond the legal deadline for an independent fiduciary audit of the STRS. Bloomfield Hills, Mich.-based Funston Advisory Services was paid $663,800 to examine the $100 billion fund. The fund provides retirement income for a half million current and retired Ohio teachers.

STRS is under fire by members, who don’t pay into Social Security and have all retirement benefits riding on the state fund, for a 100 percent loss on a $500 million investment in Panda Power, a Texas independent electric company.

Simultaneously, the state auditor’s Public Integrity Unit is investigating whether STRS understated alternative investment management fees in 2018. That decision may have enabled bonus payments of $7.8 million to internal investment staff.

Nationally prominent pension lawyer Ted Siedle, hired by the Ohio Retired Teachers Association, issued a report concluding that the costs for investment management would have been much cheaper using low cost index funds. Mr. Siedel says index funds would have added $400 million a year to the STRS bottom line.

The Funston audit disputes the Siedle study, saying STRS is in the top 25 percent of all public pension funds, achieving the performance with lower than average fees for pensions and has produced nearly 20 percent annual returns in a private equity portfolio.

Funston’s report mirrors what the leadership of STRS claims. What it doesn’t tell you is the actual investment results on the $20 billion alternative portfolio is provided by the outside investment managers. STRS knows who it invested with and how much it provided, but it is blind to holdings in the portfolio and expenses associated with those investments. Without that information, the performance and expense is impossible to verify. What can’t be verified should not be trusted.

The Funston report does include some good recommendations. Funston recommends STRS establish a third-party valuation process for alternative investments to ensure transparency. In addition the audit recommends external manager fee reporting which include performance and incentive fees, partner profit shares, and pass-through expenses from portfolio companies to the retirement fund.

Ohio has five pension funds with $266 billion covering more than 2 million people. None of them can independently validate the fees, expenses or asset values of their alternative investments. The Funston recommendations, as limited as they are, should be applied across the board immediately.

— Toledo Blade, June 3