Ohio Teachers Pension Faces Special Audit Over Scathing Report

The $95 billion Ohio State Teachers Retirement System (STRS) is facing a special state audit over a report that accuses the pension fund of secretly collaborating with Wall Street firms, lacking transparency, and wasting billions of dollars.

In June, Benchmark Financial Services released preliminary findings of a forensic investigation of Ohio STRS titled “The High Cost of Secrecy.” The report ripped into the retirement system, saying it “has long abandoned transparency, choosing instead to collaborate with Wall Street firms to eviscerate Ohio public records laws and avoid accountability.”

The Ohio Auditor of State’s Office recently sent a letter to Ohio STRS Executive Director William Neville saying it has received “numerous complaints” regarding the report and that it had conducted a preliminary examination into the matter.

“The information obtained to date supports a reasonable basis for conducting a special audit,” the letter said. “As such, the Auditor of State is initiating a special audit of the State Teachers Retirement System of Ohio.”

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The pension fund may also have to foot the bill for the audit, as state law allows the state auditor to charge for audit services.

Benchmark was hired by the Ohio Retired Teachers Association (ORTA) earlier this year to conduct the forensic investigation. ORTA had raised $75,000 to contract pension audit expert and former Securities and Exchange Commission (SEC) attorney Edward “Ted” Siedle to conduct the report.

Ohio STRS has vehemently rejected the findings of the Benchmark report, saying it “contains numerous misstatements and allegations which are unsupported by evidence,” adding that “it is unconscionable for the author to make repeated baseless allegations.”

The pension fund added that it is committed to transparency, complies with the Ohio Public Records Act, and closely scrutinizes investment fees and accurately reports investment cost and performance.

The pension fund’s board recently reported that its funded ratio improved to 80.1% from 77.4% last year. And, when measured using the June 30 market value of assets, the funded ratio rises to 87.8%. It also said that, according to its actuarial consultant Cheiron, Ohio STRS’ unfunded actuarial liability decreased to $20.83 billion from $22.31 billion.

But Cheiron added that despite improvement in the plan’s funded status over the past fiscal year, the fund “is still vulnerable to future adverse experience,” which is mainly attributed to a 7% assumed rate of return that exceeds the long-term expectations of the board’s investment consultant, Callan.

Callan has forecast that domestic equities will return approximately 6.6% over the next decade, and it has a low-growth, low-return forecast for international equities over the same time frame. The board is currently conducting an asset-liability study that is expected to be completed in March.

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Tags: Benchmark Financial Services, forensic audit, Ohio Auditor of State, Ohio State Teachers Retirement System (OSTRS), ORTA, Retired Teachers Association, Ted Siedle, William Neville

The perennial Wall Street question is: What’s next? The answer might be: Nothing good. Asset managers are getting skittish, what with the ongoing pandemic, higher inflation, US-China tensions, and supply chain problems, according to Bank of America’s Global Fund Managers Survey, a widely watched monthly Wall Street barometer.

The managers’ cash levels leaped to a 12-month high for the first time since April 2020, when the pandemic was getting underway. Such stockpiling is always a sign of getting ready for bad times. Cash lately rose to 4.7% of allocations, from 4.3%, the survey said. Another pessimistic indicator was the dip in the BofA Bull & Bear Indicator, down one-tenth of a percentage point to 5.0, the midpoint of the scale. This gauge factors in cash levels and a comparison between cyclical and defensive stocks.

The backdrop, BofA explained in its report, is that the managers fear inflation and fret that economic growth will cool. This is “the least bullish” set of findings since October 2020, the bank noted. BofA polls institutional, hedge fund, and mutual fund managers.

In terms of asset inflows and outflows, energy and financial stocks, commodities, and cash were the winners this month. Losers: bonds, health care, and consumer staples shares, per the survey. That makes some sense. Oil and gas prices are climbing along with other commodities, which find inflation a boon; financial firms are benefiting from trading and the prospect of increasing interest rates (although inflation could end up hurting them); and cash, also vulnerable to inflation, nonetheless is viewed as a safe store of value if stocks tank. On the minus side, bonds get hurt as rates rise, while health and staples don’t tend to do well amid inflation.

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Global economic expansion was the biggest source of anxiety, with growth expectations turning negative for the first time in 18 months. Moreover, most respondents saw profit growth drooping over the next 12 months, following this year’s robust performance.

How did the respondents rank the perils facing the economy and the markets? Inflation is their biggest “tail risk,” some 48% indicated. China comes in second, at 23%. A mere 3% named COVID-19 as an economic/financial risk.

The managers still agree with the Federal Reserve that the current heightened inflation is temporary, but that viewpoint has fewer adherents than the previous month. In October, the adherents to the temporary outlook were 58%, compared with 38% agreeing that inflation will persist. In September, though, the tally was 69% to 28%, respectively. What’s more, stagflation fears (rising inflation and dropping economic growth) increased to 34%, up 14 points.

On interest rates, 44% expect the Fed to enact one quarter-point boost next year, as other oddsmakers favor two.