STUMP » Articles » Ohio Public Pensions: Point, Counterpoint, and Meeppoint » 31 July 2016, 08:32

(it’s a new word)

I’m getting together some more posts on Chicago, Illinois, and California pensions, but there are so many sources to get together on those, let me do something quick and dirty.

Ohio!

[note: I am not claiming Ohio is either quick or dirty. I haven’t been there in years. I assume they’ve swept since I was last there.]

POINT: OHIO PENSION FUND IS RISKY

First up, a piece from John Damschroder, a Fremont native who worked in Gov. George Voinovich’s administration, who writes about business and economic development in Sandusky County. (as his author blurb says at the end):

Ohio taking a reckless gamble with pension funds

FREMONT – Gov. John Kasich claims Ohio public pensions are “rock solid,” but the math revealed in the Comprehensive Annual Financial Reports (CAFR) and the annual U.S. Census survey of all public pensions shows a system sinking in the quicksand of terrible investment returns and ultra high expenses.

In 2015 Ohio’s five public pensions paid outside fund managers a staggering $734.8 million. These management fees are extraordinarily high because Ohio relies on secretive alternative investments more than any state in America. Census data shows Ohio reduced holdings in hedge funds and private equity funds by more than $10 billion dollars last year but still own more of these high-cost investments than any other state.

The results are embarrassing. In 2015 the Ohio Public Employees Retirement System, the state’s largest pension fund, spent $428.2 million in external management fees for investment results that fell 99.8 percent from 2014, a year when PERS also failed to match what a low-cost index fund would have returned.

The Ohio Retirement Study Council, a state government agency created to advise the state legislature, confirms that no Ohio public pension fund has earned the investment returns assumed by their contribution rates over the last 10 years. This is why three of the five funds have increased employee contribution rates from 25 percent to 40 percent and all of the funds have changed the benefit calculations to cut retirement payments.

The least an Ohio public employee pays to these pensions is 24 percent of pay, but still the combined employee/employer contribution is far short of funding the pensions. Recently released census data shows Ohio’s unfunded pension obligation grew from $35 billion in 2014 to $134.5 billion in 2015.

This means the $2 billion surplus you hear so much about — the state’s so-called “rainy day fund” — doesn’t exist. Ohio’s claimed portion of the unfunded liability is more than $26 billion. The state hides the true size of the pension crisis by assigning the rest of the deficit to city, county and school employers on a pro-rated basis, while carefully explaining that once the contribution to the state fund has been made the employer has no control over the funds and no liability for the shortfall.

That was just an excerpt, obviously. Go here to read the whole thing.

COUNTERPOINT: OHIO PENSIONS ARE BEING MANAGED RESPONSIBLY

Here is a response, from Karen Carraher, the executive director of the Ohio Public Employees Retirement System:

You should know unequivocally that the Ohio Public Employees Retirement System is well-managed and strong. OPERS’ 80-year history of prudent management has resulted in secure retirement benefits for thousands of public workers — now and in the future.

It appears the author combined all Ohio’s five public pension systems’ liabilities and recalculated them according to an unknown criteria, using an extremely low rate of return. Using such a low rate of return drastically inflates OPERS’ liabilities, and no financial expert considers this rate a reasonable basis for calculating pension liabilities. That is why this rate is not used by regulators who oversee our activities and report on our financial status.
…..
• Claim: The state of Ohio is responsible for the retirement systems’ liabilities. This is not true. OPERS is responsible for its liabilities. And, much like a mortgage, we pay down these liabilities over a long-term horizon of 30 or more years. Retiree pensions are 100 percent funded at the time of retirement.

• Claim: Ohio’s pensions are guaranteed by the state of Ohio. Actually, state law requires that if pension systems need to make changes or are outside the state-mandated funding requirement of 30 years, pension systems are required to present a plan to the legislature to comply with the 30-year requirement.

…..
• Claim: No Ohio system earned its assumed rate of return over the last 10 years. In reality, while OPERS’ average rate of return over the rolling 10-year period is less than our assumed rate of return, a year-to-year review shows that OPERS earned more than the 8 percent rate of return in six of the last 10 years.

• Claim: Ohio funds own more alternative investments than any other state. OPERS’ investments are in proportion to our asset size. According to the Pension & Investment Research Center, OPERS ranks ninth in private equity holdings and is the eleventh-largest public pension fund in the United States. In 2015, these investments earned OPERS 6.09 percent.

The column stated that in 2015, OPERS paid $428 million in fees to external managers for all four of its trust funds. While this is true, that equals less than 0.5 percent of OPERS’ total investment portfolio.

Contrary to the assertion made in the article, OPERS is a major contributor to state and local economies, making pension and health care payments last year in excess of $7.7 billion to its retirees and their families.

Again, just some excerpts. Go here for the full piece.

MEEPPOINT: LET’S LOOK AT GRAPHS!

For Meeppoint, I am going to take the issues in the order I prefer. I’m going to mainly be working off of Carraher’s response.

And exploit the heck out of the Public Plans Database.

Seriously guys, that site is the best thing ever for public pension bloggers.

FIRST MEEPPOINT: INVESTMENT FEES

What Carraher said:

The column stated that in 2015, OPERS paid $428 million in fees to external managers for all four of its trust funds. While this is true, that equals less than 0.5 percent of OPERS’ total investment portfolio.

Carraher is correct that the appropriate metric for investment fees is in relation to the size of the fund being managed.

Question: is an under-50 basis point fee low for a pension manager?

Let’s check the Public Plans Database!

Man, I’m getting the hang of that tool.

Here’s a graph of the investment expenses.

Not quite sure what’s going on with Ohio’s numbers, but the weighted average of the entire PPD results are definitely moving up, and are about 30 – 35 basis points. Maybe with alternative assets, the fees being paid are more “lumpy”. In any case, it’s important to look at a trend, and Ohio’s trend is weird.

What makes this post quick ‘n’ dirty is that I’m not digging through the numbers to see if there’s an error, or missing data, or whatever.

Spreadsheet of the calculations are here.

The point is: both authors are correct. One should be looking at the expense as percent of assets… and that Ohio’s expense ratio is high compared to other public plans.

SECOND MEEPOINT: USE OF ALTERNATIVE ASSETS

Back to Carraher:

Claim: Ohio funds own more alternative investments than any other state. OPERS’ investments are in proportion to our asset size. According to the Pension & Investment Research Center, OPERS ranks ninth in private equity holdings and is the eleventh-largest public pension fund in the United States. In 2015, these investments earned OPERS 6.09 percent.

That last sentence is irrelevant. It doesn’t look like I can get at the Pension & Investment Research Center study, so I’m just going to take her claim as true with respect to the PIRC results.

But hey! I can look at the Public Pension Database! (this is the awesomest tool ever)

Screenshot one:

So, the PPD has OPERS as the 7th largest pension fund in the U.S. (measured by assets, not liabilities).

Screenshot two:

Where’s Ohio? I didn’t put the whole screen in, but OPERS isn’t in the top 20 for allocation. (But jeez, Texas County & District, what are you doing?)

It’s really more appropriate to check alternative assets as a percentage allocation, and while OPERS is in the top 50, it’s not in the top 20. It’s not an extreme case. Carraher is correct.

THIRD MEEPPOINT: INVESTMENT RETURNS*

Back to Carraher:

• Claim: No Ohio system earned its assumed rate of return over the last 10 years. In reality, while OPERS’ average rate of return over the rolling 10-year period is less than our assumed rate of return, a year-to-year review shows that OPERS earned more than the 8 percent rate of return in six of the last 10 years.

You know where I’m going with this….

OPERS’ page at PPD:

Ignore the 2015 number — I think they’ve not updated the PPD for that yet. For 2001 to 2014, we;ve got 14 datapoints, and there…. 8 out of those 14 returns are higher than the assumed rate. (and if I look from 2005 to 2014, I do see Carraher’s claim is correct.)

My rebuttal: true, but irrelevant. Those years where the fund underperformed that assumed 8%?

Look at 2009. A little important, eh?

So I’m going back to the PPD to see if they’ve got a rolling average return for me. They don’t, but what they do have readily available are the 1-year returns and the cumulative average return (geometric) since 2001.

Here’s a graph:

Now, this is not a great graph, as it just starts in 2001. I wish we had a longer history than that. And because the one year results are more volatile, I used the right-hand axis for it and the left-hand exis for the cumulative return.

But you can see the effect of one really bad year: the average return was creeping up toward 8% (remember, that’s the assumed rate of return for the fund), and then 2009’s results obliterated it. And it’s been creeping up to an average of about 6% per year.

That’s quite a bit less than 8%.

And what if we get another obliterating down year?

Just a thought.

That’s all the Meeppoints I have for today. This is supposed to be quick & dirty…. for me.