Once again demonstrating the Ohio Retirement Study Council’s apparent inability to provide intended legislative oversight of the five state pension systems in Ohio, the Council recently—following years of growing public outcry—finally commissioned a long-overdue fiduciary performance audit of the State Teachers Retirement System of Ohio. The last fiduciary audit of the pension in 2006, took an unimaginable two years to complete thanks to repeated sharing of draft versions of the auditor’s report as well as discussions with both pension and Council staff who provided written comments. Many of the most serious deficiencies noted in 2006 have not been addressed to this day.
Bad enough that the Ohio Retirement Study Council somehow seemingly forgot to commission the audit of the near-$100 billion pension within the statutorily-mandated period (10 years), the consulting firm finally selected by the Council last week to perform the audit, Funston Advisory Services, is currently facing criticism in connection with its work at the $67 billion Pennsylvania Public School Employees’ Retirement System which the FBI has been investigating for possible investment performance fraud. The Pennsylvania pension’s contract hiring Funston reportedly included provisions that troubled other corporate governance experts. It stipulated that the fund’s senior staff would monitor Funston’s review “without limitation” and that the firm’s reports would be subject to pension management’s review, consideration and approval.
The Ohio Retirement Study Council was created by the Ohio Legislature to provide legislative oversight of Ohio’s five statewide public pension systems with combined assets in excess of $200 billion and over 2 million members, beneficiaries and recipients. The Council is composed of 14 members, including the five executive directors of the state retirement systems. Why the five executive directors are included as members (albeit non-voting) of a Council created to provide legislative oversight of the pension systems they administer is a mystery to me. Sounds way-too-cozy. Not surprising, decisions of the Council are decidedly pro-administration and pension staff—as opposed to being based solely upon the best interests of pensioners.
The Council is statutorily required to have conducted by an independent auditor at least once every ten years a fiduciary performance audit of each of the pensions, as well as actuarial audits.
Let me emphasize: the Council is not required to actually perform any of these audits. The Council is merely responsible for picking up the phone every ten years and hiring outside firms to do the work.
It’s that easy.
Yet even making those calls to prospective auditors once a decade has apparently long proven to be too burdensome for the Council’s 14 overworked members.
Despite the statutory requirement of fiduciary and actuarial audits at least every 10 years, it has been approximately 15 years since the last such audits of the State Teachers Retirement System commissioned by the Council.
As I noted in the findings of my recent forensic investigation of STRS:
When statutorily mandated, critical audits designed to protect the integrity of a near $100 billion retirement plan are not commissioned, and delayed year-after-year, it is inexcusable. An investigation into the failures to audit—by the Council, as well as STRS’s failure to demand such audit results—is warranted, in my opinion.
To be clear: no one “forgot” about the statutory requirement to commission these critical audits. Local media repeatedly questioned the Council about the delays, yet the Council time and again failed to act.
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 Council said in a statement to NBC News that the delay was due to state pension reform in 2013 and…are you ready for this… Covid-19.
I also noted in the findings of my forensic review that when audits are neglected, any mismanagement or malfeasance which could have been exposed years earlier through timely audits may be allowed to persist, potentially resulting in great risk and cost to the plan. I identified approximately $20 billion in underperformance losses that might have been prevented had the audits been commissioned in compliance with applicable law.
That’s right— an estimated $20 billion squandered as a result of failure to audit.
Finally, in my report I observed that the Council’s failure to audit was especially troubling because it indicated a lack of diligent legislative oversight potentially impacting all $200 billion-plus in Ohio public pensions and over 2 million 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 fiduciary audit due 2016 had never happened; and the actuarial audit of the Ohio State Highway Patrol Retirement System was 21 years overdue.
In addition to the controversy surrounding the governance advice the firm provided to the Pennsylvania Public School Employees’ Retirement System which the FBI has been investigating for possible investment performance fraud, Funston Advisory Services was also, by far, the highest cost provider to submit a bid to the Council. Funston’s bid ($775,000) was more than twice the price of its nearest competitor ($307,000) and ten times as great as the only other bidder ($75,000).
Funston claims to “operate a virtual consulting network comprised of the nation’s leading experts on public funds. We tailor our project teams to each client’s needs to ensure their success. We are the firm that public funds are turning to for help in governance and operational matters to improve system performance.”
For sure, Funston, is a leader in its niche of providing supportive governance advice to specifically America’s public pensions. While the firm has few employees, the Expert Network it utilizes to staff projects includes many former public pension officials, as well as lawyers and financial advisers that have deep public pension relationships.
One member of Funston’s “Expert Network Core Team,” a recently retired Executive Director of the School Employees Retirement System (SERS) of Ohio, happens to be a former Council member. A Funston Expert Network Senior Advisor happens to be the co-founder of the firm which monitors the organizational performance and investment fees paid to Wall Street by the Ohio teachers’ pension Funston will be auditing.
In short, rather than reassure taxpayers and pensioners, the Council’s selection of a controversial firm to conduct a costly, inexcusably delayed fiduciary performance audit only demonstrates the Council’s apparent inability to provide legislative oversight of the five state pensions.
Hopefully, this fiduciary audit will not take two years and numerous re-writes by Council and pension staff to complete.