When State Auditor Keith Faber announced to stakeholders in the State Teachers Retirement System of Ohio, including active government workers, retirees and taxpayers, his office was initiating a Special Audit of the pension based upon complaints evolving from a forensic investigation commissioned by the Ohio Retired Teachers Association, there was hope that the lack of transparency, mismanagement of investments and potential violations of law at the fund would finally be addressed.
After all, the State Auditor has the authority to demand key investment information—documents which the government pension has steadfastly refused to provide in connection with the ORTA participant-funded forensic investigation.
A year later, Faber is conveniently delaying release of his office’s findings until after his upcoming re-election, even as he publicly expresses unspecific “concerns” regarding the pension. Faber has also withheld the investment documents he has been provided by the pension which were heretofore deemed “secret,” from review by outside experts. Further, public statements he has made recently confirm a profound lack of knowledge regarding pensions matters.
Stakeholders are now bracing for a political whitewash.
In a letter dated October 11, 2021, the Auditor of the State of Ohio informed the Executive Director of the $100 billion State Teachers Retirement System that his Office had received numerous complaints evolving from a report issued by my firm, Benchmark Financial Services, Inc., titled The High Cost of Secrecy: Preliminary Findings of Forensic Investigation of State Teachers Retirement System of Ohio, Commissioned by the Ohio Retired Teachers Association.
The Auditor stated his Office had already conducted a preliminary examination of the matters in the forensic report, the results of which were forwarded to the Auditor of State’s Special Audit Task Force for consideration. (To date, the findings of the Auditor’s preliminary examination have not been released to the public.)
According to the Auditor, “the information obtained to date supported a reasonable basis for conducting a Special Audit. As such, the Auditor of State is initiating a Special Audit of the State Teachers Retirement System of Ohio (STRS).”
A year later, despite the profound deficiencies detailed in the ORTA participant-funded forensic investigation including notably, an utter lack of transparency at the pension (as well as the failure to monitor and properly disclose all investment fees and expenses); the inexcusable failure of the legislative pension oversight board—the Ohio Retirement Study Council—to commission a fiduciary audit of the pension within the statutorily-mandated 10-year period; and a disturbing news release regarding mismanagement of the pension written by the only STRS Ohio Board member with a financial background at that time (Wade Steen, CPA), no report has been issued by the Auditor.
Faber initially represented his Special Audit would be complete by the end of the summer. While he now denies his report is being intentionally delayed until after the election, it appears politics (as opposed to the best interests of pension stakeholders) is driving the timing of the release of his office’s findings.
It is noteworthy that the forensic investigation undertaken by my firm which, for the first time ever, identified numerous serious concerns long-overlooked regarding pension investments took only approximately 90-days to complete.
In response to an email dated May 4, 2022, the Auditor’s office initially stated, “The Auditor of State’s Office expects to complete its special audit of STRS later this year.” I was informally advised by spokesperson Marc C. Kovac at that time the Special Audit should be complete by the end of the summer.
In an email dated August 16, 2022 the Auditor’s office subsequently stated, “Our initial estimate was late summer. However, the engagement is taking longer than anticipated, the work is ongoing and we are still gathering information. We’re now expecting to be finished before the end of the year.”
While delay of the release of the Auditor’s findings until after the election may bolster Faber’s standing within his own political party by not accusing his colleagues responsible for oversight and management of the pension of potential wrongdoing, stakeholders are left to wonder if the teachers’ retirement plan is secure and whether Faber is truly committed to addressing any mismanagement.
The red flags here include:
· The Auditor has taken over a year to complete his Special Audit—far longer than he initially indicated and longer than necessary.
· The most plausible explanation is that the Auditor is delaying release of his report until after his re-election.
· It appears politics (as opposed to the best interests of pension stakeholders) is driving the timing of the release of his office’s findings.
Troubling Interview with Auditor’s Staff
Surprisingly, I was not contracted by the Auditor’s staff until nearly a year after commencement of the Special Audit, in September 2022—months after I indicated to his staff that I was available, indeed eager, to assist the staff.
At the outset of the recorded interview, the Auditor’s staff acknowledged that it had no in-house expertise in pension matters.
This admission was hardly surprising since forensic investigations of retirement plans are exceptionally rare and require highly-specialized skills which even federal regulators and law enforcement acknowledge they lack. (Federal whistleblower programs at the SEC, CFTC, and DOJ recognize the lack of in-house regulatory expertise and provide financial awards to experienced investigators who assist government investigators with respect to investment frauds. To date, I have been awarded over $78 million for my expert assistance to state and federal regulators.)
In response to my question about when their report would be finalized, the Auditor’s staff said that as I was the last person they were interviewing, it was reasonable to assume to report would be released soon.
I was surprised to hear I was the last person to be interviewed. But, apparently I was misled by the Auditor’s staff during the interview.
A month later, in an email dated October 22, 2002, Mr. Kovac in the Auditor’s office indicated that my interview “was not the last interview and that the staff was still gathering information and working on the engagement.” In response to my statement that the Auditor appeared to be intentionally delaying release of his report until after the election, I was summarily told by Kovac, “There is no intentional or any other delay.”
At the outset of my hour-plus interview, I indicated to staff that none of the key investment documents I had requested from the pension through public records filings had been provided. Absolutely none. As I wrote in Forbes in early May, I had endured a year of pernicious stonewalling.
Immediately following the interview, I sent an email to staff indicating that if the Auditor had been provided access to the very same key investment documents the pension had refused to provide to me, I would welcome the opportunity to provide an expert review of said documents for potential violations of law. Since a review of the key investment documents was critical to any meaningful analysis and the Auditor’s office openly acknowledged it lacked the expertise to review the documents, it seemed logical to have a pension expert provide said review—better still, at no cost to the office.
In response, I was told the staff member would forward my “request to our legal department as I am unsure if I can release those.” No further response to my gratuitous offer was ever provided. Disturbingly, the Auditor had apparently determined maintaining pension secrecy was more important than public scrutiny of the $100 billion pension for potential violations of law.
The red flags at this point included:
· The State Auditor’s staff acknowledged they had no pension experience.
· The staff indicated I was the last person they interviewed. This made no sense. In my opinion, if the auditors lacked pension experience, then the very first person they should have interviewed—a year earlier—would be a leading pension forensics expert who literally wrote the only book on the subject of pension looting (Who Stole My Pension?) and who was also the author of the forensic report that served as the “reasonable basis” for the Auditor’s Special Audit.
· The Auditor apparently had been provided with key investment documents previously denied in response to public records requests filed on behalf of participants, but was unwilling to share said documents with the one expert capable of identifying potential violations of law. Clearly, the interests of pension stakeholders was taking a backseat to Wall Street and STRS secrecy demands.
State Auditor’s Misleading Transparency Awards
For both fiscal years 2020 and 2021, the State Auditor, for reasons that are impossible to fathom, somehow granted STRS Ohio its Highest Achievement in Open and Transparent Government Award—awards which STRS Ohio has continued to tout even after my expert forensic investigation detailed a profound lack of transparency and after the Auditor announced his special investigation into the pension based upon legitimate concerns.
There was simply no reasonable basis for the Auditor to conclude STRS Ohio was transparent in 2021, especially given the fact that retirees were unsuccessfully demanding the pension release its key investment documents at that time.
(“Read the prospectus before you invest,” is the oft-stated advice from state and federal securities regulators. STRS Ohio, nevertheless, steadfastly refuses to provide pension stakeholders with prospectuses and other documents related to the investment of their retirement savings. Absent access to the key investment documents, pension stakeholders simply cannot determine whether their retirement savings are invested prudently.)
Since I could not imagine how the State Auditor could have granted STRS Ohio its highest transparency award for 2020 and 2021, on April 27, 2022, I asked the Auditor to provide me with any materials, documents, emails etc., related to the transparency awards the Auditor gave to the pension. As I indicated in my email, I wanted to gain insight into the depth of analysis behind granting the awards.
In response, I was told, “The StaRS portion of any public entity’s audit was never intended to evaluate the contents and legality of every public records response, just that agencies were in compliance with the law. The legality of the responses are left to the courts to determine.”
In other words, the Auditor’s transparency award is misleading, as well as meaningless—it only addresses whether state entities have policies regarding public record requests, and not whether such responses are legally sufficient.
I also provided the Auditor with the link wherein STRS advertised its transparency awards as recently as the prior week. I stated that, in my opinion, for the pension to tout its past transparency awards while under Special Audit by the Faber’s office for issues including transparency was, at best, grossly misleading. I encouraged the Auditor to let the pension and/or the public know whether, in his opinion, such incomplete disclosure was misleading. To my knowledge, the Auditor failed to take any appropriate action regarding this misleading, or at least incomplete, disclosure by STRS Ohio.
In an email dated May 4, 2022, the Auditor’s office stated, “The audit work that led to the current StaRS transparency rating of STRS was completed for the fiscal year that ended June 30, 2021, prior to the launch of this investigation. The Auditor of State’s Office expects to complete its special audit of STRS later this year. The results could affect the retirement system’s StaRS rating in the future.”
(Note: My forensic investigation detailing lack of transparency at the pension was released in May 2021. Clearly, the Auditor was aware of its damning findings when he swiftly issued the reassuring transparency award to STRS approximately one month later.)
In my opinion, rather than allow STRS to continue to tout its past transparency awards, STRS stakeholders should have been advised immediately that the pension’s transparency rating could be detrimentally impacted by the Special Audit. This is material information for pension stakeholders.
The red flags at this point included:
· The Auditor’s transparency rating system was obviously incomplete and misleading, clearly intended to achieve political objectives, as opposed to enhancing public scrutiny and protecting pension stakeholders.
· There was simply no reasonable basis for the Auditor to conclude STRS Ohio was transparent, deserving of his highest award.
Red Flags Regarding Auditor’s Public Statements
Recently, public statements made by the Auditor about the Special Audit have been disturbing.
In a September 16, 2022 interview with Statehouse News, the Auditor indicated a reason for the near year-long delay in his review was that his office had to “hire some outside help” for the pension audit. He indicated he hired “an independent actuarial consultant who didn’t do work for the plans” to assist.
In an October 24, 2022 interview with the Toledo Blade, the Auditor stated, “We had enough concerns that came forward from members and then we saw enough red flags come up during our audit to take a deeper look at it,” Mr. Faber said. “We wanted to have an independent actuarial perspective to take a look at it.”
This makes no sense since the findings of my forensic investigation—the report which led to his office’s special investigation—had nothing to do with actuarial concerns. Further, actuaries are not qualified to opine as to mismanagement of pension investments and related potential violations of law.
A substantial delay due to hiring an actuary indicates, at best, a disturbing lack of sophistication regarding pensions.
In the September 16th interview, the Auditor indicated: “We’ve got some concerns. I will just tell you that audit’s going to have some concerns,” Faber said. “We don’t talk about audits while they’re pending, but we have some concerns and things that we’re identifying. But we are on it. We are working aggressively.”
Rather than alarm the public that he had identified “some concerns” and was “working aggressively,” the Auditor’s pension investigation should have been made a top priority, as well as completed and released to the public before the election so that voters could determine whether the Auditor was diligently doing his job to protect public monies from corruption.
Alarming active government employees and retirees about “concerns” related to their pension—their retirement security—without disclosing the nature of those concerns is irresponsible, in my opinion.
The Auditor also said in the October 24, 2022 interview with the Blade, “the audit will not second guess investment decisions or decide whether the bonuses were deserved.” Again, this statement reflects a profound lack of sophistication about the management of pension assets, as well as provides reassurance to pension looters on Wall Street and investment professionals at the fund engaged in wrongdoing, if any, that they will not be prosecuted.
Faulting STRS Ohio for its ongoing practice of selecting high-cost, high-risk, opaque alternative investments which inevitably underperform (due to excessive fees, conflicts of interest and fiduciary breaches) does not amount to second guessing. It is known and knowable prior to any investment decision—at the get-go—that these investments are not suitable for public pensions (due to their lack of transparency) and will underperform (due to excessive fees and risks).
Most notably, Warren Buffett—arguably the world’s greatest investor—has repeatedly warned public pensions about alternative investments. STRS Ohio does not possess greater investment acumen that Buffett, despite the pension investment staff’s grandiose claims. If STRS Ohio chooses to willfully disregard the advice of the Sage of Omaha, then it should be held accountable to stakeholders for underperformance of the poorly-selected investments.
The Auditor’s statement that “We will answer whether they paid bonuses according to their policy… They have the discretion to set their bonus policy, but we will make note as to whether that policy is consistent with other industry practices and whether their benchmarks are benchmarks that are widely accepted” also reflects a poor understanding of pensions. As I detail in Who Stole My Pension?, prevailing public pension industry practices are widely-recognized as grossly deficient. With respect to public pensions, prevailing practices amount to what I refer to as “gross malpractice generally practiced.” That’s why Wall Street considers public pensions “the dumbest investors in the room.” Further, as I noted in my investigative findings, STRS’s use of actual alternative investment performance as a benchmark for calculating staff bonuses is both absurd and contrary to even public pension practice.
The Auditor also suggested in his September 16, 2022 interview with Statehouse News other agencies should be doing some reviews.
“Don’t forget, there are other individuals and entities who do oversight on the state pension plans,” Faber said. “The Retirement Study Council is the big one. They’re the ones that are supposed to be looking at the investment and that history. We look generally at the numbers and whether the information that they’re sharing is accurate.”
This reference to the “big” role of the Retirement Study Council has overseeing pension investing makes no sense since my forensic investigation most pointedly detailed the inexcusable, repeated failure of the ORSC to commission statutorily-mandated fiduciary audits every ten years. (I noted the last fiduciary audit of STRS Ohio was 6 years overdue, i.e., the pension had gone a full 16 years without a fiduciary review.)
Red flags at this point included:
· A substantial delay supposedly due to the unnecssary hire of an actuary indicated a disturbing lack of understanding regarding the management of pensions.
· Alarming government active employees and retirees about “concerns” related to their pension—their retirement security—without disclosing the nature of those concerns was reckless and irresponsible.
· The Auditor’s statement that he would not second guess pension investment decisions reflected a profound lack of sophistication about the management of pension assets, as well as provided reassurance to pension looters on Wall Street and investment professionals at the fund engaged in wrongdoing, if any, that they will not be prosecuted.
· The statements that the Auditor would not determine whether millions in bonuses paid by the pension were deserved, but would merely answer whether the bonuses were paid according to the pension’s policy and consistent with industry practice is both irresponsible and reflects a poor understanding of pensions. Whether millions of stakeholder monies are squandered paying undeserved bonuses to anyone, clearly should be a matter for the State Auditor to address. Whether other public pensions engage in similar waste of public monies should be irrelevant.
· Using STRS actual alternative investment performance as a benchmark for calculating staff bonuses is obviously both absurd and contrary to industry practice.
· The Auditor’s deference to the Ohio Retirement Study Council suggests he does not acknowledge the ORSC’s longstanding failure to provide intended legislative oversight of Ohio public pensions.
State Auditor Was Former Chairman of Ohio Retirement Study Council
The Auditor was a voting member of the Ohio Retirement Study Council, as well as its Chairman for at least two years—the very legislative oversight group for Ohio pensions which my report noted has long been derelict in its duties. It appears he was at ORSC from 2008-2013.
The red flag here is that the Auditor’s deference to the ORSC may be due to political considerations since the ORSC has indisputably failed to provide the legislative oversight intended.
In conclusion, the State Auditor clearly has the authority to demand access to the key investment documents STRS Ohio has, to date, refused to provide to stakeholders. Even STRS Ohio Board members with financial experience, such as Wade Steen, CPA and Dr. Rudy Fichtenbaum have openly expressed frustration accessing pension records. Since the Auditor has apparently been provided with the heretofore “secret” documents in connection with his Special Audit, it should be an easy task for a recognized pension expert to determine upon review whether the state pension’s assets are prudently managed—assuming anyone at STRS or the Auditor’s office wants that conclusion disclosed to the public.
While the Auditor is seemingly delaying release of his overdue report until after his re-election and cautiously avoiding the issues related to management of investments, bonuses and benchmarks, if STRS Ohio is truly well-managed it should welcome public scrutiny and abandon its longstanding culture of secrecy.