The Pew Charitable Trusts have come to a conclusion long held by this column: State public pensions are overpaying investment managers for under-performance. Moreover, Pew concludes most of the billions in fees collected by these pension-funded investment managers are not included in the Comprehensive Annual Financial Report (CAFR) required of the funds.
It’s not just Ohio. No state met the targeted return on their alternative investment portfolio over a 10-year measurement. With the benefit of an Ohio Public Records Act request for all five state public pension systems, I’ve been able to piece together the contract terms that are standard in these pension system deals, despite record redactions that claim nearly every important detail in the contract as a “trade secret,” exempt from disclosure.
Thankfully, some of the exact contracts provided by Ohio retirement systems, after heavy redaction by their investment partners, were available to me in full detail, as they were produced during discovery in lawsuits over performance by the investment managers.
To illustrate how wonderful it would be to manage a small portion of each Ohio public pension alternative investment portfolio under the contract terms I have read for existing state agreements, assume I am penniless but connected. If my buddy the governor helped each of the Ohio funds see the wisdom in contracting with me to manage $100 million, I would be instantly rich.
To manage an alternative investment fund for Ohio I only need 1 percent of the total equity stake. Since my $500 million fund comprised solely of state pension money will pay me 2 percent a year for at least 10 years, the $10 million a year I will collect for a decade guarantees me $100 million and easily collateralizes a loan for my necessary $5 million.