This morning I participated in an hour-long discussion on Oregon Public Radio focusing on what broke the Oregon state pension and what might fix it.
At first glance, the $75 billion Oregon Public Employees Retirement System (OPERS) appears to be yet another case of gross malpractice generally practiced.
Diving more deeply into its investment program, ominous red flags related to conflicts of interest, hidden and excessive fees and potential violations of law, become apparent to the expert eye.
- High investment assumption
The investment assumption for the pension is still high at 7.2 percent, down from 8 percent. That means the pension board and the costly Wall Street “helpers” hired by the pension, such as the investment consultants, actuary and money managers, believe they are smarter than Warren Buffett—arguably the world’s most successful investor—who publicly stated more than a decade ago that this investment assumption is unrealistic.
So, good people of Oregon, do you honestly believe your home team, with costly assistance from Wall Street “wizards,” can beat Buffett?
Ok. Maybe—just maybe—OPERS + Wall Street is greater, i.e., better than Buffett.
Let’s take a look at how the pension’s high-cost, high-risk investments have performed.
- Dramatic investment underperformance
Based upon the pension’s March 2019 financial statements, the pension has dramatically underperformed (11%) versus the Russell 3000 index (16%). That’s 5% annual underperformance on a $75 billion portfolio, or nearly $4 billion a year. Let’s call it $40 billion over the past decade, without compounding.
- Underperformance leads to $26 billion underfunded liability
How underfunded is the pension? Based upon the 7.2 percent assumption, the pension is reportedly $26 billion underfunded.
Did $40 billion in underperformance losses—over the past decade alone—contribute substantially to the $26 billion underfunding? In my expert opinion, any other conclusion is indefensible.
That’s why I can’t understand how the CIO of the pension could say last year, “There is no investment strategy to solve the unfunded liability.”
That’s just not true.
In the same interview, the CIO demonstrated a callous disregard for the high fees the fund pays. “Skills are sufficiently rewarded in certain alternative asset classes, like private real estate, private equity, minerals, mining, timber, agriculture,” he said. Spoken like a true ex-Wall Streeter.
Paying Wall Street gunslingers billions to chronically underperform is “sufficient reward?” Let’s ask state workers and taxpayers how they feel about that.
Oregon deserves better, in my opinion.
Again, Warren Buffett, in the latest Berkshire Hathaway annual letter, warned pensions paying high fees to Wall Street results in a drag on investment returns.
To make matters worse, not only has the pension dramatically underperformed an index fund, the pension has taken far, far greater risk, including many unknown risks.
High risk, low reward is not my idea how to run a pension.
- Gambling in high-risk investments
Let’s talk about the pension’s reckless gambling in high-cost, high risk funds.
It appears the pension has almost 45 percent of its assets invested in high-cost, high-risk so-called “alternative” investments. It’s reckless and irresponsible to gamble in hundreds of these funds which lack many of the hallmarks of prudency, such as transparency, liquidity, and low fees.
For example, over 20 percent is in private equity investments which utterly lack transparency. Neither the public, nor the OPERS staff, really knows what’s going on with these investments.
OPERS staff may think they know what they’re doing with these investments, however, based upon my decades of experience and, in my expert opinion, I am confident that they don’t. Wall Street is running circles around them.
Once again, OPERS investment practices are contrary to the Oracle of Omaha. Buffett recently warned pensions against investing in private equity investments and questioned how these funds report their performance.
“We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest,” said Buffett. “It’s not as good as it looks.”
Even if you believe OPERS stated private equity performance results, and I (like Buffett) have every reason to believe results are overstated, performance has been dismal (13.35 percent vs. 16 percent for the index).
Chances are, due to the fact that private equity managers are permitted to value the assets they manage (and, thereby increase their asset-based compensation), the actual performance is worse.
Remember, these private equity investments are far costlier and riskier than index investing.
Equally lacking in transparency and worrisome is the Oregon Opportunity Portfolio which, based upon its underperformance (11.57 percent versus 16 percent), I submit is more aptly called the Oregon “Inopportune” Portfolio.
A hallmark of prudent investing for public pensions is transparency. Public pensions are supposed to be subject to public scrutiny and accountability. If a Wall Street gunslinger refuses to submit to public scrutiny, then investing with the manager should be out of the question as a legal matter. Either comply with public records laws, or get lost.
Until recently all public pension investments were fully transparent. Over the past decade, Wall Street has systematically thwarted public records laws and today over 30 percent of public pension assets nationally have been swept into secrecy accounts where nobody knows who’s managing the money, what it’s invested in or where it’s being held—assuming the money is even there.
- Potential violations of law
Recently the staff of the Securities and Exchange disclosed that over half of all private equity funds have bogus fees and other illegalities. I am confident that a forensic review of OPERS private equity and other alternative investments would reveal potential violations of law.
Again, the Private Equity and the Oregon Opportunity Portfolios are particularly troubling.
- Forensically investigate before cutting benefits, making changes
An independent investigation into the pension’s investments should be undertaken—immediately –for the protection of all pension stakeholders, including state workers whose retirement security is at risk and taxpayers.
While the pension pays Wall Street massive ongoing fees for so-called investment expertise—advice that has been ruinous—the stakeholders need their own expert to conduct an independent review of the problems and how to fix the pension.
A second opinion, if you will.
There is urgency here—tens of billions are at risk and before any further discussion of the need to cut benefits, an investigation should be undertaken.
Hopefully, OPERS will cooperate with an independent, outside review and provide access to financial records and documentation—access above and beyond what is required under state public records laws. However, OPERS cooperation is not necessary for an initial expert review. Forensic experts can connect-the-dots based upon publicly available information. Crowdfunding an investigation paid for by members of the public is even possible.