Alarm bells should be ringing about the Ohio Police & Fire Pension following the release of a fiduciary audit of the fund, finished six years after the legal deadline.
Ignoring the law falls on the Ohio Retirement Study Council and their creator, the Ohio General Assembly. But the warnings on investment risk within the OP&F portfolio demand immediate, widespread attention.
The combined pension contribution for police is 31.75 percent of their salary and with firefighters the employer-employee combination is 36.25 percent.
House Bill 512, under consideration in the legislature would raise the city contribution for both police and fire personnel to 26.5 percent of pay and bring the combined contribution to 38.75 percent. Safety forces are normally the largest expense in Ohio local government, so taxpayers have an enormous stake in this pension.
OP&F is unlike nearly all other public pensions according the fiduciary audit.
Ohio Police & Fire is “clearly thinking outside the box,” according to Funston Advisory Services. “OP&F is among a very small number of major institutional investors to have adopted a risk parity investment approach across the plan’s entire investment structure,” Funston tells us. Ohio’s police and fire pension is also a pioneer in an investment strategy called “portable alpha.”
In each case, the characteristic that separates OP&F from the rest of the public pension pack is “meaningful use of portfolio leverage.” The Ohio safety forces pension is using one of the riskiest investment strategies in America. The 25 percent of leverage showing on the balance sheet is actually much higher because the alternative investments also include leverage.
The entire portfolio is managed by outside managers, 135 fund managers by our count, who pulled down “mind boggling” fees according to pension expert Richard Ennis. If Mr. Ennis’ name sounds familiar you probably remember he was the expert Ohio turned to for comprehensive analysis of the Coingate scandal at the Ohio Bureau of Workers Compensation. Mr. Ennis gave us an assessment of the OP&F performance over the last 10 years that indicates the pension matched the results of an index fund despite the high fees.
If the goal is to match an index using borrowed money while making investment fund managers rich, OP&F is right on target. But past results are no guarantee of future performance, and highly leveraged risk parity investments face by far the most difficult environment since OP&F implemented the strategy. By way of example the Ohio Public Employees Retirement System reports a loss of 23.88 percent on its risk parity investment over the past six months.
“The OP&F portfolio is susceptible to much greater potential surprise in terms of future investment results than are most other large public funds. The surprise factor — a form of risk — almost certainly results from the funds increasing use of alternative investments. The fund’s significant use of leverage may also contribute to this form of risk.” That is the professional judgement of Mr. Ennis.
Ohio’s police and fire forces take great risk every day in performing their duties. It is the duty of state lawmakers to make sure their retirement fund provides financial security. Out-of-the-box thinking with borrowed money is right up there with rare coins, baseball cards, and beanie babies. Past experience tells us well what can go wrong.
First Published September 18, 2022, 4:00 a.m.
