A Series of Unfortunate Investments
February 23, 2019
In late January, Omaha World Herald reporter Henry Cordes broke the story that the OPS pension fund is facing the consequences of a 771-million-dollar shortfall following a series of questionable investment choices. As the Omaha School Employees Retirement System (OSERS) scrambles to pick up the pieces, teachers and administrative staff are left with unanswered questions and schools are faced with harmful budget cuts to try to make up for the losses.
OPS’s 53,000 students are largely ignorant when it comes to this issue.
This in-depth look at the vast underperformance of the pension fund will attempt to answer the essential question for students in the OPS district: What is a pension fund, and why should I care?
What is a pension fund?
Pension funds are a type of retirement fund for teachers, administrative staff and other school employees. Based on the financial average compensation and years of credible service of an educator, a certain amount of money is put into the pension fund to be returned following retirement.
OSERS operates on the following formula: final average compensation x 2% x years of credible service. For example, say a teacher has been employed for 15 years and makes 50,000 dollars annually. In this case, 1,250 dollars per month would be put into the pension fund to be later returned.
Most pension plans are handled by a state-wide plan. In Nebraska, all other districts are run by this plan. OSERS is the only one that is independently run by the school district itself. As of 2019, the Nebraska State Investment Council has taken control of the investments for the fund, though OSERS remains independent.
The efficacy of pension funds is evaluated by a few essential numbers: funded ratio and Unfunded Actuarial Accrued Liability (UAAL). To fully understand the shortfalls of OSERS, one must have at least a vague understanding of these terms.
To begin, UAAL measures the difference between values of assets and the liabilities that a pension plan has garnered. In other words, it is the amount of money that a fund must pay in order to keep operating at a healthy rate.
While the obvious ideal unfunded liability is zero, pension funds can operate healthily with a modest amount. Even some of the highest performing pension funds in the nation harbor debts that will later need to be repaid.
OSERS has had a steady rise of UAAL since the mid-2000’s. Even at their peak in 2007, the organization reported nearly 138 million dollars in unfunded actuarial accrued liabilities in their annual actuarial report.
In the past ten years, this number has grown to 771 million dollars.
Next is the concept of the funded ratio of a pension. This, quite simply, is the ratio of assets to liabilities—the money they have to the money that they owe. An 80% funded ratio has long been seen as the minimum requirement for a high-functioning pension fund.
To better understand this concept, let’s look at high-preforming pension funds and their funded ratios. The Arkansas Teacher Retirement System (ARTRS) was rated as the highest preforming teacher pension plan by the Urban Institute for fiscal year 2017. They sit at a healthy 80.2% funded position.
OSERS, on the other hand, reported a mere 57.76% funded ratio at the end of fiscal year 2018.
All these numbers are available on the OSERS website. “There has always been transparency of the OSERS pension plan,” Executive Director Cecelia Carter says.
The 2013 OSERS handbook outlines the investment process as such: “Investments are made upon the recommendations of the Board of Trustees and are subject to the approval of the Board of Education.”
After the stock market crash in 2008, OSERS pooled a massive amount of money into “non-traditional” investment alternatives. While most pension funds rely largely on large cap and international equity (otherwise known as stocks), the board of trustees decided to invest in risky markets such as, but not limited to: foreign currency, real estate in other countries and energy and power.
Many of these investments were advised by Atlantic Asset Management, a self-proclaimed “fundamental, value-oriented equity investment firm.” The small firm of 24 employees is located in New York City and has been a registered investment advisor for a little over ten years. Beginning in 2009, Atlantic developed an advisement relationship with OSERS. Soon, however, they began to sell the trustees their own stock market alternatives.
In Henry Cordes’ original report regarding the OPS pension, it was estimated that the investment mistakes made by OSERS trustees cost the organization nearly 500 million dollars in losses.
“Of Atlantic-tied investments by the OPS pension fund in 2015, most fell short of benchmark returns for similar types of investments,” the World Herald report reads. “Only two were big winners, and four lost money.”
People have been quick to blame pension shortfalls on Atlantic’s advisement and the lack of skepticism from trustees and Board of Education members, who often approved what Atlantic sold to them without the blink of an eye.
When a plethora of new representatives were elected in 2013, Board of Education members were outspoken about their feelings towards the OSERS shortfalls. Lou Ann Goding was quoted in late January saying, “I’m aware of how challenging it’s been for not only parents, but teachers as well. In my subdistrict, it hasn’t been pretty.”
That same month, fellow board member Ben Perlman said in a school board meeting: “The ramifications of those catastrophic decisions are going to affect this school district for the next 30 to 50 years.”
Cecelia Carter suggests that this concern was not evident in interactions between OSERS and the Board of Education.
“Since the summer of 2017, the Board of Trustees has extended several invitations requesting the Board of Education to engage in dialogue on what could be done to solve this matter,” she explains. “However, the requested meetings with representatives of the Board of Education did not take place.”
Board of Education members are no longer advised to talk to press. Board of Trustees members and investment advisers have been kept from talking to the press from the get-go.
Considering this information, the essential question remains as to how the failures of OSERS will come to affect the students themselves. For the 2018-2019 school year, 30 million dollars was cut from the OPS budget. 19 million dollars of this was used to make up for the deficits in the pension fund. These budget cuts for the benefit of pension money will not be a one-time occurrence.
“Pension funds look out 20 to 30 years into the future when projecting financing,” Cordes explains. “The shortfall could very well be made up over that kind of period of time. As long as you can see in the foreseeable future, they will be making these payments and these payments will most likely increase each year.”
With the 30-million-dollar budget cut that hit schools this year, OPS reported the elimination of 180 positions, cuts to elementary field trip and supplies budgets, delay of new book purchases and cuts to administrative staff, many of whom filled positions at the OPS TAC Center.
Still, officials are insistent that are doing all that they can to avoid the effects of these cuts trickling down to OPS’s 53,000 students. However, though the district was able to dodge a bullet with a comparably small budget cut this year, critics fear that this will not be the case as annual payments begin to grow.
The hard hit of 30 million dollars will not be the end of budget cuts. In 2022, OPS is expected to put nearly 26.9 million dollars towards making up for pension liabilities alone. To lessen the initial round of cuts, the district also tapped in to their unrestricted fund balance for over 21 million dollars this year. This is not a sustainable practice.
With a lack of public contacts, opinions from individuals who are educated about the matter are few and far between. This leaves students, teachers and the general public to come to their own conclusions with accessible public data. The problem is that a majority of students are ignorant to the magnitude of this problem, likely because of the high-level investment jargon and apathy to the inner workings of a retirement fund.
“I don’t think student involvement is necessary,” says Carter, “However, student awareness is welcomed”.
In recent years, however, student voices in district matters have become increasingly important both within OPS and throughout the nation. As the George Lucas Educational Foundation reported, “Students’ voices belong in the dialogue about what does and doesn’t work for their education.”
That being said, the next steps for students to take are unclear. As Carter said, student awareness is welcomed. It is encouraged for students, as well as teachers, to read up on the information and attend any meetings regarding the pension that are open to the public. As the payments grow in the coming decades, analysis will be needed to see the actual effects of the pension fund failure on the student body. At that point, student voices may be more readily welcomed by officials.
The crucial takeaway is the importance of student awareness so that students can be articulate and knowledgeable in the case that this shortfall affects quality of education in the coming years.