When the leaders of the Omaha Public Schools pension fund made their biggest blunders, then-Superintendent John Mackiel was conspicuously missing.
As the district’s top leader, he was a member of the pension system’s board of trustees. But he missed a dozen straight meetings as the nation fell into the Great Recession and his fellow trustees launched an ill-advised stock sell-off. He missed more than half the subsequent meetings where the trustees made risky new investments in things like real estate in Mumbai, India; distressed housing in the U.S.; and agriculture in the Ukraine.
Today, while the district Mackiel formerly led slashes its budget to make mandated extra payments into its badly underfunded pension system, Mackiel is personally collecting an annual district pension of $189,000.
There is much blame to go around for the debacle that transformed one of the nation’s best-performing pension funds into one of the worst, including the trustees and chief administrator of the Omaha School Employees’ Retirement System, their paid investment adviser, district leadership and the unions whose members count on the pension system for their retirement security.
That system is now $771 million short of its obligations, and the district faces escalating payments to make the fund sustainable.
While the funding woes are taking a toll on the education of thousands of children, and could ultimately land on the shoulders of taxpayers, the pension fund’s leadership isn’t owning up to any mistakes.
It also appears at this point that no one who played a role is facing any consequences.
“I don’t know too many people who get sent to prison for being dumb, misinformed, going along or making bad decisions,” said Gary Anderson, the retired former director of one of the largest public pension funds in Texas. “And you can’t undo the decisions that were made. That’s water under the bridge.”
Now it’s OPS teachers — and the students they are charged with preparing for productive lives — who are paying the biggest price for the collective failures.
Said one OPS teacher recently: “We have had the wool pulled over our eyes.”
Mike Smith and OSERS trustees
Former OSERS executive director Mike Smith and Roger Rea, a retired teacher who is the longest-serving OSERS trustee, aren’t ready to admit to any mistakes.
Rea acknowledged that due to the trustees’ sale of stocks, OSERS failed to capitalize on the last decade’s bull market. He acknowledged that the new non-stock investments included a number of “dogs.” But he and Smith still insisted the strategy could yet bear fruit.
“We’re still not sure how it’s going to turn out, are we?” Smith said.
But 10 years and hundreds of millions of dollars in losses later, other observers seem more ready to pass judgment. Ben Carlson, a Michigan investment adviser who writes a popular blog on institutional investing, said The World-Herald’s series on OSERS offers a cautionary tale for all investors, showing how to wreck a portfolio “in three easy steps.”
1. Make a major change in asset allocation.
2. Invest heavily in things you don’t understand.
3. Use a faulty process to choose investments.
In the end, a World-Herald analysis suggests the trustees’ disastrous decision to slash stock holdings by half and then engage in the poor-performing non-stock investments cost the pension system $500 million. And it was all preventable, Carlson and other pension and investment experts say.
Anderson, the retired Texas pension fund manager, said what happened at OSERS should have been avoided with proper investment policies, governing procedures and checks. Successful institutional investing starts with a sound, long-term investment policy, he said.
The Nebraska Investment Council — the state agency that invests funds for the statewide school pension system and, for the last two years, has invested OSERS funds, too — has an investment policy that’s more than a dozen pages long. Its many provisions include one aimed at discouraging sudden, major allocation shifts, the policy stating that investment strategies “will generally be long-term in nature and will avoid ad hoc decision-making based on short-term factors.”
In contrast, OSERS had a one-page investment policy that merely described what it invested in, setting no real limitations or long-term vision.
“Investing dollars in a public pension fund,” Anderson said, “should be like being captain of an aircraft carrier. It’s large, you set your course, and you make any course corrections gradually as conditions warrant.”
Whether Smith was over his head as the fund’s $149,000-a-year executive director appears debatable. While his background had been in small-town banking and insurance, he appeared to competently lead the OPS fund for nearly two decades before the 2008 market crash.
Still, Smith and the trustees clearly underestimated the risks and challenges associated with putting more than half their portfolio into “alternatives” — investments like hedge funds, commodities, real estate, distressed debt and private companies that aren’t publicly traded.
Pension funds in recent years have turned to increased use of alternatives as a hedge against the stock market. But OSERS didn’t use alternatives as a hedge. Few pension funds in the country invested more heavily in the funds known for potentially high rewards but also high risk, high fees, complexity and volatile results that are heavily dependent on how well fund managers perform.
“The difference between (the performance) of the top and bottom funds is huge,” Carlson said. “If you aren’t good at selecting them, you have a much higher probability of doing bad than good. The risks are huge if you go wrong.”
Due to the widely varying results produced by managers in alternatives, experts advise extra care in choosing fund managers.
Despite that, Smith and the trustees inexplicably abandoned their own longtime policy for manager selection when choosing the new investments. That policy called for hiring a consultant to study "the universe" of fund managers in that niche and then interviews with multiple candidates.
Instead, records show Smith simply started presenting the trustees investments owned by firms OSERS was already doing business with, including OSERS adviser Atlantic Asset Management. Rea said he couldn’t recall why the trustees failed to follow their policy.
Whenever Smith did bring such new investments before the trustees, he was virtually assured of gaining approval.
The 10-member board included four trustees representing OPS staff and retirees, including two teachers, a retired teacher and a district plumber. There were also two business representatives whom records suggest were historically selected on the recommendation of Smith. The other four spots on the trustees were held by the superintendent and three school board members.
Meet the 2009 OPS trustees
These 10 members served as trustees for the Omaha School Employees' Retirement System during key years when investments were shifted from the stock market to so-called alternative investments. The decisions meant the system largely missed the stock market rebound and got lower returns or losses from the alternatives, creating the shortfall Omaha Public Schools is trying to manage.
OSERS records show that the four OPS staff and retiree representatives joined the two business representatives to vote in tandem for all the new investments. As OSERS moved out of stocks into alternatives, records show those six members collectively provided 135 favorable votes, a single no vote and were absent for only seven votes. Regardless of how the other trustees voted or were even present, Smith was virtually assured the required six votes.
“It was always very interesting to me how vigorously the trustees who were not school board members stood by Mike Smith,” said Marian Fey, a school board member who joined the trustees in 2014.
Those same trustees also consistently joined Smith in traveling annually to a pair of national teacher retirement conferences and workshops. Though one of the nation’s smallest school retirement systems, OSERS would typically have among the largest convention delegations.
During an October 2015 convention at a seaside Hilton hotel in La Jolla, California, Smith, the six staff and business trustees, plus a representative of the Omaha Education Association teachers union gave the tiny Omaha pension fund eight attendees, tied for most of any pension system nationally. The school pension system representing all teachers in California sent three representatives. The state of Nebraska and many other states sent one.
OSERS has continued to send large delegations, spending more than $46,000 in 2017 for attendance at workshops, conferences and meetings.
Smith defended such travel, saying the conferences offered the only training opportunity available to trustees.
“It was not a boondoggle of some fashion,” he said. “We wanted to have educated, well-versed trustees.”
But in the end, that training did nothing to stop Smith and the trustees from wrecking the fund.
Four of the trustees who served throughout that time remain on the board today as it continues to administer benefits for OPS retirees, including one who was just re-elected by the district’s teachers.
Many have also questioned why the OSERS board was predominantly made up of educators rather than people with investment and finance experience. Even the two designated business representatives did not work in investing.
“That structure was moronic,” said current OPS board member Ben Perlman.
Experts say such boards of lay members are not unusual in the public pension world and don’t have to be a barrier to success.
Key, they say, is hiring a good investment adviser.
Atlantic Asset Management
During a meeting in 2010, an employee of Connecticut-based Atlantic sold the trustees on the benefits of investing in a pair of new funds that the advisory firm had a financial stake in.
“Atlantic really wants these companies to grow; so do you,” he said. “It’s a great structure in that sense to make sure we are all moving forward and there is no gaming going on.”
Looking back now, some might question whether there was gaming going on in the relationship between Atlantic and OSERS.
Investment experts say there is a potential conflict of interest for a paid adviser, whose top obligation is to help a pension fund maximize returns, to also be selling investments it owns to that client. It raises questions about whether the strategic advice is truly independent and in the client’s best interest.
However, not only did Atlantic sell investments to OSERS, it also convinced the trustees to put more than half of their $1.2 billion portfolio in investments owned by Atlantic or by firms Atlantic financially partnered with on other OSERS investments.
“Something went astray in that relationship,” Carlson said.
Atlantic since 1993 had been OSERS’s chief adviser on how to allocate its funds, despite the fact advising was largely a side business for the bond firm. There is no evidence Smith and the trustees ever put that role out to competitive bid again over more than two decades. The relationship was also a cozy one — emails suggest the trustees were regularly wined and dined by the firm.
While Atlantic almost from the beginning sold investments to OSERS, the percentage of Atlantic-tied investments dramatically spiked after Atlantic advised OSERS to heavily allocate funds to alternatives. The firm collected millions in fees on alternatives it sold to OSERS.
Bailing on stocks, going heavy to alternatives
Beginning in 2008, the OPS pension fund dramatically cut its stock holdings, and then got heavily into alternatives, investments outside typical stocks and bonds. Its reduction in stocks and embrace of alternatives were both among the highest of any public pension fund in the country. Below you can see the percentages of the investments.
Three-quarters of the dozen Atlantic-tied investments on OSERS’s books in 2015 underperformed benchmarks for similar investments, and three lost a combined $27 million. That doesn’t include $16 million stolen from OSERS on another Atlantic-managed investment after the firm was sold to new owners.
Patricia Vannoy, a Lincoln attorney who litigates cases involving financial advisers, said it appeared Atlantic knew OSERS would never say no to an investment offered by the firm “and took advantage of it.”
Atlantic investments mostly bad performers
Of Atlantic-tied investments held by the OPS pension fund in 2015, most fell short of benchmark returns for similar types of investments. Only two were big winners, and four lost money.
*Atlantic rebalancing reflects 10-year returns.
Rea declined to say in a recent interview that OSERS was poorly served by Atlantic and said he didn’t believe the high number of investments in the firm was a problem. Ron Sellers, the longtime owner of Atlantic, defended the Atlantic investments as based in long-term trust in the firm. He also said Atlantic always disclosed its financial interest in the investments.
Whether Atlantic did anything illegal in its dealings with OSERS is unclear.
Atlantic as an adviser had a fiduciary obligation to work in the best interest of OSERS, Vannoy said, but whether it failed to do so could be proved only through litigation. And with Atlantic having gone belly-up under its new ownership after the theft case, the issue may be moot. Any litigation would likely have to be directed at secondary parties like individuals, insurers, accountants or other related firms.
“The question of whether they are crosswise with that obligation depends on whether they fully disclosed all the facts of the investments,” she said. “The hard part in a situation like this, where Atlantic has folded, is there really anything to go after?”
In his own words, Mackiel’s attendance at OSERS meetings was “sporadic at best.” But the former OPS superintendent, whose primary responsibility was to watch over district finances, said that doesn’t mean he considered the meetings unimportant or intended to miss them. Things just came up, he said.
“The parent who was concerned about the fact a bus didn’t show up in an ice storm is not going to want to hear I am in a retirement meeting,” he said. “The priority was always the day-to-day demands of the position.”
The three school board members serving as trustees at that time had equally spotty attendance, collectively missing half the votes where critical decisions were made.
Justin Wayne, a school board member who served briefly on the trustees, said he did so reluctantly because no other board member was willing. He said he felt ill-equipped.
“You are sitting there as a school board member who ran for office to help kids read and make sure they graduate, and they are throwing out all these numbers,” he said. “I’m not an investor.”
The board as a whole was also lax in its oversight of OSERS. The board was unaware of the retirement system’s fundamental shift from stocks to alternatives, even though the full board by law needed to sign off on all the OSERS investments.
Board members say they deferred to the trustees, who were the ones who spent hours in the monthly meetings discussing investments, markets and strategy. But even a board member who was a trustee during the shift said she had no idea OSERS had become an outlier in how it invested, saying she “didn’t have any reason to believe this is not what a well-managed fund would look like.”
Mackiel likewise in an interview showed little knowledge of what had occurred at OSERS during his 15-year tenure as superintendent. He seemed unaware of the big exit from stocks and could only specifically recall one of the fund’s alternative investments.
Mackiel and the board also added to OSERS’s funding problems by not always contributing as much to the fund each year as actuaries suggested was necessary to keep it healthy. The $9 million they shorted the fund over the last decade, however, represents a very small part of the current $771 shortfall. The vast majority of the shortfall can be traced to poor investment returns.
For his own part, Mackiel noted that OSERS was seen as in relatively good shape when he retired in 2012 — a day that was also marked by his receipt of a controversial $1 million lump sum payment he’d years earlier negotiated with the school board.
Indeed, it would be several more years before the mistakes under his watch would come to haunt OPS.
OPS staff, unions, retirees
Last year, Chris Proulx, the former president of the OEA teachers union, announced he was opposing the re-election of a longtime OSERS trustee.
The response he got from a number of fellow OPS teachers: Are you nuts?
Many teachers and retirees had been led to believe that the fund’s shortfall was simply due to the 2008 market crash, and also believed that Smith and the trustees were the saviors of OSERS.
In the wake of The World-Herald’s pension revelations, fewer teachers think Proulx was crazy. But he also understands why many teachers and retirees believed what they did. For a long time, Proulx admits, he and nearly all teachers and retirees were oblivious to how their own representatives were undermining the pension system.
“Mike Smith ran our pension into the ground, and did it with the blessing of all the union reps on the OSERS board,” Proulx said. “I know because I was there.”
Proulx had taken over as president of the OEA in 2010. OSERS at the time was about 75 percent funded, having taken a big hit after the market crash two years earlier.
— Chris Proulx, former president of the OEA teachers’ union
However, most pension funds nationally — including the Nebraska state teachers fund — were in a similar state, Proulx said. It would take several more years, as the state fund recovered while OSERS continued to decline, before it became obvious that something was seriously wrong.
Proulx said the two trustees selected to represent teachers on the OSERS board reported once or twice annually to OEA leadership. He can’t recall them mentioning the strategic shift into alternatives but said he also probably wouldn’t have known enough at the time to question it.
“Historically, there was too much reliance on a small number of people and not enough people in the association who were well-versed enough to call foul or poke a little and get a deeper explanation of things,” Proulx said. “There was no interest to critically question what Mike was doing.”
In late 2013, the trustees, the OEA and retirees were furious after the school board rejected the trustees’ decision to put $50 million into another alternative investment — something no one could recall happening recently, if ever. Rea, a former president of the OEA who represented retirees on the trustees board, during one OSERS meeting likened the school board to “child abusers” for what he saw as the school board abusing its authority.
The blow-up eventually led the teachers union to back a bill in the Legislature to boot school board members off the board of trustees. OPS retirees came out in force at an OSERS meeting to support the proposed change.
“You have people sitting here who don’t trust you,” one retiree told a school board member, sparking applause from other retirees.
Eventually, though, even the OEA’s top leader would join the school board in losing confidence in Smith and the trustees.
A disaster revealed
When OPS school board candidate Jeff Miller failed to advance during the primary election in 2013, he made an offer to one of his opponents, Lou Ann Goding: He would endorse her in the general election, but only if she would agree to take a school board slot as an OSERS trustee.
Miller was a small-business owner who in general was not a big fan of the defined benefit pension plans that teachers and Omaha police and firemen receive, even though his wife is a teacher. He was also one of the few people anywhere sensing something was wrong with OSERS.
The fund’s latest actuarial report at the time showed a growing shortfall and investment returns that lagged the roaring stock market. To Miller, it just didn’t add up.
Goding accepted Miller’s offer and was eventually elected to the school board. She joined an entire slate of new board members ushered in by a special election that had been engineered by the Legislature and Omaha business community, in part due to the controversy over the $1 million payment to Mackiel.
In June 2013, Goding joined the trustees. With a background in accounting, it didn’t take long for her to see concerning things.
She was troubled that the same Atlantic representatives who were advising OSERS were also giving reports on investments they managed, to her an obvious conflict. She saw the slipping investment returns, on their way to becoming among the worst of any pension fund in the nation.
“She started picking it apart,” Wayne said of Goding.
Indeed, Goding, fellow school board member-trustees Fey and Matt Scanlan, and new Superintendent Mark Evans began questioning how Smith and the trustees did business.
As evidence of what they saw as excessively close ties between OSERS and investment firms, they became concerned about Smith taking paid trips to examine investments. When Smith requested to travel to India to check out the fund’s real estate investments, planning to take additional time off for a personal vacation, Evans rejected it. He recalled telling Smith, “We can’t have a vendor we’re working with pay for you to go to India and see the Taj Mahal with your wife.”
The new members’ concerns also prompted that rare school board vote to reject an investment. By late 2014, Goding and other board members were working behind the scenes with a state lawmaker on a bill that would completely shut down OSERS, merging the OPS retirement plan with the state teachers system.
The Legislature in 2015 rejected that proposal, not willing to have the state take on the shortfall that today leaves OSERS at a 64 percent funding level. But leading senators did negotiate with OPS leaders, OSERS and the teachers union to have the state take over the investment of OSERS funds.
The OEA’s Proulx supported the change, by then having been briefed by Evans and Goding on the problems within OSERS.
By the time the bill passed in 2016, Smith was gone. The longtime OSERS leader in August 2015 abruptly announced his retirement. The reasons given for Smith’s exit vary.
Smith simply said, “It was time.” Fey said Smith was “coaxed” into retirement. Proulx says he was made aware of an effort by Evans to fire Smith. Evans denies that, saying he thinks Smith left because he “wasn’t used to having people question things.”
In February 2017, Goding spoke to the Nebraska state investment officer, who the previous month had taken charge of investing OSERS dollars.
“Just so you know, I fired all the (investment) managers I could this morning,” Goding recalled him saying.
The state had come up with a new plan for OSERS investments that was heavy on stocks and light on alternatives — in many ways mirroring the makeup of the OSERS portfolio back in 2008. But it will take some time to fully implement the plan. About a third of the fund remains locked up in alternatives that can’t be sold for years.
The pension fund’s serious financial problems didn’t become widely known until a little over a year ago. That’s when Evans convened a task force to find budget cuts to cover a $19 million extra payment the district was required to make to begin shoring up the fund.
The bar will only get higher in the future, with the extra annual payment estimated to hit nearly $26 million this year — more than 4 percent of the OPS budget — and continue to grow from there.
The initial cuts are already affecting the classroom, with decisions not to replace 100 teachers’ aides and to delay replacing language arts textbooks. If in future years the cuts become too severe, it’s possible taxpayers could be asked to vote to authorize OPS to exceed the state’s levy limit on property taxes.
“Ultimately, unfortunately, the taxpayers are going to end up taking a beating on this,” predicted Miller, the man who prompted Goding to join the trustees. “There isn’t enough money.”
Miller said he wouldn’t be happy about it. But he thinks it’s also important that the education of the more than 50,000 kids in OPS not suffer just because none of the adults were paying attention.
To Miller, though, any tax increase would have to be part of a grand bargain, one that would feature shared pain among teachers and retirees and end with the state at some point completely taking over OSERS.
Overall, Miller isn’t happy with what he sees as a lack of accountability from those who caused the OSERS disaster. And looking back, he said he takes no particular pride in the role he played in helping expose it.
Indeed, when one considers Smith and the trustees, the now-defunct Atlantic, OPS leaders, district retirees, teachers, students and taxpayers, there are no winners when it comes to OSERS. Only losers.
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