Are your public pension funds holding risky crypto-related investments? Find out.

During Robin Rayfield's three-minute speech, he had three points to make. For a 66-year-old retired educator who relies on defined-benefit pensions for his retirement income, that wasn't much time to raise his long list of concerns. 

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The State Teachers Retirement System of Ohio, one of the largest U.S. public pension funds and one of the largest cryptocurrency exchanges, was holding its board meeting in Columbus in December 2022, about a month after cryptocurrency exchange FTX collapsed. A fresh worry for retirees like Rayfield has been generated by the shockwaves coursing through the digital-asset ecosystem. They had long been concerned about their pension funds' outside investment managers not providing them with enough information on their fees and performance. STRS had not responded to questions about FTX exposure, according to Buyout Insider, a trade publication that focuses on private equity. According to the publication, the Ohio teachers' pension plan has some exposure to FTX through a private equity fund whose holdings are not public. 

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Despite Rayfield's assurances, the pension fund's board is still waiting for information about alternative investments. Was there a return on investment, if so, what was the value of that investment, and how much was invested? Rayfield, who is also executive director of Ohio Retirement for Teachers Association, an organization with about 18,000 members, said, "Now we're worried about crypto." His advice is to give up trying to beat the market at this point. In addition to Rayfield, some retirees attending the meeting raised concerns about potential losses linked to FTX and suggested index funds be used over crypto-related investments. 

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During the meeting, the board didn't answer the retirees' questions. However, Trade Algo reports that STRS had nearly $9.5 million in FTX exposure, $6.6 million of which was in a private-equity fund called Thoma Bravo Growth Fund, and the rest spread across various funds. To determine STRS's total exposure to crypto-related holdings, the pension fund did some research. A total of nearly $125 million was estimated by STRS and its outside money managers during November and December regarding its exposure to tokens, blockchain, and other holdings that could be affected by the crypto implosion. New York State Common Retirement Fund, which has $240 billion in FTX exposure, declined to comment.   

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Since the collapse of FTX, research groups, taxpayers, and retirees have looked for details in regard to how cryptocurrency contagion may affect public pension funds. While crypto-related allocations for public pension funds are typically a small fraction of total assets, they are primarily derived from publicly traded holdings such as Riot Platforms RIOT, -2.06% and Marathon Digital Holdings MARA, -3.24%, but they are mostly generated by private equity firms and venture capital firms that do not divulge much information. FTX exposure in public plans has been difficult to compile for researchers. It has been found in Trade Algo's interviews with taxpayers, pension officials, and review of plan communications that some public plans with crypto exposure have provided only carefully constrained details about those holdings–or none at all.  

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Pension experts say a cloud of uncertainty surrounds these holdings. Approximately 12 million teachers, police officers, firefighters, and other retirees rely on state and local pension funds to provide steady retirement benefits. When their returns aren't adequate, these funds rely on taxpayer contributions. According to Anthony Randazzo, executive director of Equable Institute, a nonprofit focusing on public retirement systems, they must adhere to higher transparency standards, from fee disclosures to listings of every private equity fund they own and every portfolio company they own. “This level of transparency does not exist in every state,” he said. Although public plans manage about $5.6 trillion in assets, they don't always drive a hard bargain with private funds when they negotiate investment terms. Instead, they sign nondisclosure agreements that conceal funds' fees and performance, according to researchers. 

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There is a trade-off between transparency and access to the best private funds, according to some pension officials and investment managers. According to Morgan Creek Capital Management CEO Mark Yusko, some public retirement systems hold blockchain-focused funds that are managed by Morgan Creek Capital Management. In addition to its direct investments in crypto and related assets, Yusko's funds have made spectacular profits from one such investment. The best team is what everyone wants, he said. Since public pensions cannot sign nondisclosure agreements, they do not have any chance of being able to access certain funds.  

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A Securities and Exchange Commission proposal would require private funds to disclose their full cost and performance to their investors, which coincides with the increased scrutiny of public plans' private holdings. A group of more than two dozen consumer advocacy groups, labor unions, and research groups wrote to the SEC last month that the SEC must improve the inefficient and dysfunctional process investors currently use to negotiate investment terms in private funds, a process that leaves them with little information to evaluate their investments. As a result of this antiquated process, public pensions, and other institutions have unfairly transferred billions of dollars in wealth to private fund advisers. 

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Randazzo called the crypto-related holdings of public pensions "a canary in the coal mine." According to the Center for Retirement Research at Boston College, virtually all public pension plans have fallen short of their return assumptions between 2001 and 2022. This is an example of the kinds of bets public sector pension funds are taking to meet some fairly unrealistic investment return targets. Plan returns are currently close to 7% on average. State and local research associate Jean-Pierre Aubry said they maintain lofty return targets because "it costs less." Pension funds contribute based on expected returns, regardless of the amount of risk involved. 

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Some key questions remain unanswered at pension fund public meetings

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Two of McLean's public pension plans hold crypto-related investments, which taxpayers have questions about - about five single-spaced pages worth of questions. Fairfax County Police Officers’ Retirement System and Employees Retirement System officials have been discussing their pioneering move into blockchain and other crypto-related holdings for the past few years on podcasts, industry panels, and in the media–but since FTX collapsed, they have been speaking less. As of year-end 2022, the police officers' fund had a 7.2% weighting in blockchain funds, while the employees' fund had a 4% weighting. The retirement system posted a note on its website explaining the thesis behind its blockchain investments earlier this year. Public pensions, however, are exempt from disclosing details that could adversely impact their investments under state public-information law. 

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The McLean Citizens' Association dates back more than 100 years and is well-connected politically. In mid-January, the McLean Citizens Association was able to arrange a meeting with the investment chiefs of both pension funds to discuss cryptocurrency holdings. On its Facebook page, the citizens' group posted a two-hour virtual meeting. Several questions from the group went unanswered. 

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The Fairfax Employees' Retirement System's investment chief told the meeting that we are restricted in some ways. The managers did disclose specific holdings of the retirement system's funds that weren't listed on the blockchain.  

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On its website, the retirement system promoted a blockchain-focused public meeting a month later, in February. According to the pension officials who declined to comment for this article, they had never directly or indirectly invested in FTX and had generally turned profits on their blockchain investments. 

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Many things remained unsaid after all that talking. The EJF Silvergate Ventures Fund is a joint investment vehicle operated by EJF Capital and Silvergate Capital Corp., which Katherine Molnar cited as a holding during the January meeting of the Fairfax Police Officers Retirement System. In response to congressional inquiries about its role in the loss of customer funds at FTX, the company operates a crypto-friendly bank in California. Trade Algo reported in early February that FTX and Alameda Research were under investigation by the Justice Department. The company said in a regulatory filing on March 1 that it would delay filing its annual report because it is evaluating its ability to continue as a going concern and evaluating certain regulatory and other inquiries and investigations that are pending with respect to the company. There was no comment from Silvergate or EJF. 

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Public pension fund meetings did not mention Silvergate's troubles. Neither was BlockFi, which filed for bankruptcy protection in late November after receiving financial assistance from FTX. At the time of investment, BlockFi accounted for about 10% of assets in Morgan Creek Blockchain Opportunities Fund I and II, according to Yusko. During the January meeting, Molnar cited Morgan Creek funds as Fairfax pension-fund holdings but did not mention BlockFi. It has been entirely written off of Morgan Creek funds' BlockFi holdings, according to Yusko. Fairfax has already received more than $1 back for every $1 it put into the first fund thanks to the fact that "the winners more than offset the losers," he said. 

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As part of the Q&A session at Fairfax pension funds' February public meeting, a participant asked if there were any blockchain- or crypto-related bankruptcies affecting the pension system. During the chat, Jeff Weiler, executive director of the retirement systems, responded directly, saying: “Only Genesis, which is currently being worked out, and we anticipate getting most of our money out of it.” In the January meeting, Molnar identified VanEck New Finance Income Fund as holding a pension fund. Genesis Global Holdco, another crypto lender roiled by FTX's collapse, filed for bankruptcy in January and is among the largest creditors. The Fairfax Employees' Retirement System's investment chief, Spellar, did not mention Genesis or VanEck when he addressed the participant's question verbally, saying FTX "did not directly affect us." 

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Genesis has filed for bankruptcy, and VanEck hopes and expects that DCG will step up to support Genesis creditors, the company said in a statement. 

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There could be more clarity about private funds under the proposed rule

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Research is underway to compile more definitive data on public plans' holdings, but with mixed results. A list of 15 public pension funds - including many of the country's largest retirement systems - had been compiled by Equable Institute, Randazzo's organization, by early December. STRS Ohio was also added to the list a couple of months later. 

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Equable does not list the New Mexico Educational Retirement Board, a pension plan for teachers worth $15 billion. According to the bankruptcy proceedings for FTX, NMERB Sierra Blanca Fund is listed as a creditor. FTX exposure was minimal for NMERB through Sierra Blanca, according to NMERB board member Matias Fontenla. Fontenla said he does not believe in crypto or anything related to it. He said he'll closely examine the pension fund's investments for any crypto-related investments as a relatively new board member. Bob Jacksha, NMERB's investment chief, declined to comment further on the holdings of the company's private equity funds. 

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The American Federation of Teachers said in a statement that pension funds were the retirement savings of working people. According to the group, pension funds interested in investing in crypto should demand "the highest level of transparency" from firms. 

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Herila Weinberg, executive director of Truth in Accounting, a nonprofit dedicated to government transparency, recently raised questions about some wild swings in pension fund performance. When she investigated the results, she discovered that some plans had crypto holdings, but the word "crypto" was not always mentioned. In light of possible exposure arising from pension funds' investments in other funds, she questions "how much control the trustees had" over such holdings. Is their level of sophistication high enough to comprehend all this? ”  

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According to Josh Altic, the group's research director, Ballotpedia aggregates information on each state-run pension fund across the country, including the asset managers and investment policies used by the funds. Voters will be able to access more information about public plans' investment strategies, Altic said. We think there is a gap in information, for sure. 

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It is hoped by many transparency advocates that the SEC will help clear up the confusion regarding the fees and performance of the private funds typically held by public pensions. Public pension funds and other institutional investors with limited partnerships in private funds would be able to spend their bargaining chips elsewhere because of the proposed SEC rule's minimum standards for cost disclosure, which would take the current debate over fee transparency off the negotiating table. An institution investor trade group, the Institutional Limited Partners Association, reports Neal Prunier, senior director of industry affairs. While the ILPA has since 2016 offered a fee-reporting template intended to clarify private equity funds' expenses and fees, more than 40% of its members receive that information less than half the time-" and sometimes never." According to Prunier, investors are mostly negotiating disclosures in “side letters,” which are used by private fund managers to grant special rights to certain investors, so the process is extremely inefficient. 

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As part of its fee transparency efforts, STRS Ohio has recently retained a new consultant who will help with private market fee verification. The firm encourages its partners to use ILPA's fee-reporting template. 

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It's still unclear to retirees like Rayfield. Rayfield said, "We're the ones who put the money in, but we can't see what Wall Street does with it."