Ohio lawmakers are the latest to join the governor and attorney general in an effort to block reformers from taking control of the teachers’ pension fund by proposing to remove elected members from the board.
The decision is a response to accusations by state authorities that the management of the Teachers’ Retirement System board is involved in public corruption.
At a meeting Monday, the Ohio Retirement Study Council (ORSC) discussed solutions to what committee co-chairman State Sen. Mark Romanchuk (R-Ontario) called the “STRS confusion.”
Summary
The Board of Directors of the State Teachers Retirement System of Ohio (STRS) is composed of 11 members. There are five elected associate teachers and two elected retired teachers. The Governor may appoint one investment expert. The Speaker of the House of Representatives and the President of the Senate may jointly appoint an expert. The Treasurer and the Director of the Department of Education and the Workforce may appoint an expert.
There is an ongoing debate about how STRS should invest money—through the current system of actively managed funds versus an index fund. Active funds try to outperform the stock market, have more advisors, and typically cost more. Index funds perform at par with the stock market, are seen as more passive, and typically cost less.
In compact, the “reformers” want to move to index financing, while the “status quo” maintainers want to continue to actively manage funds.
Former teacher Robin Rayfield lost nearly $40,000 due to mismanagement by the STRS board of its $94 billion pension fund, he said.
He describes himself as a reformer, and retirees like him have helped elect board members who want change and whose primary goal is to provide a full cost-of-living adjustment (COLA).
“For someone like me, this is real money,” Rayfield added.
He is the executive director of the Ohio Retirement for Teachers Association (ORTA), an organization of reform-minded teachers.
Following the last elections, reformers took control of the board, obtaining the supermajority needed to implement the up-to-date policy.
In May, Attorney General Dave Yost filed a lawsuit seeking to oust two STRS executives, alleging they were participating in a “scheme” to direct contracts that could directly benefit them. Yost began the investigation after documents prepared by STRS employees alleged that Wade Steen and Chairman Rudy Fichtenbaum were executing contracts for a private investment group called QED Systematic Solutions.
Yost began investigating after STRS employees forwarded the documents to Gov. Mike DeWine’s office. The office believes “multiple whistleblowers” ​​wrote the 14-page memo, which also included about a dozen other documents, to verify their allegations.
Steen and Fichtenbaum are “seeking to divert” as much as 70% of STRS’s current assets, or $65 billion, to a “front company” that has “connections with members behind the scenes,” Yost argued.
The attorney general states the couple should be removed because they breached their fiduciary duties of care, loyalty and trust by “acting in collusion” with QED.
There has been constant fighting, two board resignations, and now state lawmakers are stepping in.
Pension Research Council
ORSC met Monday to hear from its senior research associate Jeffrey Bernard about the status of STRS and its finances.
It is divided into two sections: intergenerational capital and COLA. Intergenerational capital, in elementary terms, is equal treatment in the financing of pensions between generations.
Bernard supports the current STRS system. In compact, he said the current STRS plan is on track to be fully funded within 11 years, so retirees should continue to benefit from it.
Highlights of the 1.5-hour meeting, according to Bernard:
STRS has $20 billion in unfunded liabilities.
This poses significant challenges to intergenerational capital. Bernard said these liabilities cannot be met by up-to-date unfunded benefits. There are also additional risks related to negative cash flow, investment returns and the active-to-retirement ratio, which are exacerbated by the size of this unfunded liability, he added.
There have been no recorded cases of COLA recoveries.
The COLA was granted and “will be in effect until death,” he said. Other states have clawbacks, but Ohio does not.
As we reported earlier, there has been a suspension of increases, which is crucial for pensioners who need the money and are struggling with inflation.
COLA is not the same as PBI, or Performance Based Incentive
Bernard apparently blamed the media for misleading ORSC members by failing to differentiate between COLA and PBI. He explained that they are two separate issues—one related to liability and benefits, the other to compensation.
Teachers often say they are disappointed that investment officers continue to receive bonuses while their COLA is capped.
As we have already informed numerous occasionsThe $10 million in bonuses paid to investment staff last year and even their lavish building can’t compare to the money needed to restore the COLA rate.
Now that PBI is gone, there is a “group” of investment workers who are now earning “half of what they were paid.” Bernard fears that workers will take jobs elsewhere where pay is more competitive.
Worries
ORSC staff raise concerns about recent benefit “boost”
Currently, current energetic teachers are contributing more than is needed to fund their benefits, Bernard said. That’s good because it’s meant to facilitate make up for the STRS deficit. But the board has redirected that money and has additional plans to redirect it, according to Bernard.
This could create sedate accountability gaps in the system, he added.
Solutions
After the presentation, council co-chairman Rep. Phil Plummer, R-Dayton, spoke about ideas he proposed during the committee hearing and that several of his colleagues seemed interested in.
“The committee could cover a whole bunch of expenses to keep costs down,” Plummer said.
He wants to get to the heart of the problem to prevent the collapse of the entire financing system.
“We need the opinions of pensioners, but people need to show logic and common sense,” he added.
Instead of five different public pension funds and boards, the state should have just one to run everything, he proposed. That means merging STRS with the Ohio Public Employees Retirement System (OPERS), the Ohio Police and Fire Pension Fund (OP&F), the Ohio Highway Patrol Retirement System (HPRS) and the School Employees Retirement System of Ohio (SERS).
“Let’s look at combining all five systems—we have five buildings, five different investment groups,” he said. “We have a huge number of employees, huge overhead, huge costs. Can we reduce that there? Can we stop spending so much money?”
He also wants to see at least the STRS board put under greater supervision and restructuring to prevent possible cases of corruption.
“Let’s hire people who have the knowledge, experience and expertise needed to keep an eye on who is investing our money, how much and where,” the Republican added.
Plummer acknowledged that would mean eliminating some teacher-elected positions.
We asked whether this could be considered anti-democratic, since the reformers have just won a qualified majority on the board and the whole affair is related to their interest in changing the investment structure.
“Well, that depends on how we set it up,” he replied. “If we have one central council, they still have the right to elect people.”
This was, of course, a problem for Rayfield.
“We would be diametrically, categorically opposed to any change that reduces or eliminates teachers’ contribution to their pensions,” the retired teacher said. “We live in a democracy.”
Lawmakers are currently working on the reform, and Plummer mentioned several colleagues who are on board and will work to simplify the issue.
It wouldn’t be the first time lawmakers have stepped in to change the board’s role or composition when they don’t have a majority. In 2022, Democratic-aligned candidates won control of the state board of education, and a week later Republican lawmakers introduced a bill forward to strip them of their powers. This bill was passed, thus creating the Department of Manpower and Education, leaving the BOE essentially obsolete compared to its original form.
Still, the move makes sense, Plummer said. It’s about protecting retirees’ money, getting investment advice from real professionals and stopping alleged fraud.
“It’s unthinkable,” Plummer said when asked about QED. “We can’t — a brand new company that has no history — we can’t give them millions or billions of dollars because if they lose it, we won’t have the money to put back into the systems. This has to be stopped.”
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