Ohio legislators have recently teamed up with the governor and attorney general to block educators who champion reform from taking charge of the retired teachers’ pension fund. Their plan involves eliminating the board’s elected members.
The State Teachers Retirement System board leaders are currently under investigation for their alleged involvement in a public corruption scheme.
During a meeting held on Monday, the Ohio Retirement Study Council (ORSC) delved into possible solutions to the predicament referred to by committee co-chair, State Sen. Mark Romanchuk (R-Ontario), as the “STRS turmoil.”
Recap
The board of the State Teachers Retirement System of Ohio (STRS) comprises 11 members, including five contributing teachers and two retired teachers elected by the members. Additionally, there is an investment expert appointed by the governor, while an expert appointed jointly by the speaker of the House and the Senate president also serves on the board. Furthermore, an expert designated by the treasurer and director of the Department of Education and Workforce each also serve on the board.
The investment strategy of STRS is a matter of debate, particularly whether it should continue with actively managed funds or switch to an index fund. Active funds aim to beat the stock market, often involving more advisors and higher costs. On the other hand, index funds have a more passive approach, aligning with the stock market’s performance, and are generally cheaper.
In brief, those who advocate for reform are pushing for a shift towards index funding, whereas those who support the status quo are determined to continue with active fund management.
Since the very beginning, we have been providing extensive coverage of the ongoing controversy, which includes six recent stories about the latest developments surrounding the alleged corruption plot. In order to gain a comprehensive understanding of the situation, we conducted a Q&A session with our viewers and readers.
Taking on viewer queries regarding the chaos surrounding the pension fund of retired teachers in Ohio.
According to Robin Rayfield, a former educator, he lost almost $40,000 because of the mismanagement of the $94 billion pension fund by the STRS board.
Retirees such as himself have played a significant role in electing board members who share his passion for reform. He identifies as a reformer and believes that the main objective should be to provide a full cost-of-living adjustment (COLA) to retirees.
Rayfield expressed that the amount mentioned is significant to someone like him.
A group of educators, driven by a passion for change, formed the Ohio Retirement for Teachers Association (ORTA) and appointed him as their executive director.
Following the latest election, the board has been taken over by reformers who now hold a supermajority to initiate new policies.
If you want to know more about the reformers, STRS staff, and the current status quo, simply Click here.
In May, Attorney General Dave Yost took legal action to remove two members of STRS, accusing them of involvement in a contract steering “scheme” that could potentially benefit them. The investigation was launched after documents prepared by STRS employees revealed that Wade Steen and Chair Rudy Fichtenbaum were allegedly acting in the interest of private investment group QED Systematic Solutions.
After STRS employees provided documents to Gov. Mike DeWine’s office, Yost initiated an investigation. The 14-page memo, accompanied by approximately twelve other documents, was believed to be written by “numerous whistleblowers” who were attempting to substantiate their claims.
According to Yost, Steen and Fichtenbaum aim to direct up to 70% of the current STRS assets, which amount to $65 billion, towards a “shell company” that has undisclosed links to the members.
According to the Attorney General, the duo must be dismissed as they violated their fiduciary responsibilities of care, trust, and loyalty by engaging in “collusion” with QED.
To know more about the lawsuit, simply Click on the provided link.
I was able to acquire a video recording of a meeting that proves Yost’s claim that Fichtenbaum and Steen were promoting a $65 billion partnership with an investment firm that lacked legitimacy, despite the reformers’ denial of it.
Amid controversy, a board member of Ohio’s teachers’ pension fund has resigned. The Attorney General’s statement regarding the matter has been proven truthful with the emergence of an archived meeting.
The situation has been marked by a series of ongoing conflicts, including persistent fighting and the resignation of two board members. Currently, state lawmakers have stepped in to address the matter.
The Retirement Study Council is an organization dedicated to providing valuable insights and information on retirement planning.
On Monday, the ORSC received an update from Jeffery Bernard, their senior research associate, regarding the current state of STRS and its financial situation.
The topic was divided into two main sections, namely intergenerational equity and COLA. Intergenerational equity refers to granting equal treatment to all generations in terms of pension financing.
According to Bernard, the current system of STRS is on the right path to becoming fully funded in 11 years. Hence, he encourages pensioners to stick to the current plan as it is supportive and reliable.
Bernard shared the key takeaways from the 1.5-hour meeting.
The unfunded liabilities of STRS amount to a staggering $20 billion.
Bernard highlights the significant challenges faced by intergenerational equity due to the unfunded benefits liability. Adding new benefits is not a viable solution to fill this gap, as per Bernard. Moreover, the size of this unfunded liability exacerbates the risks associated with negative cash flow, investment returns, and the actives-to-retirees ratio.
No COLAs have been clawed back.
He stated that a COLA has been approved and will persist for the rest of his life. Although some states have claw-backs, Ohio does not have them.
As reported before, retirees who rely on their pension to cope with inflation have been impacted by the suspension of increases. This situation has caused significant difficulties for them.
When it comes to compensation, it’s important to understand that a COLA (Cost of Living Adjustment) is not the same as a PBI (Performance-Based Incentive). While a COLA is simply meant to adjust for inflation and rising costs of living, a PBI is designed to reward employees for their hard work, dedication and exceptional performance. It’s important for employers to recognize the difference between the two and offer appropriate incentives to motivate and retain their employees.
According to Bernard, the media is to blame for confusing ORSC members by failing to distinguish between COLAs and PBIs. He clarified that the two are distinct issues, with one concerning liability and benefits, while the other pertains to compensation.
Many educators express their discontent over the fact that investment staff still receive bonuses even though there is a limited cost-of-living adjustment (COLA) for them.
I have mentioned multiple times that restoring the COLA requires significantly more money than the $10 million in bonuses awarded to investment staff or the extravagant building they occupy.
With the departure of the PBI, a group of investment staff members are facing a significant cut in their earnings, receiving only half of what they used to. Bernard is concerned that this decrease in pay may prompt these skilled professionals to seek employment elsewhere, where salaries are more competitive.
Issues to Consider
As we delve deeper into the topic at hand, it is essential to address a few concerns that may arise. These issues are crucial to consider as they may impact our understanding and decision-making process. Therefore, we must take a closer look at these concerns before moving forward.
The enhancement of benefits is causing concerns among the ORSC staff.
According to Bernard, the present active teachers are contributing more than the required amount to fund their benefits, which is a positive sign towards addressing the STRS deficit. However, he also stated that the board has been redirecting this surplus money and has further plans to do the same.
He expressed his concern that such a situation could lead to significant liability gaps within the system.
Ways to Address the Issue
After the presentation, I had a chance to speak with council co-chair State Rep. Phil Plummer (R-Dayton) about his proposed ideas that he presented during the committee hearing. It was evident that several of his colleagues were intrigued by his proposals.
Plummer suggested that the committee could reduce costs by addressing numerous expenses.
His main goal is to identify the root cause of the problem to prevent the funding system from collapsing.
“He added that retirees’ input is crucial, but it is equally important for people to exercise logic and common sense.”
The proposal suggests consolidating all five public pension funds and boards of the state into one entity for better management. This would involve merging STRS with Ohio Public Employees Retirement System (OPERS), Ohio Police and Fire Pension Fund (OP&F), Ohio Highway Patrol Retirement System (HPRS), and School Employees Retirement System of Ohio (SERS).
He suggested consolidating all five systems, including the five buildings and investment groups, to reduce the tremendous amount of overhead and costs. “We have to look at whether we can lower our expenses and stop spending so much money,” he added.
In order to prevent possible instances of corruption, he believes that there should be increased oversight and restructuring of the STRS board.
The Republican emphasized the importance of involving individuals who possess the necessary knowledge, background, and expertise to monitor the investments being made with our money. “We need to keep a close eye on who is investing, how much they’re investing, and where,” they stated.
Acknowledging the need for change, Plummer stated that it would entail the elimination of certain seats that educators have elected.
I inquired whether this could be perceived as an act against democracy since the reformers had recently secured the supermajority on the board and the entire controversy revolves around their intention to modify the investment framework.
He replied, “It all depends on the setup. If we have a single board, they will still have the authority to elect individuals.”
Rayfield faced an evident problem.
“The retired teacher adamantly opposes any changes that would diminish or remove the input of teachers in their pension system,” she stated. “Living in a democracy, it is crucial for teachers to have a say in matters that directly affect them.”
Several lawmakers are currently drafting reform to simplify the issue at hand, according to Plummer. He also mentioned that several of his colleagues are on board and committed to the cause.
Lawmakers have a history of altering the setup and function of boards when they no longer hold the majority. In 2022, Democratic-affiliated candidates gained control of the State Board of Education, and within a week, Republican lawmakers introduced a bill to diminish their powers. As a result, the Department of Workforce and Education was established, rendering the BOE virtually useless compared to its initial structure.
Plummer believes that taking this step is a sensible move. Its purpose is to safeguard the funds of pensioners, adhere to the recommendations provided by investment experts, and put a stop to any purported fraudulent activities.
When asked about QED, Plummer outright dismissed the idea, stating that it was a nonstarter. He emphasized that it was not possible to entrust a brand new firm without any track record with millions or billions of dollars as there would be no way to recoup those funds if they were lost. According to Plummer, this practice must be put to an end to ensure that state funds are not lost.