STRS Ohio Systematically Overstates Its Returns By: Rudy Fichtenbaum

In this post I will discuss how STRS Ohio systematically overstates its returns. The incentive for overstating returns is clear: higher returns mean bigger bonuses for the investment staff.

Exactly how STRS calculates its returns is something of a mystery, which speaks to the broader problem of a lack of transparency. STRS returns are verified by Adviser Compliance Associates, LLC (ACA). Specifically, in a 2020 GIPS Verification and Performance Examination Report issued August 10, 2020, ACA verified that STRS “complied with all the composite construction requirements of the Global Investment Performance Standards (GIPS)….” 

The notes in the ACA report say that STRS returns are calculated using the Modified Dietz method. Most of us probably know that a simple rate of return is just the change in value divided by the value at the starting point. The problem with using this simple method is that STRS is always adding to its funds during the year as member and employer contributions are paid, and also subtracting from those funds as benefits are paid; those cash flows must be taken into account in calculating the rate of return. This is what the Modified Dietz Method accomplishes. 

According to the report, total fund gross return consists of a weighted average of gross returns for all assets, except externally managed real estate and alternative investments. Externally managed real estate and alternative investments are allegedly reported net of fees even though they are included in STRS’s computation of gross assets. STRS then compares those “gross returns” (a mix of gross returns and allegedly net returns) to a benchmark, which is itself a net return.

Measuring performance relative to benchmarks which are net returns by comparing them to gross returns is clearly misleading. Gross returns should always be higher than net returns, and this virtually guarantees that the STRS investment staff will receive bonuses. In fact, ACA reports that in 2020 STRS’s net performance was 3.01% and that the benchmark was 3.07%, so “the fund underperformed its benchmark”, but bonuses were still paid.

Moreover, ACA reports that “costs are reported annually by CEM Benchmarking.” But we know, based on my last post, that CEM excluded certain carried interest and performance fees; STRS pays these to the general partners of private investment funds that manage alternative investments for hedge funds, real estate, infrastructure, natural resources, and private equity. STRS’s true costs are thereby underestimated. Hence, I use the term allegedly when I refer to returns that STRS claims are net of fees. 

At the end of the day, all that matters is net investment income and net rate of return. So, let’s look at STRS’s real net rate of return. To calculate this, we use the same method used by Cheiron, the consultant that provides STRS with their Actuarial Valuation Report. Cheiron’s returns are the ones that really matter because they are used in calculating the funded ratio. Restoration of the COLA is tied to the funded ratio. Their method for calculating a rate of return takes net investment income and divides it by the average of the beginning and end of year assets plus ½ of the net cash flow. The following table shows the difference between GIPS (Global Investment Performance Standards) returns used to determine bonuses and the Cheiron returns that influence the funded ratio.

Between 1991 and 2020, the compound annual GIPS return was 8.17% compared to 7.32% per Cheiron. If for each year you multiply the difference in annual returns and by the end of year net fiduciary position (the assets STRS has to pay members) that adds up to $13.4 billion. That’s a loss of $446.7 million per year. In the last 5 years the loss was $808 million, or about $161.6 million per year. Contrast those losses with the cost of restoring the COLA, about $210 million per year.

If you elect me to the STRS Board, I will be your advocate and do my best to get you the truth about what is going on at STRS. In addition, I will fight to change the culture at STRS to ensure that it puts members’ interests first. That means reducing expenses, fighting to increase employer contributions and restoring the COLA.

Rudy H. Fichtenbaum is an American economist. He is a professor emeritus at Wright State University, and in 2012, was elected the president of the American Association of University Professors.

Tom Curtis to all retired STRS members: Cast your vote for Fichtenbaum and Jones

 From Tom Curtis

April 1, 2021

Subject: Ballots For STRS Board Seat(s) To Be Mailed Today, 4.1.21

I am sending this to everyone on my email list. It is only relevant to all Ohio retired teachers. If you were not an Ohio teacher or now live out-of-state, I am sure you know someone that is a retired Ohio teacher. Would you kindly send them this email, a text, phone them, or mail them a copy of this email. All STRS retirees had their STRS COLA eliminated in 2017, thus we now receive a stagnant yearly pension, there have been no increases since 2017. This is a cruel and unusual determination by the STRS board. The other 4 Ohio pension systems pay a COLA to some or all of their retirees. None of them have eliminated it. 

Let it be known that both Robert Stein and Rita J. Walters, our current retiree board members, both have voted yes, in favor of paying performance bonuses to a employees this year and each year during their tenure on the board. The performance bonuses criteria are determined by those receiving the bonus. Those bonuses have amounted to multi-millions of dollars, yet we don’t deserve a COLA? This is commensurate to our Congress awarding themselves a raise and benefits, when we the people have no say at all about it. Hundreds of retirees sent emails to both of the above board members requesting that they vote against the bonuses paid last June. They totally ignored us.

Unfortunately, it is the practice of most of the elected board members to not communicate by email with benefit recipients. They are not accountable to most every retiree. Please try emailing one of the elected board members and kindly let me know if any of you receive a response. 330.754.6162

Tom Curtis

PLEASE VOTE FOR STRS BOARD CANDIDATES:

RUDY FICHTENBAUM

AND

ELIZABETH JONES

THEY SUPPORT RESTORING OUR COLA!

THEY WILL ADDRESS AND SUPPORT IMPORTANT RETIREE ISSUES!

Bob Buerkle responds to Becky Higgins' denial that we were promised a COLA

From Bob Buerkle

A rebuttal to Becky Higgins' comment

March 31, 2021

Becky Higgins: "You were not promised a cola." (03/19/2021 on OEA's Facebook page, in response to a comment by Kathy Bonham.) 

Bob Buerkle's response:  Let's see Becky - I have multiple STRS publications that state that "a 3% COLA will be provided annually on your retirement anniversary month." This was stated continuously in the Ohio Revised Code, Section 3307.67 from 2002 through July 2013, at which time the ORC 3307.67 annual COLA was changed to 2%, after the zero year for 2013. 

I have my personal STRS Statements from the 1990's that say retirees will receive a 3% annual COLA in all years that inflation is 3% or greater, or they have "banked reserves" that carried over from years of higher than 3% inflation, which basically applied to nearly every retiree since it was established in 1979 and until it became an automatic annual 3% after 2002.

STRS Counselors who met with retiring teachers told us we would receive a 3% COLA annually. 

When the OFT Retirement Committee would meet for their annual conventions, STRS Deputy Executive Director of Member Benefits, Richard Zimmerman, told us that we would receive a 3% COLA annually, as did his replacement, Sandra Knoesel, until she retired. 

Was I to assume that these were not promises? No such statement was ever delivered in print or elocution.

Only Health Care was not guaranteed, as we were told verbally and in printed documents.

Becky Higgins is past president of the Ohio Education Association.

Bob Buerkle to Rita Walters: Why you are unworthy to remain on the STRS Board

 A heads-up, especially for active teachers 

Here's an interesting comment from Bob Buerkle to Rita Walters, recently seen on OEA's Facebook site, where her candidacy for STRS Board is being promoted, along with Bob Stein's. Active teachers in particular will be very interested in it. 

Bob Buerkle, 3/29/2021, to Rita Walters on FB: 

I JUST WATCHED YOUR VIDEO ASKING FOR MY VOTE. YOU'VE GOT TO BE KIDDING! SURELY YOU JEST RITA! AND FOR SURE YOU HAD NOTHING TO DO WITH THE FACT THAT THE STRS HEALTH CARE FUND NOW STANDS AT 180% FUNDED.

THE ONLY REASON THE HEALTH CARE FUND HAS GONE FROM 50% TO 180% FUNDED IS BECAUSE YOUR OEA BOARD MEMBERS VOTED TO REQUIRE TEACHERS TO WORK UNTIL THEY ARE 60 YEARS OLD AND HAVE A MINIMUM OF 35 YEARS OF SERVICE. AS IT TURNS OUT, MOST TEACHERS WILL HAVE WORKED ABOUT 38 YEARS BY THE TIME THEY REACH AGE 60. WHEN YOU CHANGE THE PENSION REQUIREMENTS, MAKING TEACHERS WORK AN AVERAGE OF 5-8 YEARS LONGER, WHICH MEANS THAT STRS SAVES 5-8 YEARS OF HEALTH CARE COVERAGE PER RETIREE. THAT'S WHY THE HC FUND IS 180% FUNDED AND FOR YOU TO TRY TO TAKE CREDIT FOR IT PROVES THAT YOU ARE UNWORTHY TO REMAIN ON THE BOARD!