Which Side Are You On?
Rudy Fichtenbaum
At the November Board meeting Wade Steen, Bob Stein and I tried to make
a presentation on a proposal that we believe has the potential to provide the funding needed to restore the COLA and other benefits cuts. I use the word “tried” because, for those of you who may not have heard the meeting, our attempt at making a presentation was continually interrupted in what was clearly a well-orchestrated plan executed by the senior staff and their consultants. Thus, although the Board had agreed to hear our presentation, the senior staff and their consultants prevented us from making a coherent presentation.If you have ever attended a meeting of a public body where a group of protesters comes in and disrupts the presentation by shouting out questions and statements designed to prevent the body from carrying out its function, then you would have recognized what was happening in an instant.
The difference is that the STRS staff are supposed to work for the Board. Board members are fiduciaries, responsible for setting “policies governing the operation of the system and investment of funds…and may authorize its administrative officers… to act for the board in accord with such policies” (ORC 3307.04). Imagine for a moment what would happen if a group of administrative employees employed by a school board were to go to a Board of Education meeting and disrupt the meeting to prevent the Board from discussing a policy. They would be fired the next day!
In hindsight, I would have given a slightly different presentation but fundamentally the presentation was sound. We were trying to present a concept. The problem, which I did not see as clearly then as I see it now, is that the concept that we were trying to present was conflated with QED or individuals associated with QED. Part of that confusion is my fault. That said, all along the senior staff have been trying to kill this concept because it is a threat to them. The truth is they don’t even acknowledge that there is a problem because the current structure of STRS creates a conflict of interest.
This is what I think is most important. STRS has a problem: The problem has two elements.
First, the pension doesn’t have enough money; it takes too much risk; and it can’t beat a real passively investable benchmark.
The problem of not being able to beat a real benchmark is easy to solve. in theory, just index the investments. However, even if everything were indexed, the pension would still not have enough money. Thus far, the only “solutions" the senior staff and their advisors have advocated is taking more risk and cutting benefits. In fact, if they were being honest, they would be telling the Board that the odds are that under the current regime, they will have to make more cuts in the future.
Second, the senior staff think they are partners with members. In fact, they view themselves as the general partners and the members as limited partners. The only thing they really care about is preserving their jobs. The senior staff have done nothing to show that they understand the problems of members and have done nothing to try and solve the problems. In fact, the senior staff can’t even acknowledge that there are problems because they are a major part of the problem.
So, what is important? Even if STRS could beat a benchmark or if the fund were indexed, the net cash outflow is too big--i.e., they don’t have enough money to “invest” their way out of the problem.
I am aware of only two solutions to the problem. One, which I advocated when I was running, and that I still support, would be raising employer contributions. To even begin addressing the problem, employer contributions would probably have to double. I don’t have to tell you how unlikely that is to happen, given the current political situation in Ohio.
The second solution is the concept I tried to present, albeit unsuccessfully, at the last Board meeting. That concept at its core is that STRS, in effect, owns a warehouse (its balance sheet), but the warehouse is empty. Right now, STRS treats the empty warehouse as a real estate investment--i.e., we are waiting for it to appreciate. The solution is to start using the warehouse to store things and charge storage fees and then lend out the inventory to earn additional fees. That is the idea in a nutshell. Whether QED is involved in implementing this idea or not does not matter. The idea is fundamentally sound.
What is clear to me is that the current senior staff are incapable of implementing this idea, for if they truly were acting in members' interests, they would be looking for a way to implement this idea, with or without QED. The fact is the senior staff have done everything possible to sabotage the consideration of this idea because they see it as a threat to their modus operandi.
Finally, while exploring ideas that can really solve the problem, STRS should at a minimum sell its equity assets, hold Treasurys, and get a total return swap. A total return swap on the Russell 3000 would give STRS the actual returns of the Russell 3000. For example, if they sold all their U.S. equities and did a total return swap on the Russell 3000, at a cost of 50 bps, and held Treasurys earning 1.5%, they would outperform the Russell 3000 by 100 bps.
If there is another solution lurking in the shadows that is better than the idea that I tried to present, I am open to learning about it and advocating for that solution as well.
I have titled this post “Which Side Are You On”, an old union song written in 1931 during the Harlan County Coal War by Florence Reece after the sheriff, hired by the coal companies, entered her house, and terrorized her and her children, looking for her husband, Sam, a union leader. Our pension has a problem and It’s time for the Board to decide, “Which Side Are You On.” Are you on the side of members or on the side of those who profit at members’ expense?
Dr. Rudy Fichtenbaum is Professor Emeritus of Economics at Wright State University. He is an elected member of the STRS Ohio Board, filling a retiree seat since September 2021.
