Rudy Fichtenbaum on administrative costs at STRS: 'Will the Real Costs Please Stand Up'

 Will the Real Costs Please Stand Up

By

Rudy Fichtenbaum

September 22, 2022

Immediately following the September Board meeting the STRS staff predictably issued an“eUPDATE” with more good news for members. STRS is like the fictional town of Lake Woebegone, where all the children were above average. With STRS the only news is good news.

Citing a CEM Benchmarking Report on administrative benchmarking, the “eUPDATE” stated that STRS earned the second highest score among 43 pension systems in the U.S. and Canada.Moreover, the eUPDATE also stated that STRS had administrative costs that were below the average of its peers and these costs have been decreasing 1.1% per year, while costs for peers have been rising. Of course, they neglected to report that their average cost for the previous 7 years was above their peers.

Here are the CEM Benchmarking graphs showing STRS’s performance over time and in relation to its peers. While we can identify the members in the peer group, we have no way of verifying the data that CEM reports for individual pensions except STRS because their data is proprietary.

However, to check the veracity of the CEM Benchmark claims, I turned to the Public Pension Database (PPD) housed at Boston College (https://publicplansdata.org). This database covers 219 public pensions in the U.S. This data has been used by many scholars to analyze U.S. public pensions. I chose a peer group of all the U.S. pensions included in CEM’s peer group.

Unfortunately, CEM chose to include one Canadian pension in the STRS peer group, Ontario Teachers, so my peer group omits them.

I defined administrative cost the same way CEM Benchmarking did i.e., administrative costs divided by the combined number of active and retired members in each pension (leaving out inactive members). If data was missing in the PPD, I went to the appropriate Annual Comprehensive Financial Report, which is the source of data used in the PPD, and filled in the missing data. Here is what I found.

The first graph shows administrative costs per member for 2021. STRS OH had the second highest cost for administrative expenses among its peers at $202 per member, compared to an average of $105 per member. So STRS administrative costs are nearly twice that of its peers in 2021. Does omitting Ontario teachers skew the results? It is likely that administrative costs for Ontario teachers are above the average cost of the peer group since Ontario is a high-cost area.However, to raise the average cost of the peer group to that of STRS, by including Ontario teachers, their administrative cost would have to be $1,400 per member, and that seems implausible, especially since the Canadian $ is only worth $0.74 U.S.

The second graph shows STRS’s administrative cost since 2014 along with the average administrative cost per member for peers. Over the entire 8-year period costs at STRS were on average 1.8 times more than for its U.S. peers. Moreover, STRS’s administrative costs per member increased during this period at an average annual rate of 1.1%.

In summary, STRS reported that its administrative costs per member were lower than its peer group and were declining by 1.1% per year, while I found that STRS’s administrative costs were significantly higher than its peers and were increasing 1.1% a year. As the Dark Knight said,“Sometimes the truth isn’t good enough. Sometimes people deserve more. Sometimes people deserve to have their faith rewarded.”