Dean Dennis: Governor DeWine’s Selective Red Flags and the STRS Ohio Pension System
From ORTA/Dean Dennis
May 29, 2024
It appears that Governor DeWine only sees “red flags” when the investment practices at STRS are threatened by change, potentially impacting the employees and their benchmarks and bonuses.
Was it a red flag to Governor DeWine when the Ohio Retirement Study Council (ORSC) neglected to commission and fulfill their statutory duties and hold the required once-every-ten-year independent audit? The audit was supposed to occur no later than 2016 but wasn’t completed until 2022.
STRS Ohio has eleven Board members; four are appointed, and teacher members elect seven. These elections end on the first Monday in May. Recently, these elections have been drawing attention because members are becoming more aware that STRS Ohio management's active investment practices have resulted in the loss of benefits.
Loss of benefits include active teachers having to work longer for full-formula benefits while their employee contribution rate increases and retirees having lost their inflation protection. To simplify, “reform-minded-members” want more transparent investments, such Loss of benefits include active teachers having to work longer for full-formula benefits while their employee contribution rate increases and retirees having lost their inflation protection. To simplify, “reform-minded-members” want more transparent investments, such as investing in index funds. Reform-minded members think STRS is paying too many hidden fees while trying to beat the market. Trying to beat the market is a fool’s errand. Meanwhile, “status-quo-minded members” aren’t concerned with investments that allow for private equity investments, which contain investments housed in non-disclosure agreements and hidden fees. Transparency in investment practices is crucial, as it directly affects the members' benefits and the pension system's overall performance.
In early May of 2023, a reform-minded candidate won by an overwhelming margin, which would have resulted in a Board with a reform-minded majority. However, after the first Monday in May, Governor Mike DeWine illegally removed his appointed member, Wade Steen, who was reform-minded, and replaced him with a status-quo appointee. This action was eventually reversed 11 months later by the courts by members who took proactive steps, demonstrating their unwavering commitment to the cause and readiness to act by raising over $ 60,000 for the defense. On May 16, 2024, Wade Steen returned to his rightful board seat again.
In early May of 2024, another reform-minded candidate, Michelle Flanigan, won by obtaining 85% of the votes, obviously a mandate for STRS reform. Coincidentally, after the first Monday in May, an “anonymous 14-page document” penned by STRS staff arrived at the Governor's office. This was preceded by one of the STRS consultants, Aon, abruptly breaking their contract with STRS. The Governor said, “Recently, we learned that Aon is severing its contract with STRS. This is a huge red flag, questioning how STRS operates and provides oversight. The unstated implication is that the governance issues at STRS are so concerning that Aon could not continue its contract in good faith.” It appears that Governor DeWine only sees “red flags” when the investment practices at STRS are threatened by change, potentially impacting the employees and their benchmarks and bonuses.
There are many questions.Was it a red flag to Governor DeWine when STRS retained Aon? In January 2024, Aon had to pay a $1.5 million settlement with the Security Exchange Commission over faulty data related to the Pennsylvania Pension Plan. Aon reported mistaken asset performance, which resulted in the pension plan overreporting its performance.
Was it a red flag to Governor DeWine when STRS members raised $75,000 for a forensic audit by Benchmark Services of their pension system to see if there were clues as to why so many of their benefits were being withheld?
Was it a red flag to Governor DeWine that the ORSC selected Funston Advisory Services for the audit, whose $775,000 bid was more than twice the next-highest competitor?
While still on the topic of audits, after the Benchmark Services forensic audit, State of Ohio Auditor Keith Faber conducted an audit of STRS. Regarding the audit, the Toledo Blade Editorial noted, “On page 28 of Mr. Faber’s special audit. It shows that an investment in the Standards & Poor’s 500 index in 2009 would have provided STRS with $90 billion more than the teacher's retirement fund has earned with the high-cost, illiquid, mysterious alternative portfolio they have embraced instead. The issue of public pension staff bonuses and alternative investments are inextricably linked.” Was this a red flag to Governor DeWine?
Was it a red flag to Governor DeWine that the STRS Board suspended cost-of-living adjustments for retirees in 2017, knowing they weren’t eligible for Social Security inflation protection?
Was it a red flag when the Panda Investment lost over half a billion, and the public had to learn about it many years later when the press became aware of it?
So, the Governor seemed a little disingenuous when he stated to Colleen Marshall in a May 8, 2024, interview, “We should do everything that we can so that retired teachers, you know, first, their money’s protected, but second, that they get the cost of living. But I think this issue goes to the governance of the board itself.”Suppose the governor truly wants to provide a cost-of-living adjustment. In that case, he can start by advocating for raising the Employer-Contribution-Rate, which has remained unchanged since 1984 and is among the lowest of any non-Social Security state. After all, he is the Governor of Ohio. Perhaps the governor is unaware that the Employee-Contribution-Rate has increased by 60%. At the same time, the Employer-Contribution-Rate has been stagnant and is now among the lowest of any non-Social Security state. Mike DeWine was also a United States Ohio Senator in 2000 when the Legislature in Ohio passed Substitute Senate Bill 190 in the year 2000, which brought every STRS retiree within 15% or less of their original purchasing power. Similar legislation could be introduced tomorrow if Governor DeWine is sincere. However, if the governor truly wants to support STRS members, he can at least leave the democratic process alone and not try to subvert the election process.
The mess at STRS didn’t just happen.
The pension is underfunded and flush with opaque private equity investments with hidden fees and non-disclosure agreements, which have grown from less than 2% to over 20% of the STRS investment portfolio. In the real world, professional investors only beat the market 10% of the time. At STRS, through top-heavy active management and status-quo board members, benchmarks and portfolios are set so that staff receive their bonuses 100% of the time.
It should be a red flag for everyone when the STRS staff consistently receives raises and bonuses and consistently publicizes their awards as being a top quartile pension system. At the same time, members pay more, work longer, and go without inflation protection.
That’s a red flag!
By Dean Dennis, President
Ohio Retirement for Teachers Association (ORTA)
May 28, 2024
May 28, 2024
Rudy Fichtenbaum and Wade Steen are paying legal fees to defend themselves against the lawsuit brought against them by A.G. Dave Yost. ORTA will use donations from the Pension Defense Fund to help them pay their legal expenses. They have volunteered their time to support Ohio's teachers. Now it's time for us to show our support for them. Make a donation today to the ORTA Pension Defense Fund.
posted by Kathie Bracy at 11:26 PM
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