An important message from Robin Rayfield to ORTA members: A response to recent media reports pertaining to your pension system, STRS Ohio

From Robin Rayfield, Executive Director

Ohio Retirement for Teachers Association

July 18, 2024

Greetings ORTA Members!

There is no scheduled newsletter for July, however, with the recent media reports that have surfaced over the last couple of weeks, our executive committee suggested that ORTA respond.

As you have read, outside of the Toledo Blade, the reporting on matters concerning STRS is slanted in favor of the STRS narrative. This is understandable when you think that Gannet Publishing owns the major newspapers in Ohio. Gannet is also owned by a private equity group (Apollo) that STRS is heavily invested in.

Recent Media Reports

In one recent article the reporter for the Columbus Dispatch referred to ORTA as a ‘dark money group.’ This is so laughable. ORTA has no money that can be used to influence people on any issue. In fact, over the last several elections for STRS seats, ORTA has not spent any money for any candidates. This same reporter that called ORTA a dark money entity has never called ORTA to ask anything about our Pension Defense Fund. If she had asked, we would have provided her with the same information that we provide for our membership on the Pension Defense Fund. Currently, ORTA has raised approximately $80,000 from over 1800 individuals. This is not a ‘dark money entity;’ this is a grassroots entity. Over 900 of the donations are for $25 or less. On the other hand, the politicians that she reports on get mega dollars from dark money entities every year.

As you are bombarded with conflicting information regarding our pension fund it is difficult to know who to believe. For example, STRS reports that it is in the top tier of the pension world with regards to investments. What does that mean? If you are the best of a poorly performing group is that good news? Really, STRS could say we are getting taken to the cleaners, but not as badly as other pensions. Or ‘We are the best of the worst investors in the US.’

QED

Reporters and STRS communications people have attempted to connect ORTA and QED as some sort of partnership. Let’s be clear, ORTA is not formally, nor informally connected with QED from a business perspective. Both principals at QED have helped ORTA to understand the technical aspects of investments. They have pointed out when STRS uses ‘gross of fees’ or ‘net of fees’ when describing investments or helped to understand the complex world of alternative investing.

In another recent article, a former STRS employee made the point that not paying our investment staff bonuses does not free up money to pay retirees a COLA. This is a true statement, however, paying people bonuses to actively manage our portfolios and earn less than a passively managed portfolio that cost hundreds of millions less does not make sense on any level. If a passively managed program of investing costs hundreds of millions less each year, and produces better returns, then the choice is simple. Make more and spend less with passively managed index-based investments.

ORTA has not advocated for any investment company. ORTA has advocated for investigation of index-based strategies that show promise to achieve better returns. Because our system spends more on benefits to retirees than it takes in each year, making the best investment return possible, at the lowest cost is essential.

Action by the Ohio Attorney General and Governor

As you already know, Governor DeWine received a 14-page anonymous letter claiming that Wade Steen and Rudy Fichtenbaum breeched their fiduciary duty when they attempted to ‘steer’ $65 billion towards a company that had no clients, and no track record of successful investment experience. This legal action to remove Fichtenbaum and Steen is a political move to distract any investigation into the corruption taking place at STRS. The facts surrounding this case do not match the claims in the anonymous letter. Here is what is known currently:

1. Rudy and Wade asked the board to hear a presentation on an investment strategy that is referred to as ‘index plus.’ This is currently in use at a pension fund in Ontario, Canada. This fund constantly outperforms STRS (and all other pension funds) and is far less risky. The ask by Steen and Fichtenbaum was to hire an independent firm to vet the strategy. The ask was that the firm hired to vet the strategy was not a current consultant of STRS nor the STRS investment staff as either of these groups would have a conflict of interest. The conflict of interest was obvious in that, if the strategy proved to have merit, the current investment staff and consultants could be replaced.

2. Important to note is that, if the strategy demonstrated that it had the potential to make better returns at a lower cost, an initial pilot test investment of $250 million be made. NOT $65 billion. An investment of $250 million (a great deal of money to be sure) would be made to test the strategy. So where did the STRS staff and consultants produce the $65 billion figure? Why does the media keep saying that the ask was for $65 billion? All you need to do is check the minutes of the meeting and see that the proposal was for $250 million, not $65 billion. After approval by an independent consultant. You may have heard that the audio recordings of the meeting state that Fichtenbaum asked for $65 billion. Dr. Fichtenbaum did use the $65 billion figure in a response to a question asked of him. The question was something like ‘How much money would we have to invest in this strategy to offset the $4 billion shortfall STRS faces each year?’ Rudy calculated that it would take $65 billion invested to offset the shortfall that STRS faces each year. He did not suggest that STRS invest $65 billion into this strategy. The ‘index plus’ strategy would simply be another tool in the investment strategy toolbox.

3. Rudy and Wade are fighting the effort by the A.G. and governor to remove them from the STRS board. ORTA is helping them with legal expenses in their fight with the governor and A.G.

PBI a.k.a. bonus program

The reform majority of the STRS board failed to pass the Performance Based Incentive program at the June STRS board meeting. There were several claims that the investment staff would resign because of this not being passed. For many of the investment staff receiving bonus payments of over $200,000 is common. What is interesting to note is that paying incentives to investment staff is not common in the pension investment industry. In fact, many pensions state that paying incentives (bonuses) encourage investors to take unnecessary risks to earn their bonus. In a paper published by the Warton Pension Research Council STRS ranks in the top 1% of pension compensation. This study found that 75% of pension funds do not pay incentives for performance. Of those that do pay incentives only 1% pay incentives to anyone other than the Chief Investment Officer. The typical CIO bonus is less than $70,000. By comparison, STRS pays the CIO nearly $400,000 in bonus. Even without any PBI STRS is in the top 5% of compensation for the investment staff.

I hope that the information provided here provides our ORTA members with sufficient information to help separate the facts from the opinions with regards to what is taking place at STRS.