Wednesday, July 10, 2024

Ohio lawmakers propose removing board members from teachers’ pension fund amid controversy

Ohio lawmakers propose removing board members from teachers’ pension fund amid controversy

By Morgan Trau

July 10, 2024

The entrance to the Ohio State Teachers Retirement System headquarters in Columbus. (Photo by Marty Schladen, Ohio Capital Journal.)

Ohio lawmakers are the latest to join the governor and attorney general in trying to prevent reform-minded educators from taking control of the retired teachers’ pension fund. They have proposed removing the elected members from the board.

This comes as the state alleges the State Teachers Retirement System board leaders are involved in a public corruption scheme.

In a meeting Monday, the Ohio Retirement Study Council (ORSC) discussed solutions to the “STRS turmoil,” as co-chair of the committee state Sen. Mark Romanchuk (R-Ontario) called it.

Recap

The State Teachers Retirement System of Ohio (STRS) board is made up of 11 members. There are five elected contributing teachers and two elected retired teachers. The governor gets to appoint one investment expert. The speaker of the House and the Senate president get to jointly appoint an expert. The treasurer and director of the Department of Education and Workforce both get to designate an expert.

There is a debate on how STRS should invest money — through the current system of actively managed funds versus an index fund. Active funds try to outperform the stock market, have more advisors and typically cost more. Index funds perform with the stock market, are seen as more passive, and typically cost less.

In short, “reformers” want to switch to index funding, while “status quo” individuals want to keep actively managing the funds.

Former educator Robin Rayfield lost nearly $40,000 due to the STRS board mismanaging the $94 billion pension fund, he said.

He calls himself a reformer, and retirees like him have helped to elect board members who want a change, people whose main focus is providing a full cost-of-living adjustment (COLA).

“That’s real money to a person like me,” Rayfield added.

He is the executive director of the Ohio Retirement for Teachers Association (ORTA), full of reform-minded educators.

After the most recent election, reformers have taken control of the board, having a supermajority to implement new policies.

In May, Attorney General Dave Yost filed a lawsuit to remove two members of STRS, stating they are participating in a contract steering “scheme” that could directly benefit them. Yost started the investigation after documents prepared by STRS employees alleged that Wade Steen and Chair Rudy Fichtenbaum have been doing the bidding of private investment group QED Systematic Solutions.

Yost started investigating after STRS employees gave documents to Gov. Mike DeWine’s office. The office believes “numerous whistleblowers” wrote the 14-page memo, also including about a dozen other documents in an attempt to verify their allegations.

Steen and Fichtenbaum “seek to steer” as much as 70% of current STRS assets, which is $65 billion, to a “shell company” that has “backdoor ties” to the members, Yost argued.

The AG states that the pair should be removed because they broke their fiduciary duties of care, loyalty and trust when “colluding” with QED.

There has been constant fighting, two board resignations and now, state lawmakers are getting involved.

Retirement Study Council

The ORSC met Monday to hear from their senior research associate Jeffery Bernard on the status of STRS and its finances.

It was broken up into two sections: intergenerational equity and COLA. Intergenerational equity, simplified, is equal treatment in pension financing between generations.

Bernard is supportive of STRS’ current system. In short — he said STRS’ current plan is on track to be fully funded in 11 years, so pensioners should continue to follow the system.

Highlights from the 1.5-hour meeting, according to Bernard:

STRS has $20 billion in unfunded liabilities.

This causes significant challenges for intergenerational equity. This liability can’t be filled with new unfunded benefits, according to Bernard. There are also additional risks related to negative cash flow, investment returns and the ratio of actives to retirees that are exacerbated by the size of this unfunded liability, he added.

There have been no claw-backs of COLAs.

A COLA has been granted and “will continue until death,” he said. Other states have claw-backs, but Ohio doesn’t.

As we have previously reported, there has been a suspension of increases — significant for retirees who need this money and are dealing with inflation.

A COLA doesn’t equal PBI, a performance-based incentive

Bernard seemingly blamed the media for confusing ORSC members by not differentiating between COLAs and PBIs. He explained how they are two separate issues — one related to liability and benefits and the other related to compensation.

Educators have routinely stated that they are upset that investment staff continue to get bonuses while there is a restricted COLA for them.

As we have reported on numerous occasionsthe $10 million in bonuses given to investment staff last year, or even their lavish building, don’t hold a candle to the money needed to restore the COLA.

Now that the PBI is gone, there is a “chunk” of investment staff that are now earning “half of what they got.” Bernard fears that staff members will take jobs elsewhere, where the pay is more competitive.

Concerns

ORSC staff have concerns regarding the recent “enhancement” of benefits.

Right now, the current active teachers are contributing more than is necessary to fund their benefit, Bernard said. That is good because it is meant to fix the STRS deficit. However, the board has redirected this money and has additional plans to redirect it, according to Bernard.

This may cause significant liability gaps in the system, he said.

Solutions

Following the presentation, council co-chair state Rep. Phil Plummer, R-Dayton, spoke about his ideas, ones which he proposed during the committee hearing that several of his colleagues looked interested in.

“There’s a whole lot of expenses this committee might get their arms around to lower the cost,” Plummer said.

He wants to get to the crux of the problem so that the entire funding system doesn’t go under.

“We need retirees’ input but people need to have logic and common sense,” he added.

Instead of the state having five different public pension funds and boards, there should just be one to manage all, he proposed. This means combining STRS with the Ohio Public Employees Retirement System (OPERS), Ohio Police and Fire Pension Fund (OP&F), Ohio Highway Patrol Retirement System (HPRS), and School Employees Retirement System of Ohio (SERS).

“Let’s look at merging all five systems — we have five buildings, we have five different investment groups,” he said. “We have a tremendous amount of employees, tremendous amount of overhead and costs. Can we lower it there? Can we quit spending so much money?”

He also wants there to be more oversight and restructuring of, at least, the STRS board to prevent possible instances of corruption.

“Let’s get people that have the knowledge, the background, the expertise involved to watch who is investing our money, how much they’re investing where,” the Republican added.

This would mean removing some educator-elected seats, Plummer acknowledged.

We asked if that could be seen as anti-democratic because the reformers just won the supermajority on the board, and this whole debacle is related to their interest in changing the investment structure.

“Well, it depends on how we set it up,” he answered. “If we have one major board, they still have a right to elect people.”

This was, obviously, a problem for Rayfield.

“We would be diametrically, adamantly opposed to any changes that reduce or eliminate teacher input into their pension,” the retired teacher said. “We live in a democracy.”

The lawmakers are now looking at drafting reform. Plummer mentioned several colleagues who are on board and will work to simplify this issue.

This wouldn’t be the first time lawmakers stepped in to change the function or set up of a board once they didn’t have the majority. Back in 2022, Democratic-affiliated candidates won control over the State Board of Education, and one week later, the Republican lawmakers moved a bill forward to strip their powers. That bill passed, thus creating the Department of Workforce and Education, leaving the BOE basically obsolete in comparison to its original form.

However, this step makes sense, Plummer said. This is to defend pensioners’ money, follow investment advice from actual professionals, and curb an alleged scheme.

“That’s a nonstarter right there,” Plummer said, when asked about QED. “We can’t — a brand new firm that doesn’t have a history — we can’t hand them millions or billions of dollars because when they lose those, we don’t have that money in the state to put back in the systems. That needs to be stopped.”

Read this article online here

Larry KehresMount Union Collge
Division III
web page counter
Vermont Teddy Bear Company