Pensions & Investments: The reform movement at STRS Ohio

From Pensions & Investments

Key board election could spur significant reform at Ohio State Teachers | Pensions & Investments
PENSION FUNDS
January 12, 2024 

Reinstating COLA, gutting investment staff and moving to index funds on the agenda 

By ROB KOZLOWSKI 
Ohio State Teachers' Retirement System, Columbus, faces a key board election in the spring that could tilt the balance to a group of self-proclaimed reform trustees.

The reformers support restoring a permanent cost-of-living adjustment, funded by cost cutting, including a move to passive investing and significant cuts to the $90.1 billion plan's investment staff. 

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The reform trustees have been spurred on by a grassroots movement of retirees and active Ohio teachers angry about reduced or eliminated annual cost-of-living adjustments.

In 2012, the state Legislature passed pension reform that gave the STRS board the authority to set the system's COLA. The previous fixed 3% COLA was seen as unsustainable following the financial crisis of 2008, and the board cut the COLA to 2% from 2013 to 2016, and did not provide one from 2017 to 2022.

The board argued that the reduction was necessary to preserve the fiscal integrity of the system. 

While the board has since set a 3% COLA for fiscal year 2023 and 1% for fiscal year 2024, the six years of no COLA sparked a wave of protest throughout the state, resulting in a sea change in the composition of the board of trustees in the last several years. 

The 11-member Ohio STRS board consists of seven trustees elected by STRS participants and four trustees appointed by state officials. Of those seven elected trustees, currently five — all elected since 2021 — are in favor of reforming the system by converting to index funds and cutting bonuses. 

The seat up for election in May could give the reformers a majority of the board, and is held by Dale Price, current chairman and not considered one of the reform trustees.

While petitions for candidates are not due until Feb. 23, the primary opponent currently facing Price will be Michelle Flanigan. Price and Flanigan did not reply to requests for interviews. Flanigan is a government, economics and financial literacy teacher at Brunswick City School District. 

In its fight for the restoration of a 3% COLA, the Ohio Retirement for Teachers Association, an advocacy group for current and retired educators, has criticized costs the system has taken on that they believe should have been used toward a COLA. 

Index funds and bonuses

Those costs include the system's investment management, particularly its staff of 115 investment professionals to manage the majority of the system's assets, bonuses paid to those staff, as well as the system's investments in real estate, private equity and other alternative investments in asset classes that total a target of 29% of the system's assets. 

The reformers say index funds could provide better investment returns and lower costs that would enable the system to readopt the permanent COLA. 

Another controversy that erupted recently was the awarding of $11 million in bonuses to investment staff beating custom benchmarks for the fiscal year ended June 30, 2022, a year in which STRS, along with most institutional investors lost money.

Rudy Fichtenbaum, one of the current reform trustees and retired professor of economics at Wright State University, said in an interview: "Members really feel that we're paying big bonuses to people to do investing and with really no path that we can see toward keeping those promises." 

"One of the major issues that STRS faces is the problem of the cash outflows that we have but a lot of what people, I think, are very upset about is being told that everything is wonderful, everything is great, we're the best, there's nothing wrong and not admitting what people are feeling here," said Fichtenbaum. 

Fichtenbaum said that participants' anger over reduced benefits is the issue, and that STRS has not prioritized restoring those benefits like he believes they should. 

"We could do better with index investing although that alone is not likely at this point to solve our problem," said Fichtenbaum. 

STRS officials, meanwhile, say the returns have been strong. STRS spokesperson Dan Minnich said in a May email the system has calculated that, without the 2012 plan design changes, the system's funding ratio as of June 30, 2022, would have been 49.6%, down from 57.6% 10 years earlier. Instead, the spokesperson said, the funding ratio was 78.9% as of June 30, 2022. The system's funding ratio as of June 30, 2023, is not yet published. 

Minnich declined to comment for this story. 

For the 10 years ended June 30, the system chalked up an annualized net return of 8.6%, the eighth-highest return among the 79 public pension funds whose most recent fiscal-year returns have been tracked by Pensions & Investments as of Dec. 14. The annualized benchmark return was 8.3%. The system returned 7.55% the most recent fiscal year and 10.2% over the past five years. 

That benchmark, however, is a bone of contention for reform trustees. Fichtenbaum laid the blame on the pension fund's investment consultants for creating those benchmarks. The board in October voted to hire Meketa Investment Group to replace Callan as its general investment consultant following an RFP process. 

"I really do believe a pension plan, of course, needs investment consultants," said Fichtenbaum, "but it needs investment consultants that really know that who they work for is the board and not the staff." 

"I'm 100% for getting advice from people but I think we're the ones who really want to set the terms, meaning if people really think that active management is better, then prove it against real benchmarks, not custom benchmarks," he said. 

Fichtenbaum cited the Russell 3000 index as the one such benchmark he would prefer the system use rather than custom benchmarks. 

Cost cutting

Steven Foreman, another reform-minded trustee of the Ohio STRS board elected in 2022, said he is in favor of cutting costs as much as possible in order to be able to restore the COLA. 

"An example that keeps getting thrown up like it's frivolous and it's not, is the daycare (for STRS employees). The daycare ran in the red year after year after year in a system that was making a decision to not give teachers a COLA," said Foreman, "and it's been said to me, 'Well, closing that daycare isn't going to give the teachers a COLA.' Well, I didn't say it was. What I said was we have to make the cuts." 

"Everything needs to be looked at, and we can't make these decisions that aren't benefiting the members," said Foreman. "Everything needs to be for the benefit of members." 

"We have to turn the ship around at some point, and there are a lot of investment systems that hire a whole lot less employees, and there are a lot of investment systems that do index investing," Foreman added. 

Candidate points to Nevada

One of the few systems to chalk up higher return for the 10 years ended June 30 was the $58 billion Nevada Public Employees' Retirement System, Carson City, which returned an annualized net 8.9%, above its annualized benchmark return of 8.5%. 

On Nov. 15, board candidate Flanigan posted a YouTube video (which is no longer available) comparing Nevada PERS and Ohio STRS, displaying a chart proclaiming Nevada PERS as the "winner" based on having a staff of three investment professionals and higher one-year return; however the effective date of that return was not provided in the video and STRS had a higher 10-year annualized return in the chart she provided. 

While reformers tout moving to all index funds and cite the Nevada system's predominately passive public equity and fixed-income portfolio, the Nevada system still has a 12% target allocation to private markets, made up of equal target weights of 6% to private equity and private real estate.

According to the Nevada system's most recent investment report, the actual allocations to private equity and private real estate were 8.6% and 5.3%, respectively, as of Sept. 30. 

NVPERS Investment Officer Stephen Edmundson said they have kept the 12% target to private markets because it has added to returns and reduced total portfolio volatility. 

"We think it's a piece of the portfolio that's going to get us to our return objective efficiently," Edmundson said. 

Part of the issue for the reform movement is the definition of "fiscal integrity," and how the STRS board in previous years eliminated the COLA in order to preserve that integrity. 

Bob Buerkle and Dean Dennis, both members of the Ohio Retirement for Teachers Association, were the two lead plaintiffs in a 2019 class-action lawsuit against the Ohio State Teachers' Retirement System, alleging the board violated the state contract law in reducing the COLA to zero in 2017. 

That suit was dismissed in 2021 and a new lawsuit, which is still ongoing, was shortly refiled. It alleges the board violated the contractual obligation of the COLA, and that the state of the system was not as dire as stated. 

The text of the suit states that STRS' funding ratio as of July 1, 2017 — when the zero COLA took effect — was 75.1%, higher than the 72% average among U.S. public pension funds at that time. 

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Read the rest of the article here.

A reader in St. Paul, MN reports on STRS-owned (and empty) real estate in his city

Letter to the Toledo Blade

January 11, 2024 

STRS investment a problem in St. Paul 

One might wonder why a resident of St. Paul would have more than a passing interest in articles editorials, and complaints critical of STRS-Ohio. 

It’s because STRS-Ohio’s real estate holdings have been affecting the quality of life here on Grand Avenue in St. Paul, and not for the better.

Simply put, STRS-OHIO is an absentee landlord of the worst kind. 

Grand Avenue is a mixed residential and business neighborhood. Its goal is to be a destination for those looking for unique shopping experiences featuring small shops and dining that distinguishes it from suburban malls.

Recently two businesses on Grand Avenue closed. A restaurant, Salut, and the retail outlet Pottery Barn. What do they have common? 

STRS-Ohio hastened their demise by exorbitantly raising their rents. 

So now there will be two more empty spaces and storefronts which will join over five other empty properties on Grand Avenue.

Those buildings are all owned by STRS-Ohio.

Some of these spaces have been vacant for years. 

Perhaps STRS-Ohio should explain to its teacher members how creating empty storefronts in other states helps increase their pension fund?

But explanations from STRS-Ohio have been hard to get. Community organizations and Minnesota media have attempted to contact STRS-Ohio, but STRS-Ohio has arrogantly refused comment. 

I am not surprised to learn there are many teachers who are questioning the handling of their pension funds and why a group STRS Watchdogs Ohio is needed, per The Blade’s Dec. 20 editorial, “Keep public comment.” I urge members to tell STRS-Ohio to divest their Grand Avenue holdings. 

Teachers are community builders. Their money should not support hollowing them out. 

RICHARD MENSING

St. Paul 

Editor’s note: The Blade asked for and received a response from STRS: “STRS Ohio has maintained an ownership interest in four buildings located on Grand Avenue in St. Paul, Minnesota, since 2006. These buildings are professionally leased and managed by Minneapolis-based companies and have averaged high occupancy during this time. We are working to lease available space consistent with our 18 years of ownership history.” 

Dan Minnich

Chief Communication Officer, STRS Ohio

Wade Steen to Ohio's Teachers: "Please know that I will never stop advocating for Ohio’s teachers both retired and active and will not cease in my effort to be returned to the STRS Board."

Posted on ORTA's blog

January 11, 2024

Wade Steen: Message to Ohio's Teachers

January 11, 2024

To Ohio’s Teachers -

I have been thinking a lot about all of the outstanding people who have chosen to be teachers now that classes have begun again for probably every school in Ohio. (including my daughter) I just want to say Thank you! I can truthfully say that this past year has been one like no other for me. Thank you so much for always having my back and supporting me through this challenging time. Your support has given me the confidence to continue to “fight the good fight”. Please know that I will never stop advocating for Ohio’s teachers both retired and active and will not cease in my effort to be returned to the STRS Board.

Teachers don’t get into teaching for fame and money, they do it to make a difference in students’ lives. As I have stated before it was the teachers that I was blessed to have while a student in the Fremont public schools that made all the difference for me. I owe, in large part, anything I have been able to achieve to all of them.

Best wishes for a great 2024! May peace, love, and prosperity follow you and your family always.

Your friend,

Wade

~     ~     ~     ~     ~

 From ORTA: For any of our new followers, who are not aware of Wade Steen's removal from the STRS Ohio Retirement Board by Governor Mike DeWine in May 2023, and Steen's continuing legal battle for reinstatement, this article is a good place to begin, written by Marty Schladden, Ohio Capitol Journal, May 9, 2023: Just as dissidents achieve majority on pension fund board, DeWine removes one. 

How can you help? Donate to ORTA's Pension Defense Fund to help pay for Wade Steen's legal expenses.

ORTA announces endorsement of Michelle Flanigan for STRS Board

From Dean Dennis, President

Ohio Retirement for Teachers Association

January 11, 2024

ORTA ANNOUNCES ENDORSEMENT OF MICHELLE FLANIGAN

As President of ORTA, I am happy to announce that ORTA’s STRS Board Endorsement Committee has endorsed Michelle Flanigan for the contributing (active) seat for the STRS Retirement Board. Active teachers will be voting to fill this seat April of 2024.

Michelle has worked as a Government, Economics and Financial Literacy teacher at Brunswick City Schools for the past 26 years. She worked as a financial analyst at American Greetings prior to becoming a teacher. ORTA was looking for a candidate who could analyze pension finances and advocate for the restoration of pension benefits in a responsible manner. During the interview it was clear Michelle had a strong grasp of finances and would be serve as an excellent fiduciary for our members.

Edward Siedle extols the virtues of Facebook as "a powerful force to combat looting of America’s pensions by Wall Street and corrupt politicians"

Pension Warriors by Edward Siedle

January 9, 2024

Facebook Public Pension Groups Replace Unions, Protecting Worker Retirement Savings

Facebook groups organized by public pension participants are increasingly doing the work unions should exposing looting and mismanagement.

My experience in 2021, conducting a forensic investigation of the $90 billion State Teachers Retirement System of Ohio on behalf of the 20,000 member-strong Ohio Retirement for Teachers Association, convinced me that Facebook groups organized by pension participants can be a powerful force to combat looting of America’s public pensions by Wall Street and corrupt politicians.

In Ohio, two Facebook groups, Ohio STRS Members Only Forum (36,000 members) and the STRS Ohio Watchdogs (14,000 members) are vigilantly working to expose gross mismanagement at the STRS Ohio pension, as well as pushing for reform at the combative, highly secretive fund.

This past week, I was introduced to another vibrant Facebook group pushing for reform of the Minnesota state pension system. While the name of the group, Pension Reform for Tier II Minnesota Public Educators, may not be catchy, with nearly 19,000 members it also appears to be emerging as a formidable advocate.

Combative and secretive, our nation’s state and local government pensions more-often-than-not treat pension participants demanding transparency and accountability as the enemy. While unions fail to effectively advocate on behalf of workers and retirees, Facebook groups are emerging as powerful forces to protect retirement savings.

Combative and secretive, our nation’s state and local government pensions more-often-than-not treat pension participants demanding transparency and accountability as the enemy. While unions fail to effectively advocate on behalf of workers and retirees, Facebook groups are emerging as powerful forces to protect retirement savings.

Facebook Has Long Been Criticized  

Long before U.S. intelligence agencies identified Facebook as a battlefield for information warfare and foreign interference in the 2016 election, the company was criticized for the harm it did including failing to stop the spread of extremism, hate speech, propaganda,

 disinformation, and conspiracy theories on its site. The 2012 post Top 10 Reasons Why Facebook Is The Devil includes alleging “it does nothing but incite envy, fake-ness, impulsivity, over-disclosure, jealousy, rage, picture-taking, hatred, loneliness and desperation.”

In 2020, Adrienne LaFrance in The Atlantic wrote, “In recent years, as Facebook’s mistakes have compounded and its reputation has tanked, it has become clear that negligence is only part of the problem. No one, not even Mark Zuckerberg, can control the product he made. I’ve come to realize that Facebook is not a media company. It’s a Doomsday Machine.”

I have written about being suspiciously blocked by Facebook from posting my widely disseminated Forbes articles in pension group discussions for somehow “violating community standards.” How can an article about pensions suitable for publication by Forbes.com violate a pension group’s community standards? Requests for explanation or reconsideration have gone unanswered by Facebook.

I also exposed an apparently fake Facebook account that was attempting to discourage Ohio government workers from donating to a GoFundMe campaign to conduct a forensic investigation into potential mismanagement at the $100 billion-plus Ohio Public Employees Retirement System (OPERS).  The fake Facebook account later disappeared without explanation, following my complaints to the company.

• Facebook Emerging As Force for Pension Good 

On the other hand, my experience conducting a forensic investigation of the State Teachers Retirement System of Ohio on behalf of the 20,000 member-strong Ohio Retirement for Teachers Association has convinced me that Facebook groups can be a powerful force to combat looting of America’s pensions by Wall Street. In Ohio, two Facebook groups, Ohio STRS Members Only Forum (36,000 members) and the STRS Ohio Watchdogs (14,000 members) are vigilantly working to expose gross mismanagement at STRS Ohio identified in a forensic investigation I completed.

This past week, I was introduced to another vibrant Facebook group pushing for reform of the Minnesota state pension system. While the name of the group, Pension Reform for Tier II Minnesota Public Educators, may not be catchy, with nearly 19,000 members it also appears to be a formidable advocate. In the group’s words:

“The purpose of this group is to champion an effort to improve pension benefits for educators hired after July 1, 1989. These educators are in Tier II.”

We call on all involved parties – Governor Walz, the Minnesota Legislature, Education Minnesota leadership, and the SPTRFA and Teachers Retirement Association (TRA) Boards – to contribute to improving Tier II pension benefits based on the following facts:

- The state currently has a budget surplus of over $17 billion, and the retirement fund had an investment return of over 30% in FY21. Now is the time to move forward.

- The rights of post-July 1, 1989 hires were sacrificed when financial times were tough. Restoring those rights should be a top priority now that times are relatively good.

- Teachers who have taught 30+ years deserve to be able to retire without a reduction in benefits, especially after having taught through a pandemic.

- A better Tier II pension system would serve as a recruitment and retention tool, and diversifying the pool of future teachers.”

It’s no secret that  increasing most of our nation’s public pension funds are grossly underfunded. Not surprising, the single greatest concern of pension participants today is whether the pensions they rely upon for their retirement security are prudently managed and if pensioners will receive all the benefits they have been supposedly promised.

While for over two decades I have implored unions to get actively involved in scrutinizing the management of pension investments—serving a watchdog function which pension boards are ill-equipped to perform—rarely have I been successful in persuading these unions that the best way to preserve pensions is to expose and address problems, not hide them. Unions tend to believe that any criticism of pensions will only lead sponsors to no longer offer them to workers.

Unions tend to believe that any criticism of pensions will only lead sponsors to no longer offer them to workers.

According to Dean Dennis, President of ORTA, “Traditional unions are supported by active teachers and focus on their issues. The problems at STRS Ohio are broader because they also affect retired teachers’ COLAs and the general public, including taxpayers. However, we are well aware that active teachers are working longer and receiving less for their contributions. I would encourage teachers nationally who are concerned about their retirement security to take action on their own—like we did—and not rely upon unions to watch over their pensions.”

“I would encourage teachers nationally who are concerned about their retirement security to take action on their own—like we did—and not rely upon unions to watch over their pensions,” says Dean Dennis, President of ORTA.

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