International Investor: Ohio Teachers’ Outgoing Executive Director Defends Fund’s Position After Months of Turmoil

Ohio Teachers’ Outgoing Executive Director Defends Fund’s Position After Months of Turmoil

Lynn Hoover says the $95.3 billion pension fund “is going in the right direction” following months of controversy stemming from a fight to reinstate COLAs.

Institutional Investor
James Comtois
October 31, 2024

After months of controversy, the Ohio State Teachers Retirement System could be turning a corner. At least, according to its outgoing executive director Lynn Hoover, who said that the “fund is going in the right direction.”

“We’ve made very hard decisions,” she told Institutional Investor, adding that she believes the fund is now well managed and has some of the top returns among pensions in the country. (The pension fund returned 10.5 percent net of fees for the fiscal year ended June 30, slightly below its benchmark of 10.75 percent.)

At its October meeting, the $95.3 billion pension plan’s board selected Global Governance Advisors as its new governance consultant after a brouhaha involving one of the finalists and conflicts of interest. Additionally, it approved a $306 million supplemental payment to retirees.Both of these moves follow months of turmoil for STRS, which has faced corruption allegations, state investigations, internal conflict, accusations of fund mismanagement, and numerous senior staff departures — including the impending exit of Hoover, who announced her plan to retire December 1 after the board deadlocked on a no-confidence vote in senior leadership.

Some of the problems started a number of years ago. Hoover said the Ohio Retirement for Teachers Association, an advocacy group for retirees, has been a vocal critic that has stoked fear among retirees. “There has been an attack on the system for at least four years, during which a lot of misinformation circulated,” Hoover said, adding that this led to accusations leveled against staff and trustees of fraud and incompetence. “We’ve been navigating a communications crisis from this system.”

To assure the public and beneficiaries, Hoover and her team have reviewed its controls and undergone audits and multiple investigations. She said the vetting “confirmed that our controls and processes are solid.”

Robin Rayfield, executive director of the advocacy group, denied spreading misinformation, saying “anything they don’t agree with is misinformation.” According to Rayfield, what the group wants transparency — and for the plan to stop paying for actively managed investment strategies, including alternatives.

According to Hoover, much of the conflict stems from debates over cost-of-living adjustments (COLAs) for retirees. When STRS was nearly fully funded in the late 1990s, the board had approved significant benefit increases  for participants, including an ongoing 3 percent COLA. But decades later, market volatility, changing demographics, and a stagnant contribution rate made these benefits unsustainable, even during periods of low inflation.

So, in 2017, the board cut COLAs to zero, which has been a source of tension, particularly as some elected board members have campaigned on promises of COLAs and reduced service requirements.

While the board had approved a plan to offer a 3 percent increase in 2023 and 1 percent in 2024, Hoover pointed out that permanent ongoing COLAs would add approximately $21 billion in liabilities, which she maintains is not sustainable for the system. “Ongoing repeating COLAs are very expensive,” she emphasized.

Even one of the plan’s former consultants agreed that all the chaos stems from the COLAs. “It’s a money grab,” Stephen Nesbitt, CEO of STRS’ former alternatives consultant Cliffwater, told Institutional Investor. “Everything else is just a red herring.”

Nesbitt added that Cliffwater chose not to rebid for STRS’ business, citing irreconcilable differences. “We couldn’t work with these so-called progressive board members,” he said.

Since announcing her intention to leave, Hoover has spoken with Ohio legislators about introducing a bill to raise employer contributions, which haven’t increased since 1984 and require legislative approval. While current election cycles and an upcoming lame duck session may delay immediate action, Hoover sees opportunity with the new Ohio General Assembly in 2025.

While Rayfield acknowledged that STRS cannot currently afford to pay the COLAs, he suggested that “doing away with the active management of our portfolio” and transitioning to passive strategies “would move the needle significantly and give us a better return” — though he admitted he isn’t an expert in finance or investment.

Like many advocates for passive investing, Rayfield argued that index funds would yield similar returns but at a fraction of active management’s cost. He expressed particular concern about alternative investments, which comprise approximately 20 percent of STRS’ portfolio as of June 30, citing the lack of transparency in the value of assets and fees. Rayfield conceded that his proposed solutions — switching to passive strategies and suspending staff bonuses, which the board agreed to do in June — would not bridge the funding gap.

Nesbitt, whose consulting practice focuses on alternatives, believes that this proposed move will hurt performance, since alternatives can provide excess returns.
“Alternatives have returned more than a passive mix. You need qualified staff to support alternatives,” Nesbitt said. “You can’t index alternatives.”

The system continues to face challenges, experiencing a negative net cash flow of $3.5 billion to $4 billion per year. But Hoover maintains that the fund is fiscally strong and responsible. As a result of its sustainable benefit plan — a framework for the board to assess the cost of potential member benefit changes every year, the system has paid over $4 billion in benefit changes for active members and retirees since the plan was implemented. According to STRS’ actuarial consultant Cheiron, the plan’s funded status saw an uptick, thanks in large part to fiscal year 2024 investment returns. The plan’s funded ratio increased to 82.8 percent from 81.3 percent. The funding period also improved, decreasing to 10.1 years from 11.2 years in the previous year’s report.

“I think that when you look at where we are, we’re at the cusp of continued future benefit changes for our members, so we’re absolutely going in the right direction,” Hoover added.

Read the article online here.

Toledo Blade: The STRS board has no more important mission than to implement policies that make it clear the fortunes of the staff and the beneficiaries are linked.

THE BLADE EDITORIAL BOARD

October 31, 2024

Editorial: Bonus for beneficiaries

Bonuses have a bad name with retirees of the State Teachers Retirement System of Ohio, but not when the benefits finally swing their way.

The STRS board approved a supplemental benefit that will add $1,720 to the average retired teacher’s pension for 2024. (“Retired Ohio teachers to get 1-time benefit,” Oct. 18.)

The cost to the pension system is $306 million. That leaves $572 million available for the STRS board to implement a permanent cost-of-living adjustment.

The STRS board will make that decision next spring.

There has been no bigger disconnect between STRS retirees and STRS staff than the lack of COLAs for beneficiaries while the pension investment staff routinely collects annual bonuses for performance measured against benchmarks below market returns.

STRS is quick to remind retirees the extra income they’ll receive this year is not guaranteed to last. The same conditions extend to the staff bonuses that often add six-figure sums to the pay of STRS investment staffers.

It’s unlikely that the STRS board will bring back the annual COLA when they are in the midst of a years-long effort to convince the General Assembly to raise the taxpayer contribution to the pension by 28.5 percent.

Paying a permanent COLA doesn’t fit the narrative of a fund in need of a large bailout from taxpayers. But paying staff lavish bonuses, even in a year the fund lost $5 billion, is just as politically foolish.

The STRS board should formally link supplemental payments to retirees with bonuses for the investment staff. In a year without an income boost for pension beneficiaries, there can be no bonus paid to investment staff, a policy that would calm the waters at STRS.

Angry teachers have been rightfully convinced the STRS staff actively works against their interests for personal benefit. If the board connects bonuses to supplemental benefits the interests of staff and retirees will harmonize.

The distrust of STRS staff by STRS retirees and the reform board members they have elected will surely be a factor in the nationwide search for a new executive director and chief investment officer.

The STRS board has no more important mission than to implement policies that make it clear the fortunes of the staff and the beneficiaries are linked.

Read the article online here.

Columbus Disparch: Is there a conspiracy at the state teachers' pension fund? Former board member thinks so

Is there a conspiracy at the state teachers' pension fund? Former board member thinks so

Columbus Dispatch
October 28, 2024
By Laura Bischoff 

A former teachers' pension board member is suing two other former board members, alleging they are part of a "civil conspiracy" that stymied his quest to investigate the retirement system's failings.

It's the latest twist in a long-running drama over who controls the 11-member board for the State Teachers Retirement System of Ohio.

Former board member Wade Steen filed a lawsuit in Franklin County Common Pleas Court last week against Brent Bishop and Brian Perera. Gov. Mike DeWine reappointed Steen as an investment expert in November 2020. But in May 2023, he removed Steen and appointed Bishop. When Bishop resigned, DeWine put Perera on the board.

Steen waged a successful legal fight to return to the board in April 2024 but his term expired in September.

Steen paints himself as an investigator, seeking answers as to why STRS's investment returns fell short and the system couldn't pay out consistent cost of living adjustments for retired teachers.

His removal from the board came in the midst of his investigation and on the cusp of Steen gaining a majority of votes on the board, according to his new lawsuit

In his new lawsuit, Steen alleges that Perera, Bishop, STRS staff, the governor's office and the attorney general's office conspired against him.

Ohio Attorney General Dave Yost filed a lawsuit against Steen and STRS Board Chairman Rudy Fichtenbaum, alleging the two violated their fiduciary responsibility to the pension fund.

The STRS board oversees roughly $95 billion invested on behalf of 500,000 current and former teachers. It is one of five public pension systems in Ohio.

In his lawsuit against Bishop and Perera, Steen wants more than $50,000 for emotional distress, reputation damage, foregone expense reimbursements and attorney fees.

An outside lobbying group covered $114,000 in legal fees for Steen and Fichtenbaum. The payments could conflict with state ethics laws.

The STRS board has faced infighting and turmoil over the past few years. Retirees are angry over the elimination of cost-of-living allowances, a perceived lack of transparency and the payment of bonuses to pension investment staff despite investment losses.

The turmoil contributed to a $1.65 million exit package for former STRS director Bill Neville, a decision to retire by interim director Lynn Hoover and a decision to retire by chief investment officer Matt Worley.

Read this story online here.

Lima News/Newsbreak: STRS plans one-time inflation payouts to retirees

Lima News

October 25, 2024

By Mackenzi Klemann,3 days ago   

STRS plans one-time inflation payouts to retirees

LIMA — The State Teachers Retirement System will distribute one-time supplemental benefits to retirees in December as inflation relief, the pension fund’s acting executive director said during a town hall in Lima on Wednesday.

The STRS board approved the one-time supplemental payments during its October meeting to assist retirees with “inflation and the economic realities that are affecting many of us,” said Lynn Hoover, acting executive director and chief financial officer.

The $94 billion pension fund, whose 545,000 members include 156,000 retirees and 174,000 teachers currently paying into the system, is in turmoil amid resignations and a lawsuit from Ohio Attorney General Dave Yost.

Hoover visited the Lima Public Library on Wednesday to reassure retirees and teachers their pensions are “safe and secure.”

“Your monthly pension will hit your account every month,” she said. “Our plan is better off than we’ve been in some time.”

Retirees who started receiving benefits from the STRS in or prior to January should receive a one-time supplemental payment by mid-December.

Benefits will be calculated at an estimated rate of $40 per year of service and each full year of retirement, Hoover said.

STRS will notify eligible retirees next month.

Retirees have not received a cost-of-living adjustment since the STRS board approved a 1% adjustment in May 2023. The board approved a 3% cost-of-living adjustment and lowered the retirement age in March 2022.

Members may now collect reduced benefits after 29 years of service and full benefits after 34 years.

The STRS board will consider another cost-of-living raise next spring, Hoover said when asked if the one-time inflation payments will replace a cost-of-living adjustment this year.

Hoover said the supplemental benefits have a shorter waiting period than cost-of-living adjustments, and payouts are greater for retirees who have been out of the workforce the longest.

Read this article online here.