Editorial: Make pensions transparent

Toledo Blade
The Blade Editorial Board
May 22, 2023

Senate Banking Committee Chairman Sherrod Brown, (D., Ohio) is on the right track in demanding more legally required disclosure from shadowy private equity funds in which Ohio’s public pensions have way too much invested.

Mr. Brown and seven fellow Democrats have written to Securities and Exchange Commission Chairman Gary Gensler asking for quick work on a rule to bring necessary transparency to private equity financial reports.

Private equity managers have nearly $14 trillion, mostly supplied by public pensions like Ohio’s five funds which have $28.6 billion invested in this asset category. In theory, private equity funds buy businesses, make management improvements, and sell for a profit.

Mr. Brown is properly skeptical of private equity asset valuations which have been far out of step with all other market indicators. The SEC is proposing requirement of an annual outside audit to verify values the private equity firms now provide without oversight.

The Ohio Police & Fire Pension Fund reported a 54.5 percent gain in private equity in the last year. All other Ohio pensions claim gains above 20 percent except the Ohio Public Employees Retirement System which reported a more realistic 4.79 percent loss.

These are hard to believe as the stock market value of private equity giants fell dramatically.

“Because private fund advisers’ fees are calculated based on fund asset valuations, the accuracy and transparency of fund asset valuation practices is crucial to prevent overcharging of investors and to mitigate conflicts for private fund advisers,” Mr. Brown wrote.

Inflated claims of performance are used to justify the fees and expenses that are paid to private equity managers. Since 2018 OPERS has paid its private equity fund managers almost $1.3 billion.

Private equity managers typically take 20 percent of a fund’s investment profit. In the last five years OPERS has provided those fund managers $608.2 million. The conflict of interest Mr. Brown details is obvious when you understand those profit shares were based on valuations set by the fund managers collecting the bonus.

There has been no transparency requirement on private equity because large investors like Ohio’s pension funds are assumed to be sophisticated and have no need for protection by the SEC.

But the beneficiaries of these pensions and the taxpayers who fund them are endangered financially by untrustworthy financial statements.

Friday, OPERS reported a $16 billion loss on investments and a decline in assets of $20.2 billion. That’s with a private equity valuation that is significantly better than the overall market and provided by managers with a massive conflict of interest.

There is a shortfall in the public pensions that Ohio taxpayers are being asked to fill.

The true extent of the problem cannot be established when pension financial reports cannot be trusted.

It is wise that Senator Brown is making a federal issue out of it.

Editorial: Bonus battle postponed

The Toledo Blade

The Blade Editorial Board
May 20, 2023

The State Teachers Retirement System of Ohio board may think it can dodge the controversy over the removal of a reform-oriented board member and paying huge bonuses to undeserving staff by postponing the decision.

That’s what it did on Thursday when the STRS trustees held its eagerly awaited meeting in Columbus.

STRS Trustees made no decision on controversial investment staff bonuses totaling more than $11 million. That explosive issue will provide the fireworks for the June board meeting, and the issue isn’t going away.

The May meeting was papered with teacher protest signs asking “where’s Wade?”

Wade Steen, the first major critic of STRS investment strategy, appointed by Gov. John Kasich and reappointed by Gov. Mike DeWine, was dumped from the board by Mr. DeWine over howls of outrage from teachers.

The law says Mr. Steen was appointed to a term which expires in 2024. His attorney Norman A. Abood of Toledo warned the STRS Board any action taken was “ineffective regardless of the presence of a quorum.”

Mr. Steen intends to force a court ruling on whether the governor’s appointee serves solely at the governor’s pleasure. Mr. Steen consistently criticized payment of large bonuses to investment staff when STRS retirees received no COLA.

Mr. Steen’s skepticism on STRS asset values was based on solid evidence provided by transparent markets.

As The Blade pointed out during last year’s STRS bonus battle (“Ohio pension results hinge on private equity,” Aug. 21), all Ohio pensions including STRS reported huge private investment gains when its outside investment managers were valued on Wall Street billions of dollars less.

Large bonuses to pension investment staff based on fictitious asset values is a cruel joke to STRS beneficiaries forced to pay more and accept less to bailout its retirement fund.

Bonuses should also be an outrage to taxpayers when they discover STRS is working with lawmakers in an attempt to raise schools’ contribution to the pension from 14 percent of salary to 18 percent.

Under current investment strategy any extra taxpayer funds will go straight to Wall Street. In the last two years STRS has paid outside fund managers $504,998,393. Claimed asset values have fallen by nearly 10 percent and the near $10 billion decline is despite make-believe asset valuations.

The entire debate over STRS bonuses ignores (“Act on STRS Audit,” Jan. 2) the finding of State Auditor Keith Faber’s special audit, showing a low cost S&P 500 index would have returned $90 billion more since 2009 than STRS current investment strategy.

Moreover, as the STRS compensation consultant made clear, index investing eliminates bonuses and the need to compete for staff with Wall Street.

The STRS Board passed a statement of investment beliefs as called for in its recent fiduciary audit. The beliefs are basically boilerplate language about prudent financial management.

But acting upon the recommendation recalls the lack of action regarding bonus benchmarks in the 2006 fiduciary audit.

That document said that staff bonuses should reflect exceptional performance that can be easily documented. The recommended bonus benchmark was the Russell 3000 total market index plus 5 percent.

By that measure, STRS would never have paid bonuses. If the fund had been invested to minimize costs in an index fund rather than maximize gain with Wall Street, annual COLA’s would never have stopped.

STRS puts staff before beneficiaries and taxpayers.

Mr. Steen’s ouster was provoked by confronting this malfeasance. 

Editorial: Focus on performance

The Blade Editorial Board

May 15, 2023

Ohio’s Retirement Study Council is supposed to safeguard the retirement assets of the state’s five public pension funds.

Close observation over an extended period leaves us with little confidence they are up to the job.

It’s a critical job. Ohio’s pensions hold over $250 billion for more than 2 million public workers who are currently paying, formerly paid, or are collecting retirement benefits. Because Ohio public workers do not pay Social Security, the state system is all they can count on for retirement income.

On Thursday, the ORSC questioned State Teachers Retirement System leadership on the highly controversial plan to pay performance incentive bonuses totaling more than $11 million to investment staff.

Multiple members, including Sen. Paula Hicks Hudson (D., Toledo), prefaced their questions with admissions of ignorance on investment management. Ideally, such an important oversight body would appoint members with some degree of expertise.

But it takes no expertise whatsoever to understand the key fact on STRS.

State Auditor Keith Faber’s special investigation of STRS featured an easy to understand performance chart.

Since 2009 STRS has underperformed the results of an S&P 500 index by $90 billion. Incredibly, Ohio is paying STRS staff performance bonuses when they have demonstrably destroyed value.

If STRS had no investment staff and put the entire portfolio into an index it would literally have doubled the money it has now, according to Mr. Faber. STRS would also have paid a fraction of the fees they do now.

There is no better illustration of ORSC incompetence than discussion without resolution on $11 million in bonuses, while ignoring $90 billion in unrealized investment gains.

STRS has a $20 billion liability, has frozen cost-of-living-adjustments since 2017 and is pushing legislation to increase the amount school districts — taxpayers — contribute to the pension.

Meanwhile, the report that shows STRS could have a $70 billion surplus has prompted no action by the General Assembly or the governor.

Financially, $11 million is inconsequential to STRS. The bonuses are important only as an indicator of self-serving mismanagement, made possible through the abdication of responsibility by the legislative and executive branches of Ohio government.

Ninety billion dollars should be impossible to ignore for even the most naïve Ohio legislator. Fifty percent of possible performance is also simple to understand. Fees of pennies on the dollars now spent are also uncomplicated.

If the Ohio Retirement Study Council does not act upon this information, who will?

Click here to read this editorial online.

FOR IMMEDIATE RELEASE

May 8, 2023

STATEMENT FROM STRS BOARD MEMBER WADE STEEN

"I believe that Mike DeWine would never knowingly do anything inconsistent with Ohio law. The attempt to revoke my appointment by a staff member was a clerical error. I am confident the Governor will step in and fix this issue. The reform movement that has been talked about at the State Teachers Retirement System of Ohio (STRS) is being driven by teachers. Ohio educators have elected new members or “reformers” in each of the last five elections over the last few years. Change at STRS has been a slow and deliberate process. Ohio educators would never do anything to harm their pension.

I am disappointed that a staff member sought to revoke my appointment to the STRS Board after I declined to immediately resign. I have been advised that I serve for the term for which I was appointed and not at the pleasure of the appointing authority. I greatly respect Governor Mike DeWine and would ask to work with his office to improve the lives of Ohio teachers. During my seven-year tenure on the board I have been an unrelenting advocate for all STRS members - contributing and retired teachers. I will be advocating for teachers until my term ends on September 27, 2024."

Background: The 11-member STRS board is composed of seven teacher-elected members (five active teachers and two retired teachers) and four members appointed by various state officials. ORTA-supported reform candidates overwhelmingly have won the last five board elections, including the announcement made on Saturday, May 6th that pro-reform candidate Pat Davidson defeated incumbent Arthur Lard in a landslide (70 percent to 30 percent.) Wade Steen, as the Governor’s appointee, also supports reform efforts. As a result of this spring’s election, reform board members will constitute a majority of the 11-member board when Pat Davidson is sworn in on September 1st.

On Friday, May 5th the Governor’s office notified Wade Steen that his appointment to the STRS board was revoked after he refused the request for him to resign. Wade Steen responded that the Governor’s office does not have the legal authority for such action per Ohio law.

# # #

Is OEA Misleading Active Teachers?

By Dean Dennis & Cindy Murphy

March 26, 2023

The April 2023 election for one contributing seat on the STRS Ohio Retirement Board is currently a hot topic on social media. The Watchdogs want to share with active teachers a serious misrepresentation on the part of the Ohio Education Association.

First, and most important, are the Minutes of the March 17, 2022, meeting of the STRS Ohio Retirement Board.

Following discussion, Mr. McFee moved, seconded by Ms. Herrington, that in accordance with the Board’s
actuary’s determination that these changes do not materially impair the fiscal integrity of the retirement system,
the Board should make the following benefit plan design changes.

1. Pursuant to the authority provided under Ohio Revised Code (RC) §3307.67(E), beginning July 1, 2022,
approve a one-time 3% cost-of-living increase be paid to eligible benefit recipients on their anniversary date
in fiscal year 2023.

2. Pursuant to the authority provided under RC §3307.58(B)(3), eliminate the requirement of age 60 scheduled
to go into effect August 1, 2026, pursuant to RC §3307.58 (B)(1)(c)(vii).

Upon roll call the vote was as follows: Mr. McFee, yes; Ms. Herrington, yes; Ms. Correthers, yes;
Dr. Fichtenbaum, yes; Dr. Hunt, yes; Mr. Lard, abstain; Mr. Price, yes; Mr. Rhodes, yes; Mr.Roulston, yes;
Ms. Walters, yes. The motion carried.

Now that you have read the Board Minutes, what follows should be of interest to all active teachers.

Here's what OEA has posted about Arthur Lard on their website.

Note that OEA is stating that Arthur Lard “voted for the elimination of the requirement that members be 60 years old or older to retire and to approve a one-time 3 percent cost-of-living adjustment (COLA) for eligible retirees".

However, the Board Minutes reveal that, when he could have voted for these changes, Arthur Lard abstained.

The STRS Ohio Watchdogs believe that abstaining from an important vote to restore lost benefits for members breaches the responsibility that one would expect of a Trustee.

If re-elected to the STRS Ohio Retirement Board, will Arthur Lard continue to abstain from voting on issues that impact Ohio's active teachers?

March 16, 2023
Ohio State Teachers Retirement System had massive investment in failed bank

System already under scrutiny for huge bonuses after big losses

By Marty Schladen

Already under fire for high pay despite big investment losses, the pension system for Ohio’s retired teachers lost between $27 million and $40 million when Silicon Valley Bank failed last weekend. That appears to be by far the biggest investment by a public pension system in the United States.

The losses follow a nearly $10 million loss last year when cryptocurrency platform FTX failed, according to the Ohio Retired Teachers Association, a group that represents pension system members.

Click here to read this story online.

March 11, 2023

"You need to keep the promises to the people" - Keith Faber to ORSC

By Cindy Murphy

Keith Faber, Auditor of State, defended his Special Audit of STRS Ohio during the March 9th meeting of the Ohio Retirement Study Council (ORSC).

Key findings from Faber's written testimony:

• "A lack of transparency, whether actual or perceived, has spawned the distrust, misunderstandings, and accusations that made this special audit necessary."

• "It would be beneficial to revisit how or whether bonus payments are offered to investment staff"

• "STRS should strive to be as transparent as possible regarding the funds held in their trust. Reconsidering trade secret provisions that shield investment decisions from scrutiny would eliminate much of the distrust harbored by many beneficiaries toward STRS investment staff."

Faber made comments after his presentation, in response to questions from ORSC Board members. Watching the recording of the meeting, and using closed captioning, we did our best to accurately transcribe Faber's comments.

• "To avoid most of those concerns about alternative fees and structures, you get rid of alternative investments. And there is a proposal that we looked at that would do that. If you get rid of that, you're not going to have to worry about what you're paying fee managers."

• "You need to keep the promises to the people who were made reliance based on those promises. I said that when I was a legislator, I'll say it when I'm your state auditor. The fact of the matter is, is people who made reliances based on those promises, and structure their life accordingly, certainly as they approach receiving the benefits of those promises, as they approach retirement, should be entitled to the benefit of that bargain [sic]. And that's what this body is designed to do."

• "It would be beneficial to revisit on how or whether bonus payments should be made to investment staff. I think it's a fair discussion as to whether investment retirement plans should pay bonuses to investment staff. If you're going to have bonuses, you need to have a fair discussion as to what those bonus structures should be."

• "I think it is a very valid discussion to say bonuses can lead to other issues and maybe it is a better decision just to pay your investment staff at amounts that are necessary to get good people and frankly, firing people who don't hit their expected performance. Maybe that's a better strategy, but that's for you to decide, and for the plans' boards to decide."

• "And the one thing that we really flagged was that the benchmark in determining whether those bonuses are paid, was a benchmark that was made internally by STRS. The question is, should you use your own internal benchmark or should you use a national standard benchmark in making those determinations."

• "But candidly, it is a fair discussion to say you should just pay your investment personnel accordingly and not have 50% of their salary potentially made up of bonuses."

• "There's a big discussion about whether bonuses should be paid when you lose money."

• "Remember, the state is the financial guarantor of the plans, right? I'm looking for all the directors to shake their heads. That is the issue."

Watch Faber's testimony at https://www.ohiochannel.org/video/ohio-retirement-study-council-3-9-2023

February 16, 2023
Ohio teacher pension fund board not confident in executive director

By Maeve Walsh

The 11-member board of the State Teachers Retirement System is not confident in the pension fund’s leader.

In a split vote Thursday afternoon, the board rejected a motion to declare confidence in STRS Executive Director William Neville, who has presided over the $90 billion public teacher pension fund since June 2020. The final vote — five in favor, five against and one abstaining — fell short of the six votes needed to assert confidence in Neville.

“We have to have a change at the top,” said STRS board member Julie Sellers, who introduced the motion. “The problems that have been here have been here for years, and I just feel like we need to have a direction forward.”

Click here to read this article online.

February 11, 2023
Let’s Give Every Ohio Taxpayer $46,000

By Edward Siedle, Contributor, Forbes

All state pensions in Ohio have dramatically underperformed for decades due to rampant political corruption and gambling on Wall Street’s riskiest investments. State politicians have profited from Wall Street campaign contributions as active government workers and retirees have seen their benefits slashed. The staggering cost of this mismanagement amounts to $46,000 per Ohio taxpayer. That’s more than the state’s $34,500 average annual per capita income.

Doing nothing is not an option. If political corruption and mismanagement doesn’t stop, count on a transfer of wealth (greater than the average annual per capita income) from pension stakeholders continuing.

Click here to read Ted Siedle's article online.

January 28, 2023

"It's no surprise to find out the State Teacher Retirement System of Ohio lost nearly $9.5 million in the collapse of crypto currency FTX." - Toledo Blade

Prior to 1996, there was a list of permitted investments for Ohio's pensions

Then came S.B. 82

This post is directly related to the Jan 28th editorial by the Toledo Blade Editorial Board. 

• Senate Bill (S.B.) 82 was introduced on February 16, 1995, and was initially designed to create a health care fund for each of the five major state retirement systems. S.B. 82 underwent significant changes when it went to the Senate Education and Retirement Committee. Most notable were the expansion of the authority of the retirement systems to make investments, and the removal of the list of types of investments in which the systems were allowed by law to make. The result was the “prudent person” standard as it applied to investments made by the retirement boards which required investments to be made “… with the care, skill, prudence, and diligence … that a prudent person … would use in the conduct of an enterprise of a like character and with like aims … .”

• On March 27, 1996, the Senate voted to pass S.B. 82. The bill then proceeded to the House Health, Retirement, and Aging Committee on April 11, 1996. While the bill was in the House committee, Terrence Gasper, as chief financial officer of the Ohio Bureau of Workers’ Compensation, testified in favor of the bill’s provisions eliminating the list of authorized investments and retaining the “prudent person” language. Consequently, while the matter was before the House committee, language giving OBWC the same investment as the various retirement systems was added to the bill. This statutory change allowed OBWC’s administrator  2 ORC §4121.12(G) (2005). 3 Legislative Services Commission Final Analysis. 8 the authority to establish partnerships, trusts, limited liability companies, or corporations in order to further its investment strategy. An analysis of the bill as it left the House Health, Retirement, and Aging Committee stated, “The fiscal impact of the expansion of BWC’s investment authority would depend on the specific investment decisions that are made, and cannot be predicted at this time.”

• The finalized version of the legislation was signed by former Governor Voinovich on December 6, 1996.

• Ohio Retirement Study Commission (ORSC) analysis of Am. Sub. S.B. 82., which expands the investment authority of the five state retirement systems, the Bureau of Workers' Compensation, and the Ohio Tuition Trust Authority by abolishing the current "legal list" of pemissible investments and adopting the "prudent person" rule.

Here is ORSC's 1996 analysis of S.B 82: https://drive.google.com/file/d/11VgdSgkENPjNlxkFMHUheq38EBciASCJ/view?usp=sharing

...

For those of you who want to dig deeper into S.B. 82 (1996), which deleted the detailed list of permitted investments for Ohio's pensions, like index funds, here is a letter I received from ORSC, with links to relevant documents.

Ms. Murphy,

You asked about the “legal list” of investments the retirement systems were permitted to invest in prior to S.B. 82, which became effective March 7, 1997.

The detailed list of permitted investments is available in the version of R.C. 3307.15 effective prior to March 7, 1997.  I have attached a link to that document:  https://orsc.org/Assets/Bills/3307.15_1994_10_11_HB197.pdf

In comparison, the version of R.C. 3307.15 effective on and after March 7, 1997 deletes the majority of those restrictions, as can be seen here: https://orsc.org/Assets/Bills/3307.15_1997_03_07_SB82.pdf

Jeffery A. Bernard
Senior Research Associate
Ohio Retirement Study Council (ORSC)

January 28, 2023
Editorial: Follow Pa., not Texas

THE BLADE EDITORIAL BOARD

Ohio lawmakers meddling with investment practices of state pensions, universities, and the Bureau of Workers Compensation have done nothing but destroy value and create corruption since 1996.

That's when S.B. 82 removed investment restrictions lim iting Ohio investments to public and transparent markets.

Click here to read The Blade's editorial.

January 21, 2023
Active teachers: We need your help!

Collect nomination signatures for Pat Davidson for STRS Board

Nomination Petition: Pat Davidson for STRS Board

• Click on this link to download and print the petition: https://drive.google.com/file/d/1Wtj9aPDMYOn1rTtEmbYxPAnYPpmxLpiW/view?usp=sharing

• Collect signatures from contributing (active) members of STRS Ohio.

• Only contributing (active) teachers can sign the nomination petition.

• Each petition has spaces for 10 signatures.

• You are not required to have 10 signatures on a petition.

• You can turn in a petition with only one signature.

• The last four digits of the signer's SSN are required to verify that the petition signer is a contributing (active) member of STRS Ohio.

• Davidson must collect signatures from at least 500 contributing (active) members of STRS containing the signatures of at least 20 members from each of at least 10 counties wherein such members are employed.

Send your signed nomination petitions(s) to:

Robin Rayfield, Executive Director
Ohio Retirement for Teachers Association
250 E. Wilson Bridge Road, Suite 150
Worthington, Ohio 43085

Election Timeline

• Feb. 24, 2023: Deadline for nomination petitions

• April 3, 2023: Mailing of election ballots to contributing members

• May 1, 2023: Deadline for receipt of votes

• May 6, 2023: Certification of election results by board of tellers

• Sept. 1, 2023: Elected member’s term begins

January 18, 2023

Sign the Petition asking Treasurer Sprague to appoint a pro-teacher board member

As reported by The Toledo Blade, Editorial: A Revealing Appointment, there is a sudden vacancy on the STRS board as one of the anti-reform members just submitted his resignation from the eleven-member board.

State Treasurer Robert Sprague will be making a new appointment to the board at any moment.

Please join ORTA in encouraging Treasurer Sprague to appoint a board member who will join the five existing pro-reform members to fight for transparency and accountability.

Pro-reform board members are saying “NO MORE” to STRS accounting gimmicks, lack of transparency, misreporting of investment performance and unconscionable staff bonuses.

Click here to sign our petition calling on Treasurer Sprague to appoint a pro-reform board member!

Treasurer Sprague needs to hear how STRS mismanagement has resulted in lost COLA’s and broken promises for retired teachers.

He needs to hear how active teachers are being forced to pay more and work longer for less benefits.

He needs to know new leadership is needed at STRS.

Also join us in calling the Treasurer’s office at 614-466-2160 and emailing constituentaffairs@tos.ohio.gov to speak your mind.

Together we are making a difference.

January 14, 2023
Editorial: A revealing appointment

A commitment to the failing status quo or recommended reform?
By The Blade Editorial Board

Ohio Treasurer Robert Sprague, a Findlay Republican, has a very telling appointment to make. Mr. Sprague’s appointee to the State Teachers Retirement System, Scott Roulston, has resigned from the 11-member Board of Trustees and the treasurer must make a new appointment to fill the seat.

Mr. Sprague’s appointment will be judged as a commitment to the failing status quo or recommended reform. A half million teachers and nearly 5.8 million Ohio taxpayers have a big stake in Mr. Sprague’s appointee fulfilling the treasurers commitment to pension transparency.

Click here to read The Blade's editorial online.

ORTA's Teaching Tuesdays

Educational webinars for retired and soon-to-be retired teachers

The Ohio Retired Teachers Association is proud to announce a new educational webinar series for ORTA members! 

ORTA partnered with Association Member Benefits Advisors (AMBA) as the endorsed benefits advisor for members. These short webinars provide valuable resources and information about important topics like Long Term Care, Medicare, Medical Transportation and more.

There have been many changes with legislation, Medicare, Social Security for Ohio's retired teachers. There are many pitfalls you need to watch for so your decisions don't cost you money.

This program should be a must for anyone getting ready to retire or those who are retired.

Mark your calendar for the 3rd Tuesday each month at 9 a.m. for ORTA's Teaching Tuesday.

The talks are educational and informative: retirees often tell us they are thankful for the overview and knowledge they gain. Robin Rayfield will also be giving a brief ORTA update.

To register for the webinar on January 17th, click on the link below. Once registered you will receive webinar login information.

Registration link: https://ambabenefits.zoom.us/webinar/register/WN_mAtE8UChRSSSxpt9igN9pQ.

December 23, 2022

The Battle Over The Side-Letter Scam
Lobbyists and their congressional allies are trying to protect secret deals that can enrich Wall Street insiders at workers’ expense.

By Matthew Cunningham-Cook

“I have encountered side letters that I have forwarded to the SEC which stated that the manager of the fund agreed to waive fees to this particular investor as long as he stayed in the fund and promised not to tell anyone about fraud involving the fund. It’s conspiracy to commit fraud,” said Edward Siedle, a former SEC attorney who currently specializes in SEC whistleblower cases. “The point is anything can be in these side letters. They can give one investor certain liquidity rights that other investors don’t have. They can give knowledge of portfolio positions that other investors don’t have. They can give different fees. Unlike mutual funds where every investor is treated equally, in these funds, every investor can be treated differently.”

Click here to read this article online.

December 6, 2022

Ohio Teachers Pension Has No Comment Or Records Regarding Its Cryptocurrency Investments

By Edward Siedle

The $100 billion Ohio Teachers pension fund recently responded to a public record request from a former board member indicating it had no records in its possession regarding its cryptocurrency investments. Later, in response to a media inquiry regarding crypto investments identified in its portfolio, officials at the state pension responded, “No comment.” 

So much for transparency and public accountability.

Click here to read the full article online.

November 23, 2022

Effort to claw back $10M in staff bonuses for Ohio teacher retirement system withdrawn 

Bonuses were awarded just before news that the teachers’ fund lost $5.3B.

By Marty Schladen, Ohio Capital Journal

https://ohiocapitaljournal.com/2022/11/23/effort-to-claw-back-10m-in-staff-bonuses-for-ohio-teacher-retirement-system-withdrawn/

A board member of the State Teachers Retirement System of Ohio last week made a short-lived attempt to claw back $10 million in bonuses awarded in August to the system’s highly paid staff. He said he’s going to keep up the fight for reform.

Steven Foreman, one of 11 members of the Retirement Board, last Thursday made a motion to claw back the bonuses after the system’s investment losses for the preceding fiscal year turned out to be 71% greater than predicted. It was a $5.3 billion loss to a system with about $90 billion under management.

“I highly question if any of the $10 million in bonuses would have been paid had the board waited for the valuations to be reported,” Foreman wrote in a letter to board Chair Carol Correthers. “The staff took money and portrayed it as justified. 

November 3, 2022
Through the STRS Looking Glass

By Rudy Fichtenbaum

Last month, the day before the Board meeting, I sent an email to Board members in preparation for the Investment Committee meeting. On the agenda for that meeting was a discussion of STRS’s investment philosophy. Staff prepared materials with Callan’s assistance in which they asserted that our philosophy supports active investment. STRS’s “belief in active investment” is based on the claim that active investment outperforms passive investment. The investment staff and our consultants constantly talk about the value added by active investing.

The only verifiable benchmark that STRS uses is for U.S. equities. Beyond that all the other benchmarks are custom, and none of them get audited. The international equities are 50% hedged; without daily data on hedging, you cannot verify performance. Fixed income uses daily weights that only STRS has and cannot be verified. Real estate uses an index that does not include leverage. For alternatives, STRS has been using its own performance until this year. Look at the reports for Cliffwater, and you will see that they never beat the Russell 3000 +1% for private equity and Russell 3000 -1% for Opportunistic Diversified, which used to be the benchmark. Now STRS uses the Cambridge “indices”, which are not real indices because, for example, there is no data publicly available on say the largest 1000 private equity deals. What is being constructed by Cambridge is an “index” based on peer reporting.

I attached a spreadsheet to my aforementioned email to Board members that used calendar year data for the S & P 500 and a Bond Portfolio which uses 10-year Treasurys, Baa Corporate Bonds and 2-month T Bills with various weights for the bonds. I noted the sources of my data and explained in a fair amount of detail how I constructed 6 different 60/40 stock-bond portfolios using three different mixes of bonds. Each portfolio started with a 60-40 mix of stocks and bonds using three different mixes for bonds. Three portfolios started at 60-40 and changed through the year, ending at 70-30, which is about where STRS is today in terms of risk. The other three just stayed at 60-40.

Over 30-years, STRS loses to all six of these portfolios. The losses range between 44 and 94 basis points (bps) on an annual basis. (A bps is 1/100th of a percent, so 44 bps is 0.44%.) That is real money. The bottom line is that between 1992 and 2021, STRS did not beat a 60/40 portfolio of stocks and bonds i.e., a real passive benchmark. Moreover, even when the returns of these six portfolios are adjusted for risk, all six still outperformed STRS.

In 1992 STRS had about $30 billion in assets. My spreadsheet also showed the money lost over 30 years, all other things equal, was between $48 billion and $109 billion. Of course, I told the Board that I realized that all other things had not remained equal i.e., the amount of money we have in assets is a function of the rate of return as well as the burn rate -- the amount by which payments to retirees exceeds contributions. In fact, I would argue that the burn rate is our biggest problem. So, the calculation of money lost is meant to illustrate the magnitude of the losses.

The bottom line is STRS between 1992 and 2021 did not beat a 60/40 portfolio of stocks and bonds i.e., a real passive benchmark. Moreover, each of these portfolios have risk adjusted returns that exceed that of STRS.

Like most pensions, STRS beats the benchmarks it constructs. But it does not beat a real benchmark, i.e., a passive benchmark that is investable and transparent.

This is a classic example of the principal-agent theory in economics where staff and consultants benefit from active investing by creating benchmarks that they can beat, allowing staff to get bonuses while consultants get their contracts renewed. They rely on complexity and the fact that most of us are not investment experts. I believe most members of the Board have good intentions. Unfortunately, as the old saying goes, the road to hell is paved with good intentions.

I am not alone in believing that STRS does not beat a passive benchmark.

Richard Ennis just sent me a paper entitled "Lies, Damn Lies and Performance Benchmarks: An Injunction for Trustees.” It will appear on LinkedIn, SSRN (an outlet for scholarly research before it appears in scholarly journals) and eventually appear in the Journal of Investing. For those of you not familiar with Richard Ennis, here is a short bio that appears on his blog.

Richard M. Ennis, CFA, managed money at Transamerica and pioneered quant investing in the early 1970s. He helped create the field of institutional investment consulting at A.G. Becker & Co. Richard co-founded EnnisKnupp, the first consultancy to be recognized as a professional services firm. During his career Ennis received lifetime achievement awards from CFA Institute and Investment Management Consultants Association. His research won Graham & Dodd and Bernstein Fabozzi Jacobs Levy Awards. He edited Financial Analysts Journal. He and his wife, Sally, retired to Sanibel Island, Florida, upon the sale of his firm to Aon in 2010.

One of the main points that Ennis makes in this paper is that most pensions report outperforming their benchmarks, but they do not use real benchmarks to measure their performance. They use custom benchmarks that exhibit benchmark bias. In his paper he explains a passive benchmark must be investable and fully transparent.

Richard Ennis has also done an analysis of STRS’s performance constructing benchmarks used in the article "Cost, Performance, and Benchmark Bias of Public Pension Funds in the United States: An Unflattering Portrait”. In this article Ennis constructs benchmarks for each pension he looks at using three indices: U.S. Stock, non-U.S. stock, and an aggregate U.S. bond index. The methodology he uses was developed by William Sharpe, Emeritus Professor of Finance and Stanford and winner of the 1990 Nobel prize in economics. Although STRS OH was not included in the article, in an email to me he confirmed that he had looked at STRS performance for 10 years and found that STRS underperformed a passive benchmark by 81 bps.

Finally, my email stated that STRS has not had a successful active management program, which is not surprising given the overall track record of active managers. Without some sort of an information edge, beating real benchmarks is basically flipping a coin, except you must pay to play – which is why most active managers lose to an index.

I concluded that STRS needs to change its investment philosophy and move toward index investing.

You would think that after receiving this email that there would have been a robust discussion of my spreadsheet and email. And yet the content of my email and spreadsheet was not discussed at all. Not one Board member said, “your analysis is wrong” or “there is a mistake in your spreadsheet.”

Instead, a majority of Board members focused their attention on whether my sending this email to the Board was a violation of the open meetings law. After a lot of back and forth I think the conclusion was that if members did not engage in discussion via email, there was no violation of the open meetings law. So, then the discussion turned to saying, but there could have been a violation if members had responded, although nothing in my email invited a response. The whole point of the email was to provide food for thought so we could have a robust discussion of our investment philosophy. Then I was admonished by Board members for not having sent my email to the Chair.

The whole experience is akin to Alice in Wonderland. Under the status quo, we have a pension where there is no prospect in my lifetime of restoring a permanent COLA for retirees and active members, and no chance of returning to 30 years for unreduced benefits. But don’t worry -- the staff will continue to get their bonuses for beating the benchmarks they create.

Change requires 6 votes. That means that if you want a COLA and you want a chance of being able to retire after 30 years with unreduced benefits, then you need to convince an existing board member to do the right thing and vote for what is in the members’ best interests or elect a new Board member for the active seat in 2023.

August 11, 2022
Ted Siedle comments on STRS Ohio & Pittsburgh Comprehensive Municipal Pension Trust Fund v. The Carlyle Group

"The goal of the forensic investigation ORTA members funded was to improve management of the pension, disclosure of investment strategies and fees, and investment returns. As you know, for nearly two years now, STRS Ohio has responded to our investigation in an adversarial manner-- attempting to discredit our efforts and never once considering that the insights of a leading pension expert might be helpful. Worse still, STRS Ohio has defensively refused to provide investment documents we requested which detail conflicts of interest, fiduciary breaches, hidden and excessive fees and violations of law which the pension has never addressed. As a result, we have been unable to date to provide STRS Ohio members with an analysis of the dangers lurking in your pension's portfolio. STRS Ohio members must instead, as in this Carlyle case, wait for other (much smaller) pensions to bring lawsuits addressing abuses. Let me restate the obvious: Had we been provided the key investment documents we requested nearly two years ago, we would have been able to identify many forms of wrongdoing at that time--STRS Ohio members wouldn't have had to wait and follow in the wake of other pensions in addressing wrongdoing, but could have led the way. STRS Ohio secrecy is causing real harm, which each new revelation of wrongdoing reminds us." - Ted Siedle

July 2, 2022

The Blade Editorial Board: Ohio's Public Pension Funds Need Scrutiny

"It’s time for an independent examination of the State Teachers Retirement System of Ohio and the state’s other public-employee pension funds.

The fees and expenses charged by professionals paid by the funds require vetting. That examination must include a determination of the values of investment funds and the direct investments made on behalf of the pension funds."  - The Blade Editorial Board, July 2, 2022

Read the article at https://www.toledoblade.com/opinion/editorials/2022/07/03/editorial-ohio-s-public-pension-funds-need-scrutiny

POLL: Should Ohio Auditor of State, Keith Faber, hire and oversee independent vendors to examine the fees and investment returns charged to Ohio’s pension plans?

May 7, 2022
STRS Ohio Board Election Results

On Saturday, May 7, 2022, the results of the State Teachers Retirement Board election were certified by a board of tellers appointed by the State Teachers Retirement Board and Election Services Company — the independent firm administering the election. The results of the election for the two contributing member seats on the Retirement Board are as follows:

• Julie Sellers, 19,030 votes

• Steven Foreman, 15,247 votes

• Jeffrey Rhodes, 10,494 votes

• Robert A. McFee, 9,817 votes

• Write-Ins, 319 votes

The results of the election for the retired member seat on the Retirement Board are as follows:

• Elizabeth Jones, 24,983 votes

• Rita J. Walters, 21,229 votes

• Write-Ins, 222 votes

The term of office for Steven Foreman, Elizabeth Jones and Julie Sellers will begin on Sept. 1, 2022, and will end on Aug. 31, 2026.

May 1, 2022
"The bottom line is the index fund portfolio had a higher annual rate of return and took less risk." - Dr. Rudy Fichtenbaum, STRS Ohio Trustee

April 8, 2022

A Watchdogs Commentary:  Why New STRS Trustees Are Needed

By Dean Dennis

This is an article I lifted for posting. The article is nearly 3 years old, but it is still relevant. As Members we cannot continue business as usually at STRS, nor elect "business as usual" Trustees. This business as usual approach has led to active members paying 14% in contributions while the "normal cost" for their pension is assessed at 12%. Our active teachers are giving 2% of their pension towards liabilities created by STRS under-performance. This is a negative value; we need new Trustees. For the upcoming election, the STRS Ohio Watchdogs, the Ohio Retired Teachers Association and the Ohio Members Only Forum have endorsed Julie Sellers, Steven Foreman and Elizabeth Jones. The Ohio Federation of Teachers have endorsed Julie Sellers and Elizabeth Jones. Please read the eye-opening article below.

Technically Speaking, Ohio School Districts Don't Contribute to Ohio Teacher Pension Benefits

By Chad Aldeman   

July 22, 2019

This may sound counter-intuitive, but here it is: Technically speaking, Ohio school districts do not contribute toward Ohio teacher pension benefits. 

"How is this possible?" you might ask. After all, Ohio school districts are contributing 14 percent of each teacher's salary into the pension fund. 

But wait, where is that contribution going? If you pull up the latest actuarial valuation report from the State Teachers Retirement System of Ohio, you can find out. Table I-1 (not shown in article) shows that the plan estimates the "normal cost" of the benefits are worth 10.91 percent of salary. That is, across all individuals who enter the plan, after accounting for their age or how long they might stay, the plan thinks the promised pension benefits are worth an average of 10.91 percent of each teacher's salary.

You'll quickly start to screw up your face, especially if you know that every teacher is currently contributing 14 percent of their salary into the plan. Fourteen is more than 10.91 percent, how can that be?

This is due to the fact that Ohio STRS has accumulated unfunded liabilities of $24.8 billion. Every single STRS member is contributing 3.09 percent of their salary (14 percent - 10.91 percent) to pay off that debt.

That's not all. In addition to the employee contributions, school districts are also paying in 14 percent of each teacher's salary into STRS. That money is going into the plan, but none of that is going toward benefits. All of it is going to being used to pay down the unfunded liabilities. 

In essence, Ohio has created a system where teachers, on average, are getting less out of their pension plan than they themselves put in. To be honest, it's hard to even call this a "retirement" system at all. The system is functioning like a debt accumulation tool and a tax on teachers, with retirement benefits on the side. 

Again, this may be sort of hard to wrap your head around, but it's true. The figures above are all based on what the state's actuaries think the Ohio STRS plan will cost over time. Ohio is the only state in such a bad situation overall, but Illinois teachers hired as of 2011 are also paying more into the system, on average, than the state's pension plan thinks their benefits are worth. Other states may be in similar territory for new, less-generous benefit tiers, but they rarely report those data separately. 

In contrast, Ohio also offers new teachers the option to join a defined contribution plan with a 9.53 percent employer match. For the vast majority of teachers, that's likely to be the better option. 

March 30, 2022
The Myth of Turning Over $65 Billion to Wall Street

By Dr. Rudy Fichtenbaum

The OEA leadership and Board members running for reelection are desperate because they know that members are upset. Active members are finding out the truth that they have the worst deal in the country, paying $1 to get a pension that is worth $0.77. Retired members can see through the scam that is being run on them when they are given a one-time 3% “COLA” and told that the Board will look at another “COLA” next year i.e., 2024. The truth is the Board just approved an investment allocation that is expected to earn 6% while approving a discount rate – that’s the expected return on investments – of 7%. Why is this important? It is important because to reduce and eventually eliminate the unfunded liability, STRS needs to earn 7%.

The truth is that to fully restore a real COLA, one that gets paid every year rather than just once, the pension needs more money. When I campaigned for a Board seat, I recognized that the pension needed more money, so I said that I would support an increase in the employer contribution. None of the incumbents running or the OEA leadership have ever campaigned on raising employer contributions. When they get backed into a corner, they might say they don’t oppose an increase in employer contributions, but they have done nothing to try to make that a reality. What could they have done? For starters, they could have had the Board vote on a resolution calling for an increase in employer contributions and directed the STRS staff to start lobbying for an increase in employer contributions.

They could have directed the staff to tell the truth: without more money there will never be a restoration of a real COLA. Instead of going around the state telling everyone what a great job they are doing, they could have started meeting with active teachers and retirees and telling them that if they want a real COLA and a pension that is at least worth what they are contributing, they need to start organizing and putting pressure on the legislature and the Governor. Active teachers and retirees vote. Their family members and friends vote, too. If teachers and retirees were showing up by the busload at the statehouse, organized by OEA and STRS working with ORTA, the Watchdogs, OFT, and AAUP, we could start creating the kind of pressure that is needed to get an increase in the employer contribution and make sure it is funded by increasing taxes on the wealthiest Ohioans who have getting tax cuts for years.

But we should never put all our eggs in one basket. If there are other ways the pension could earn more money, we should explore them openly and honestly. That is why Wade Steen, former board member Bob Stein, and I tried to make a proposal at the November meeting to explore an option that we thought was promising and could earn more money for STRS.

We never got to make our presentation because the staff and STRS consultants, with the complicity of the Board, lied and disrupted our presentation. Then they started telling the big lie that we proposed to give $65 billion to a firm without a track record.

What did we propose? We proposed hiring a specialty law firm to negotiate a contract to create a partnership that would implement a pilot program, a proof of concept that would start with $250 million. Once the partnership agreement was negotiated, we proposed it would come back to the Board for a vote. That is what we proposed.

We never proposed -- as leaders of OEA and incumbent Board members constantly repeat -- that we turn $65 billion over to a firm without a track record. That is lie. But we all know the power of a big lie. If you say it repeatedly, some people begin to believe it.

None of these OEA leaders, incumbent Board members, or staff seemed to have a problem when STRS lost $525 million on Panda Energy, a company that used our money to buy a professional wrestling league. None of these people thought it was a problem when STRS invested $50 million in Infinity Q, whose former CIO and founder was just charged by the SEC with overvaluing its assets by $1 billion, while pocketing tens of millions in fees. None of them were outraged or thought it was a problem when Ted Siedle found widespread failures and mismanagement at STRS. In fact, when an STRS staff member was asked recently about the Panda loss, he said “STRS absorbed it.” What does that mean? It means the members paid for it with our money.

So why the problem with negotiating a contract that the Board would have to vote on before it was implemented for $250 million? That was our proposal! I believe that OEA leaders, incumbent board members, and STRS staff were afraid it would be successful. That would have meant that instead of us continuing to pay an investment staff to send billions of our dollars to Wall Street, Wall Street might have been sending STRS members a check that could help pay to restore a real COLA and help give active members a pension that is worth what they are contributing.

March 22, 2022
Age 60 Requirement Lifted and 3% COLA Granted
So, Why Aren't We Happy?

By Dean Dennis

After a decade of watching their pensions erode, members of STRS Ohio watched and listened during the March 2022 Board meeting as the Trustees voted to provide a 3% COLA and remove the age 60 requirement for full retirement benefits after 35 years.

• Eleven years ago, retired teachers received a simple (non-compounding) 3% COLA. 

• Eleven years ago, active teachers received a pension with full benefits after 30 years. Active teachers contributed 10% of their salaries to STRS. Retired teachers received a COLA one year after they retired. 

• Eleven years ago there weren't any petitions complaining about STRS, any Facebook groups complaining about STRS, any protest signs at STRS meetings, and no one in Ohio knew Edward Siedle conducted forensic audits.  So, what changed?

Around 10 years ago, a nightmare was about to be dropped on STRS members. 

• Active teachers would learn that they were heading towards having to work 35 years and be at least age 60 to receive a pension with full benefits. 

• Their employee contribution would increase to 14%, while their employer's contribution remained unchanged. 

• They would learn that there would not be a 3% COLA for them when they retired, but only a simple 2% COLA. They would also have to wait 5 years after retirement to begin receiving this COLA.  

• Retirees would learn that the language in ORC 3307.67 that stated they "shall" receive a 3% COLA was meaningless. Their COLA was reduced to 2%, would be frozen a year later and then, in 2017, completely eliminated. 

Active teachers now understood that they would not have any financial security in retirement. Why did this happen?

Around 2010, STRS management began painting a dire picture to the STRS Trustees. They convinced the Trustees that their Earnings Rate Investment Assumption (projection rate on investments) was too high. Starting in 2012, Trustees would reduce the investment assumption from 8% to 7.75%, then to 7.45%, then to 7%.  At every reduction, tens of billions of projected liabilities would be added to the STRS balance sheet. Management could have presented a plan to the Ohio Retirement Study Council as to how they were going to address the new projected liabilities created by the drastic Earnings Rate Investment Assumption reductions. But they didn't. Instead, STRS management  convinced our Trustees to renege on the promises made to members and make drastic cuts to teachers’ retirement benefits. The retiree's COLA was targeted and active teachers would work longer for less. 

So, in hindsight (10 years later) was this dire picture correct? And what proactive changes have been made since the Draconian cuts?

• The Earnings Rate Investment Assumption reduction was cut from 8% to 7%. And what have we earned on our investments over the last 10 years? The answer is 9.84%.

• What proactive changes have been made over the past 10 years? The answer is, nothing significant. Members assumed all the risks and they still do. The employer contribution rate is still the same after 38 years.

• A major change suggested by the 2006 outside independent audit was how STRS awards bonuses to the Alternative Investment staff as they pertain to their benchmarks. To this day, this remains a problem.

• The 2006 audit also suggested that the STRS staff grossly needed more internal auditors.  STRS management disagreed and none were added.  

• Ten years later, management fees are still a controversy. Members aren't clear as to how much money is going to Wall Street. Members aren't clear as to what our actual investment costs are. 

• There haven’t been any real changes in how we do business. Our investments are still under an "active" management model. The forensic audit cast a shadow as to whether this is a cost for members, or a savings for members.

Still, after 10 years, our Trustees voted to provide a 3% COLA and remove the age 60 requirement for a full retirement after 35 years. So why aren't members celebrating?

Members were pillaged and are still living a nightmare. There has been some relief because something has been returned to us, from that which was taken. Members haven't seen any real changes at STRS. It seems to be the same business plan. 

Everyone knows that STRS balanced their books on the backs of its members. There's nothing noble about withholding monies promised to members and reneging on payouts to balance books in order to reach a self imposed 85% funding goal. 

Doling out a pittance, doesn't make members happy, it reminds them of what they have lost.

Ohio Retired Teachers Association (ORTA)

ORTA’S mission is to monitor, advocate for, and protect the pensions and benefits of its members.  The Association shall encourage individuals to improve the social and economic changes and issues relevant to their retirement. 

Click here to visit ORTA's website.