COLUMBUS, Ohio — A second major consulting group has stopped working with Ohio’s controversial retired teachers pension fund, dealing another blow to a system already in turmoil.
Unrest is growing at the State Teachers Retirement System (STRS).
STRS has been mired in controversy: to summarise, there have been constant infighting, two board resignations, and allegations of official corruption schemes and misappropriation of funds.
This all stems from a debate over how STRS should invest its money: through the current system of actively managed funds and index funds, where actively managed funds aim to outperform the stock market, have more advisors and usually have higher costs, while index funds track the stock market, are considered more passive and usually have lower costs.
The “reformists” want to switch to index funds, while the “status quoists” want to continue to manage their money actively. In recent elections, “reformists” have gained a majority on the board of directors.
We have been covering this controversy since the beginning. In our nine recent articles, we have covered the latest issues surrounding corruption allegations. To get a full picture of the situation, Q&A with viewers and readers.
Related: Answering viewer questions about the turmoil at Ohio’s retired teachers pension fund
McLagan, a data and analytics firm, had provided remuneration advice and research to STRS.
“While we appreciate the opportunity to provide compensation advisory services to STRS pursuant to the new SOW, we are not currently able to comply with the Board’s request on July 19, 2024,” McLagan said in a July 10 email obtained by me.
An extraordinary board meeting was scheduled to be held on July 19 to discuss compensation.
“Mr. Maclagan has been affiliated with STRS for over 20 years and will continue to assist STRS with any questions regarding Mr. Maclagan’s work and past work product,” the termination letter states.
The company did not give any reason, but it is noteworthy that it was specifically discussing performance-based incentives (PBIs). In June, the STRS board banned employees from receiving these PBIs, which are essentially bonuses.
Some STRS staff who contacted me were surprised by the layoff notice.
“STRS Ohio was notified earlier this week that McLagan is unable to provide the compensation consulting services requested by the pension plan at this time. The board will discuss investment staff compensation at its next board meeting,” STRS spokesman Dan Minich said in a statement.
In May, Aon, the consulting giant and McLagan’s owner, also withdrew from STRS. Aon provided board governance advice and services, meaning that it and McLagan had two separate contracts for different parts of STRS.
“This is very concerning for the entire pension system,” Brian Grinnell, former chief actuary at STRS, told me.
Grinnell resigned in May after 10 years at the pension fund.
“It’s disturbing that the board has seen not one, but two consultants voluntarily resign because they probably don’t want to be associated with this board, this system and the controversy that’s going on,” he said.
Eliminating the bonuses would cut STRS employees’ income in half, he warned, which could lead to talented people quitting the job — and if too many people quit, there would be no one to actually make teachers money.
Reducing staff numbers actually helps educators, said retired educator Robin Rayfield, executive director of the reform-heavy Ohio Teachers Retirement Association.
Retirees like him helped elect board members who wanted change, board members whose primary goal was to provide a full cost-of-living adjustment (COLA).
click here To learn more about the reformers, the STRS staff, and the current situation.
“Instead of having a big investment staff, we need to do index investing,” Mr. Layfield said. “It will bring in more money and cost a lot less.”
Many retired teachers argue it’s unfair that their COLAs are being limited, especially after the board approved $10 million in employee bonuses last year.
“Why are all the people who work at STRS getting such huge bonuses if they can’t even cover the cost of living?,” said Sharon Parker, a retired teacher from Columbus. “How can they afford it?”
COLAs for more than 150,000 retired Ohio teachers were suspended for five years starting in 2017. In 2012, the number of years of eligible retirement was changed from 30 to 35. Last year, that was changed to 34 years.
The STRS building is located in the heart of downtown Columbus and features a waterfall outside the building. It once housed a daycare center for employee children but was closed due to opposition from education officials. Current amenities include an on-site fitness center, outdoor balconies and a lunch room with kitchen appliances.
“There are a lot of teachers in Ohio who are living in poverty, but some of the investors and staff are getting high salaries and $10 million bonuses,” said Terry Caskey, a Parma school teacher.
The average salary for STRS investment staff was about $230,300.
Grinnell argued that $10 million was a paltry sum compared to the billions of dollars needed to restore the COLA.
“The financial system currently does not have the assets to do that sustainably, unless we get billions of dollars of outside capital,” he said. “That’s not going to happen in the near term.”
Eric Chaffee, a business law professor at Case Western Reserve University, said there is merit to both views.
“If you take away all of these luxuries, teachers may get more in terms of cost-of-living adjustments,” Chaffee said, “but it could also jeopardize the long-term future of STRS.”
He doubts that the PBI cuts will actually provide any real benefit to teachers, but sees them as more of a cosmetic measure.
“This is very symbolic,” Chaffee said. “At the end of the day, people are concerned that these bonuses are being paid out at a time when all sorts of questions are being raised about STRS.”
Grinnell said symbolic language is not helpful when educators’ pensions and staff incomes are at stake.
“What’s unfortunate is that there seems to be a faction within the board that is actively trying to undermine staff and undermine confidence in staff, rather than working in a productive way to strengthen the system, reassure people and get them the benefits they deserve,” he added.
QED
Grinnell, who was in charge of risk management, was astonished when senior board members expressed interest in the investment firm QED Systematic Solutions.
In May, Attorney General Dave Yost filed a lawsuit to remove two STRS officials from their posts, alleging that they participated in a contract-inducing “scheme” that could directly benefit them. Yost began his investigation after documents prepared by STRS officials alleged that Wade Steen and Chairman Rudy Fichtenbaum were following the orders of a private QED.
Yost began his investigation after STRS officials turned over documents to Gov. Mike DeWine’s office, which believed the 14-page memo was written by “multiple whistleblowers” and included about a dozen additional documents to substantiate the allegations.
Yost alleged that Steen and Fichtenbaum were “trying to steer” up to 70 percent of STRS’s current $65 billion in assets into “shell companies” with “secret ties” to members.
The attorneys general say the pair should be removed because they breached their fiduciary duties of care, loyalty and trust when they “conspired” with QED.
QED was founded by former Deputy Treasurer Seth Metcalf and Jonathan (JD) Tremmel, with Metcalf having served under Josh Mandel in a variety of roles, including Chief Counsel.
click here To learn more about the lawsuit.
Despite reformers’ denials, I obtained a now-archived video conference that proves Yost’s claim that Fichtenbaum and Steen were pushing a $65 billion partnership with an investment firm that lacked “legitimacy.”
So, according to archived meetings, all the board had to do was give QED $65 billion and it could have restored the COLA with $4 billion in annual revenue.
Ohio Teachers Pension Fund trustee resigns amid controversy, meeting records prove attorney general didn’t lie
Related: Ohio Teachers Pension Fund trustee resigns amid controversy, meeting records prove attorney general didn’t lie
“My dad always said if it sounds too good to be true, it probably isn’t,” he said. “In this case, there were a ton of red flags about this so-called investment opportunity.”
According to a STRS staff memo, QED tried to solicit STRS members to partner with them despite having no clients or a track record. QED was not registered as a broker-dealer or investment adviser. The pair also did not possess any technology to “facilitate their strategies,” according to the document.
“It would be highly inappropriate for a board to be involved at that level in decisions about investment opportunities,” Grinnell said.
Even though others are doing the same work and haven’t been embroiled in any controversy, I asked Steen in May if he still wanted to use QED.
“I’m not advising QED or anybody. What I’m advising is that you should look at index funding,” Steen replied. “You really should look at this method, which can reduce your costs significantly.”
Educators believe this is a bogus study by Yost.
“Now we have a supermajority and we have all the information we need that was previously hidden or not transparent,” Caskey said.
She and other reformers added that DeWine is protecting his Wall Street friends, but they also worry this could be a corruption scheme.
Caskey doesn’t trust DeWine at all and thinks the entire investigation into STRS board members’ ties to QED is a “plot.”
Dan Tierney, a spokesman for Governor DeWine, denied all of her claims, calling them “completely absurd.”
Meanwhile, the litigation between Yost & Steen and Fichtenbaum is intensifying.
“If Defendants appear resentful and aggressive, that is because they are,” the reform lawyers wrote in a joint filing. “They have volunteered countless hours to ensure that the Attorney General has the satisfaction of ensuring that the funds are being properly managed at the time of the Attorney General’s filing of suit.”
Interestingly, it appears they’re not done with QED just yet: In a joint filing, the pair defended their support for the company.
“As one of the founders of QED, Tremel has an impressive track record, including successfully managing over $1 billion in funds at age 19 and a five-star investment management track record over five years,” the filing states.
They then criticized Yost, DeWine and the STRS officials who provided the documents to their executives.
future
Lawmakers are working with the governor and attorney general to try to stop reformers from taking control of the commission.
Several ideas were proposed during Monday’s Ohio Retirement Research Council meeting and after meeting with me.
Lawmakers proposed removing elected members from the STRS board and consolidating all pension funds into one.
Ohio lawmakers propose removing trustees from teachers’ pension fund amid controversy
Related: Ohio lawmakers propose removing trustees from teachers’ pension fund amid controversy
This is anti-democratic, Rayfield said.
“We will be firmly opposed to any changes that reduce or eliminate teacher pension contributions,” he said.
Grinnell College wants only the best for its teachers, and that means relying on the insights of investment experts.
“Before we make any changes, before we make any promises that we may not be able to keep, we need to carefully consider the rationale for doing so,” he said. “We need to make good decisions, but good decisions are based on reality, not on grievances, resentment or falsehoods.”
If you have questions or comments about the STRS, please email Morgan.Trau@wews.com with the subject line “STRS COMMENT” or fill out the form below.
Sources of information are welcomed and encouraged.
to follow WEWS By Morgan Trau, State Capitol Reporter twitter and Facebook.
We will get it done
Want us to continue following the story? Let us know.
