The board, which has been nearly paralyzed by infighting and has an executive officer on extended leave amid allegations of misconduct, called an extraordinary meeting on Thursday.
COLUMBUS, Ohio — The battle over the future of Ohio’s $94 billion estate is underway. Teachers’ Pension FundReformers’ attempt to provide long-promised benefits to retirees with the help of an aggressive investment firm peddling untested AI-driven trading strategies is facing intense scrutiny.
As the drama unfolds, the eyes of Wall Street and the 500,000 members of the Ohio Teachers Retirement System are on the state, where a special meeting of the board of trustees nearly paralyzed by infighting was called for Thursday and whose executive director has denied allegations of wrongdoing and is on extended leave.
Long-standing tensions over the fund were amplified on May 8 when Gov. Mike DeWine Anonymous 14-page memo It also handed over other documents to authorities containing “disturbing allegations” about the STRS board.
Republican Attorney General Dave Yost launched an investigation the next day, calling the fund “vulnerable to a hostile takeover by a private company.” He then filed a lawsuit seeking the removal of two reform-minded directors, Wade Steen and Rudy Fichtenbaum, for backing a plan to transfer about 70% of STRS’ assets, or $65 billion, to QED, a startup investment firm run by two people, including a former deputy treasurer of Ohio, and based in a condo outside Columbus.
“This is not monopoly money. This is teachers’ hard-earned income,” Yost said in launching the investigation. “We have a responsibility to act in teachers’ best interests.”
The Ohio Teachers Retirement Association, a retiree watchdog group, said Steen and Fichtenbaum were being unfairly targeted. The group has defended the reform push as a fight against years of opaque management and greed.
Teachers, who generally aren’t eligible for Social Security and rely heavily on the fund in retirement, are especially upset about the lack of cost-of-living adjustments and market losses the fund has experienced over the years, even as STRS’s investment professionals receive big bonuses. They are calling for greater transparency in the fund’s investment and pay practices.
“We’ve been calling for an investigation for years,” said Robin Rayfield, the association’s executive director, “so our response to them will be, ‘Where have you been?'”
Rayfield said public education in Ohio would be “completely politicized” if DeWine and Yost were successful in shutting out the STRS reformers, which he described as the third leg of a stool that also includes the approval of STRS. Universal School Voucher Program Last year’s state budget Transfer of K-12 Supervision The transfer of power from Ohio’s Independent State Board of Education to DeWine’s Cabinet, with ongoing litigation alleging the latter is unconstitutional.
“Governor DeWine has done more to destroy public education than all other governors combined,” he said.
The roughly $6 trillion U.S. public pension sector has been swapping stocks for riskier actively managed alternatives such as hedge funds and private equity in recent years, a trend that calls for the kind of transparency Ohio reformers have been calling for, said David Drane, senior research fellow for public pension systems at the Pew Charitable Trusts.
“Public pensions deal with risky and complex assets so it’s important they are transparent about their investments – what are the performance returns, how much are they paying for them and what are the risks,” he said.
But critics argue that entrusting the mysterious QED with investing in STRS poses even greater risks.
Aristotle Hutras, former president of the Ohio Retirement Research Council, a legislative watchdog, thinks the governor is right to try to protect STRS from the reformers’ optimistic, AI-driven vision for improving the fund, which he calls “magical thinking.”
“STRS has continued to pay benefits through world wars, the Great Depression, the Great Recession and a global pandemic,” said Hatlas, a Democrat. “This QED concept, and essentially the manipulation of the contract, is, in my opinion, the most serious threat to STRS’ solvency in the last 96 years.”
The fund’s president at the time issued a statement after DeWine’s introduction saying that while STRS was working with them, he wanted to reassure beneficiaries that the fund was safe, stable, well-managed and in “sound financial condition.”
Among the allegations, which one of the directors said are of unclear origin and require investigation, the 14-page memo states that QED’s Jonathan Tremel approached STRS in 2020 to allege the fund was improperly calculating performance, benchmarks and investment costs. “Mr. Tremel also claimed to have an AI-based trading strategy that would solve STRS’s ‘problems,'” the memo said.
Executives rejected Tremmel’s initial proposal because QED had no professional registrations, clients or track record. His business partner, Seth Metcalf, who worked for Ohio’s former Republican Treasurer Josh Mandel, went back to STRS and asked them to reconsider QED.
The memo authors allege that around that time, Steen, Fichtenbaum, and two other directors at the time began raising nearly the same questions about STRS’s performance as QED and began working behind the scenes to outsource the pension fund’s operations to an affiliate, Ohio AI. Metadata on some of the letters and memos indicates they originated from Tremmel or Metcalf.
Federal Trade Commission They started to warn companies At the time, the committee recommended proceeding with caution around automated tools that could have biased or discriminatory effects. Last year, the committee The warning went furtherIt warned companies that making false or unsubstantiated claims about what AI can do for customers could subject them to enforcement action.
Neither Metcalf nor Tremmell returned calls seeking comment on the STRS statements. “The shell owners continue to secretly sell untested investment schemes to STRS even as their own condominiums are in foreclosure,” Yost said in court filings. The attorneys general also accused Steen and Fichtenbaum of having a “backdoor relationship” with QED.
Steen denies Yost’s claims, including that the $65 billion offer was made, and argues that the reactions to his persistent questioning of the STRS’s practices are proof he has upset people.
“He’s hiding behind a defamatory lawsuit, which is not true,” Steen said after the committee met May 15. “I expected there to be a fair and impartial investigation. This may be the fastest investigation in Ohio state history. But we’re going to vigorously defend this. None of it is true. It’s all false.”
Gov. DeWine called it a “huge red flag” when Aon, the nationally-acclaimed consulting firm that had been brought in to help address management and financial performance issues, suddenly terminated its contract with the pension fund earlier this month.
“The implicit implication is that the governance issues at STRS are so concerning that Aon cannot continue the contract in good faith,” DeWine said in a statement. An Aon spokesman declined to comment.
STRS reformers did not back down. They won a majority of votes on STRS’s 11-member board of directors and pushed through a resolution at the board’s May meeting to remove the opposing leadership and elect Fichtenbaum, a professor emeritus of economics at Wright State University, as board chairman.
Many of the retired teachers in attendance applauded after the coup. Nearby, a poster bore another STRS initial, “Theft of Teachers’ Retirement Savings.”
“This has been needed for years,” said Lee Ann Bauman, 82, who was an elementary school teacher for 32 years in suburban Columbus. “It’s hard on retirees. A lot of us work part-time, we’re older, and not getting what was promised is really hard.”
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