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Ohio School Employees sued by union over COLA freeze

Ohio School Employees Retirement System, Columbus, is the target of a lawsuit filed by an Ohio union of school employees for its decision in October to freeze the cost-of-living adjustment for three years.

The Ohio Association of Public School Employees/AFSCME Local 4/AFL-CIO filed the suit on Jan. 29 in the Franklin County Court of Common Pleas against the $14.1 billion pension fund, Ohio Attorney General Mike DeWine and Cavanaugh Macdonald Consulting, the pension fund's actuarial consultant.

The lawsuit alleges mismanagement by the pension fund that led to the COLA freeze, such as its continuing investment in hedge funds, the fact that it utilizes external money managers, and that the fund grew 64% between 2001 and 2017 while the Dow Jones industrial average grew 108%.

The union said in a posting on its website that it seeks to halt the freeze by challenging whether the freeze complies with an Ohio law requiring an annual review of the COLA.

The pension fund board voted for the suspension in October to take effect on Jan. 1, 2018, as part of a process to get the pension plan's funding ratio up to 70% by 2018 and 90% funded by 2032. As of June 30, 2016, the funding ratio was 67.6%, pension fund spokesman Tim Barbour said at the time.

The then-current COLA was a fixed 3% rate. State legislation in 2017 changed the COLA to a formula indexed to the consumer price index with a cap of 2.5%. The new COLA formula is scheduled to be effective Jan. 1, 2021.

"For nearly two years, SERS held several open meetings with representatives from all advocacy groups, including OAPSE, to discuss possible benefit changes and their effects on SERS and its membership," the pension fund said in a statement on its website. "We modeled the effects of numerous combinations of changes before deciding on the COLA changes that were implemented. We are disappointed that OAPSE's opposition to these changes was not registered during the open process when they could have been addressed with input from all interested parties."

OAPSE Executive Director Joe Rugola said on the union's website: "This is absolutely a criminal waste of resources by SERS. They spent $852 million — and that's just on outside consultants — only to get a smaller return than they would have from a savings account. It's a pathetic investment performance, and as a result of their ineptitude, OAPSE retirees are being forced to do without the cost-of-living increases they desperately need. It's wrong, and we had no choice but to sue to stop this."

The pension fund returned a net 13.2% in the year ended June 30, and annualized net returns of 5.7%, 11.9% and 4.7% in the three, five, and 10 years ended June 30, respectively, according to its most recent comprehensive financial annual report.

Messrs. Barbour and Rugola could not be immediately reached to provide further information.

The filing is available on the union's website.