Those costs include the system's investment management, particularly its staff of 115 investment professionals to manage the majority of the system's assets, bonuses paid to those staff, as well as the system's investments in real estate, private equity and other alternative investments in asset classes that total a target of 29% of the system's assets.
The reformers say index funds could provide better investment returns and lower costs that would enable the system to readopt the permanent COLA.
Another controversy that erupted recently was the awarding of $11 million in bonuses to investment staff beating custom benchmarks for the fiscal year ended June 30, 2022, a year in which STRS, along with most institutional investors lost money.
Rudy Fichtenbaum, one of the current reform trustees and retired professor of economics at Wright State University, said in an interview: "Members really feel that we're paying big bonuses to people to do investing and with really no path that we can see toward keeping those promises."
"One of the major issues that STRS faces is the problem of the cash outflows that we have but a lot of what people, I think, are very upset about is being told that everything is wonderful, everything is great, we're the best, there's nothing wrong and not admitting what people are feeling here," said Fichtenbaum.
Fichtenbaum said that participants' anger over reduced benefits is the issue, and that STRS has not prioritized restoring those benefits like he believes they should.
"We could do better with index investing although that alone is not likely at this point to solve our problem," said Fichtenbaum.
STRS officials, meanwhile, say the returns have been strong. STRS spokesperson Dan Minnich said in a May email the system has calculated that, without the 2012 plan design changes, the system's funding ratio as of June 30, 2022, would have been 49.6%, down from 57.6% 10 years earlier. Instead, the spokesperson said, the funding ratio was 78.9% as of June 30, 2022. The system's funding ratio as of June 30, 2023, is not yet published.
Minnich declined to comment for this story.
For the 10 years ended June 30, the system chalked up an annualized net return of 8.6%, the eighth-highest return among the 79 public pension funds whose most recent fiscal-year returns have been tracked by Pensions & Investments as of Dec. 14. The annualized benchmark return was 8.3%. The system returned 7.55% the most recent fiscal year and 10.2% over the past five years.
That benchmark, however, is a bone of contention for reform trustees. Fichtenbaum laid the blame on the pension fund's investment consultants for creating those benchmarks. The board in October voted to hire Meketa Investment Group to replace Callan as its general investment consultant following an RFP process.
"I really do believe a pension plan, of course, needs investment consultants," said Fichtenbaum, "but it needs investment consultants that really know that who they work for is the board and not the staff."
"I'm 100% for getting advice from people but I think we're the ones who really want to set the terms, meaning if people really think that active management is better, then prove it against real benchmarks, not custom benchmarks," he said.
Fichtenbaum cited the Russell 3000 index as the one such benchmark he would prefer the system use rather than custom benchmarks.