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Ohio State Teachers' Retirement System, Columbus, faces a key board election in the spring that could tilt the balance to a group of self-proclaimed reform trustees.
The reformers support restoring a permanent cost-of-living adjustment, funded by cost cutting, including a move to passive investing and significant cuts to the $90.1 billion plan's investment staff.
The reform trustees have been spurred on by a grassroots movement of retirees and active Ohio teachers angry about reduced or eliminated annual cost-of-living adjustments.
In 2012, the state Legislature passed pension reform that gave the STRS board the authority to set the system's COLA. The previous fixed 3% COLA was seen as unsustainable following the financial crisis of 2008, and the board cut the COLA to 2% from 2013 to 2016, and did not provide one from 2017 to 2022.
The board argued that the reduction was necessary to preserve the fiscal integrity of the system.
While the board has since set a 3% COLA for fiscal year 2023 and 1% for fiscal year 2024, the six years of no COLA sparked a wave of protest throughout the state, resulting in a sea change in the composition of the board of trustees in the last several years.
The 11-member Ohio STRS board consists of seven trustees elected by STRS participants and four trustees appointed by state officials. Of those seven elected trustees, currently five — all elected since 2021 — are in favor of reforming the system by converting to index funds and cutting bonuses.
The seat up for election in May could give the reformers a majority of the board, and is held by Dale Price, current chairman and not considered one of the reform trustees.
While petitions for candidates are not due until Feb. 23, the primary opponent currently facing Price will be Michelle Flanigan. Price and Flanigan did not reply to requests for interviews. Flanigan is a government, economics and financial literacy teacher at Brunswick City School District.
In its fight for the restoration of a 3% COLA, the Ohio Retirement for Teachers Association, an advocacy group for current and retired educators, has criticized costs the system has taken on that they believe should have been used toward a COLA.
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.
Steven Foreman, another reform-minded trustee of the Ohio STRS board elected in 2022, said he is in favor of cutting costs as much as possible in order to be able to restore the COLA.
"An example that keeps getting thrown up like it's frivolous and it's not, is the daycare (for STRS employees). The daycare ran in the red year after year after year in a system that was making a decision to not give teachers a COLA," said Foreman, "and it's been said to me, 'Well, closing that daycare isn't going to give the teachers a COLA.' Well, I didn't say it was. What I said was we have to make the cuts."
"Everything needs to be looked at, and we can't make these decisions that aren't benefiting the members," said Foreman. "Everything needs to be for the benefit of members."
"We have to turn the ship around at some point, and there are a lot of investment systems that hire a whole lot less employees, and there are a lot of investment systems that do index investing," Foreman added.
One of the few systems to chalk up higher return for the 10 years ended June 30 was the $58 billion Nevada Public Employees' Retirement System, Carson City, which returned an annualized net 8.9%, above its annualized benchmark return of 8.5%.
On Nov. 15, board candidate Flanigan posted a YouTube video (which is no longer available) comparing Nevada PERS and Ohio STRS, displaying a chart proclaiming Nevada PERS as the "winner" based on having a staff of three investment professionals and higher one-year return; however the effective date of that return was not provided in the video and STRS had a higher 10-year annualized return in the chart she provided.
While reformers tout moving to all index funds and cite the Nevada system's predominately passive public equity and fixed-income portfolio, the Nevada system still has a 12% target allocation to private markets, made up of equal target weights of 6% to private equity and private real estate.
According to the Nevada system's most recent investment report, the actual allocations to private equity and private real estate were 8.6% and 5.3%, respectively, as of Sept. 30.
NVPERS Investment Officer Stephen Edmundson said they have kept the 12% target to private markets because it has added to returns and reduced total portfolio volatility.
"We think it's a piece of the portfolio that's going to get us to our return objective efficiently," Edmundson said.
Part of the issue for the reform movement is the definition of "fiscal integrity," and how the STRS board in previous years eliminated the COLA in order to preserve that integrity.
Bob Buerkle and Dean Dennis, both members of the Ohio Retirement for Teachers Association, were the two lead plaintiffs in a 2019 class-action lawsuit against the Ohio State Teachers' Retirement System, alleging the board violated the state contract law in reducing the COLA to zero in 2017.
That suit was dismissed in 2021 and a new lawsuit, which is still ongoing, was shortly refiled. It alleges the board violated the contractual obligation of the COLA, and that the state of the system was not as dire as stated.
The text of the suit states that STRS' funding ratio as of July 1, 2017 — when the zero COLA took effect — was 75.1%, higher than the 72% average among U.S. public pension funds at that time.
