Ohio Pension Drama Continues: Investigation Called on "Hostile Takeover"
Well, that escalated ... not that quickly, if one were paying attention
Here continues the drama in the Ohio State Teachers Retirement System.
First, the news coverage:
The Center Square: Yost launches investigation into Ohio teachers’ retirement system
Ohio Attorney General Dave Yost opened an investigation Thursday into the State Teachers Retirement System, saying the move is an effort to protect teachers’ retirement accounts.
Yost says the action is in line with rooting out public corruption and instances of greed and deceit within public institutions.
“Pension board members are required by law to act in the best interest of the teachers whose money they invest,” Yost said. “I will take whatever action is necessary to protect teachers against private interests attempting to hijack their retirement accounts. This isn't monopoly money; it’s hard-earned income that belongs to teachers. There is a responsibility to act in their best interests.”
According to a news release, Yost’s office received documents that contained allegations relating to the retirement system board, allegations he called disturbing. He also said there are concerns the system is susceptible to a hostile takeover by private interests.
NBC4i: DeWine calls for investigation into Ohio’s teacher retirement system
Years after concerned retirees demanded reform of the State Teachers Retirement System (STRS) board, Ohio Attorney General Dave Yost is launching an investigation Thursday at the governor’s request.
Gov. Mike DeWine asked for investigations by the Ohio Ethics Commission, the attorney general, and the state auditor. The STRS board is in turmoil after board member Wade Steen, who was removed by DeWine last year, used a court order to reclaim his seat last month. Board executive director Bill Neville is on leave after an anonymous letter accused him of misconduct.
More on the Neville allegations in a moment.
The Anonymous Memo
Yost posted the memo here: Link to memo at Attorney General site
Here is the top level summary:
That’s the thesis of the paper. “Private interests”.
As an aside — I’m a New Yorker, and I’ve long followed specific state pension interests, such as California and Illinois (especially Chicago), so I’m mostly familiar with the players there. I’m not as familiar with Ohio political players, so I may get some of the facts munged up here. You can always email me at marypat.campbell@gmail.com with corrections or @ me on twitter/X at meepbobeep.
The main argument is that Metcalf’s & Tremmel’s investment org QED is trying to get its hands on sweet sweet Ohio pension assets.
It’s a power struggle between the internally managed funds of Ohio STRS and an outside investment manager…. and ORTA, which is an Ohio teachers group focused on retirement benefits… WHICH WANTS ITS COST-OF-LIVING ADJUSTMENTS BACK.
The core issue is that the teachers’ groups are angry that they are getting less in benefits than they had in the past, as I described in the podcast on Monday. I suppose you could call that a “private interest”, but everybody kind of ignores that is the primary driver of all of this.
I found some older material on this QED group and what they had been proposing, so let’s look at that.
Older News on QED: November 2021
There are two parts of this — the conflicts between the players, and the investment concept itself.
Let me pull out the investment concept part first, which are swaps… an alternative asset strategy
November 2021: John Damschroder: Ohio STR spells conflict
The idea is called index-plus, as they would take a small piece of the cash and buy a contract paying STRS the returns from a market index for the $250 million. The rest of the STRS money would be United States Treasury Bills, considered by financial industry accounting regulations the safest investment in the world.
Ohio would help Goldman maintain the capacity to make high profit trades for their clients by swapping the higher risk investment for the T-bills, collecting a significant payment and a contract to buy the risk assets back. Goldman would show very safe assets on their balance sheet, STRS, with none of the regulatory issues Goldman has, would have a new source of cash and a contract Goldman couldn’t escape, to buy back the risk assets, unless they go bankrupt. Regulators follow Goldman Sachs because it’s a Global Systemically Important Financial Institution (GSIFI), officially designated as too big to fail.
STRS CIO Worley says back testing the index-plus concept since 2009 shows it would have brought a 45 percent loss and cost STRS $21 billion dollars. But Worley also claims STRS has been doing rate return swaps like the QED proposal for 3 decades, so he’s already playing with fire.
The irony is that the marked-up money Goldman Sachs sells, is purchased by exactly the sort of alternative investments already stacked in the STRS portfolio. Now, STRS pays that cost, as fees to borrow money are passed on to the limited partners. If Ohio won’t switch from paying fees to collecting fees, Dr. Fichtenbaum says some other state surely will.
I won’t comment on the suitability of this investment for a public pension fund.
But I do want to comment on the various people involved here, because it’s a bunch of people who are not strangers to each other. That explains why it’s so nasty.
Ohio Players
If you know how humans operate, it’s people who have been bumping into each other for decades, and especially see the others as getting in the way of their goals, who will be the most vindictive in their actions.
There’s John Damschroder who wrote this piece, who is from Fremont, Ohio, and worked for Republican George Voinovich when he was governor of Ohio. He has long written about Ohio pension issues, particularly about the assets backing the benefits and their management. I used one of his pieces back in 2016, talking about the riskiness of Ohio pension assets in the Ohio OPERS fund. (Disclosure: I like his stuff, even if I don’t agree with all his takes.)
On the QED side are: Seth Metcalf and Jonathan Tremmel. Seth Metcalf had been on the board of a different Ohio pension fund, OPERS (the one I mentioned above) in the 2010s, had worked for Ohio state treasurer Josh Mandel during that period, and is currently president of an organization called SFOF (state financial officers foundation), a free-market-oriented organization, with links to a bunch of other similar-minded orgs. Tremmel, I can find no info on.
Here is something interesting from Seth Metcalf’s work for Josh Mandel: he was involved in an FBI investigation of his predecessor in the Ohio treasurer’s office. The Democratic predecessors in the Ohio state treasury were very busy shredding documents right before Republican Josh Mandel came into office in January 2011. Huh. Interesting.
There’s STRS CIO Matthew Worley quoted above, who is also currently deputy executive director.
Speaking of the STRS staff, there is this bit at the top:
Internally, STRS Ohio is managed by an executive director, three deputy executive directors and seven senior staff members, and employs about 500 associates.
There is Wade Steen, the STRS board member who was removed by DeWine, but the courts said no, you can’t do that, and Steen is back. There is Robert Stein, who is a retired teacher, and had been an STRS chair and board member multiple times. There is Rudy H. Fichtenbaum, a retired teacher member of the STRS board (current board member through 2025).
Those are the people mentioned in the 2021 article, but obviously it is 2024 now, and there has been a lot going on.
Not mentioned in the 2021 article is Bill Neville, who had been the executive director of Ohio STRS, but who got suspended in November 2023 due to accusations of misbehavior. In February 2024, Neville was somewhat cleared, but as of now he’s still on paid leave. He was the executive director in 2020, but was not mentioned in the article.
I thought I’d mention him, because I think the complaints about him, given anonymously, may be tied to activity here… but then again, it may not. He may just be annoying to deal with.
But let’s get to what the core of the issue is: the retirement benefits.
Real Interest: Benefit Boost — Return of the COLAs
What’s driving all this frenzy: COLAs (cost-of-living adjustments) were made optional in 2013 and completely removed in 2017 from Ohio STRS, and the teachers have been looking for ways to get them back permanently since then.
AFT, 2022: Ohio retirees aren’t waiting another year for a COLA
It’s been more than five years since retired teachers in Ohio have received a cost-of-living adjustment from its pension fund, the State Teachers Retirement System of Ohio. No COLA and rising prices have forced some retirees to tighten their belts or return to work, says Elizabeth Jones, retiree chapter president of the Cincinnati Federation of Teachers. “It’s a choice that they have to make to make ends meet. At this late stage of life, retirees should be enjoying life. People need a COLA to live.”
The pension fund’s COLA has been a source of conflict since 2013, when the adjustment was suspended because the pension fund was in financial trouble. In 2017, the COLA was eliminated entirely.
More than 500,000 active and retired teachers are enrolled in the system. In the last five years, there has been a lot of activism by many of those members calling on the administrators of the STRS Ohio to reinstate the COLA. There are five public pension funds in Ohio; all but one, the retired teachers’ pension, is given a COLA. In addition, an independent forensic investigation of STRS found that it had paid more than $400 million in fees to a private equity firm. The report also found that by reducing fees paid to private equity, hedge funds and other alternative investments, STRS could restore COLA benefits.
The problem is that COLAs are expensive.
Much more expensive than $400 million in whatever period they choose.
I mentioned it verbally on Monday, but here it is again in text, and using a more recent actuarial report.
In the FY2023 Actuarial Report for Ohio STRS, there is a section where various changes to the pension plan are considered and impacts are calculated. I highlight the COLA category:
If we look at the results and compare them to the baseline, one can see how costly these changes are:
The one that they want, the permanent 3% COLA (and this is a simple, not compounding COLA), increases the liability instantly from $105.3 billion to $125.9 billion.
A one-time increase is merely a $1.5 billion increase (ah, but then we’ll do another “one-time” increase… yadda yadda….)
The funded ratio drops from 80.3% to 67.2%.
Now, this is using the discount rate of 7.00%. I happen to think that’s still too high.
So I would be estimating a much higher baseline pension liability without COLAs, and a larger increase to the liability when COLAs were added.
But nobody asked me.
For what it’s worth, I went back to the 2017 report, to check what happened when they removed the COLA. Because of course, that would remove it from the value of the benefits.
There were multiple changes simultaneously, which made it difficult to tease out the COLAs on their own:
Most of the changes made increased the value of the liability, except for the COLA removal. The following table actually shows that:
The new assumptions (other than COLA removal) added $6.5 billion to the liability.
Removing the COLAs reduced the liability by $12.4 billion by themselves.
Outside Players
I mentioned the internal-to-Ohio players, but there are a few external players.
Ted Siedle, or Edward Siedle, was involved in this drama earlier on. He’s mentioned in the anonymous memo.
Here is one of the items Siedle has written: Siedle: What If Stakeholders in Every State Pension Demanded SEC Intervention?
In June 2021, the damning findings of my expert forensic investigation of the pension commissioned by the Ohio Retirement for Teachers Assocation (“ORTA”) were released. Among the key findings in the 128-page report titled The High Cost of Secrecy:
1) The pension had long abandoned transparency, opting instead to allow Wall Street money managers to withhold key investment documents from public scrutiny;
2) Legislative oversight of the pension had utterly failed, as the Retirement Study Council had somehow failed to perform statutorily-mandated fiduciary audits over the past 16 years;
3) Wall Street had been permitted to pocket lavish fees without review;
4) Investment costs and performance had been misrepresented, i.e., dramatically understated; and
5) Failure to monitor conflicts of interest had undermined the integrity of the investment process, as billions that could have been used to pay retirement benefits promised to teachers had been squandered.
Due to the serious investment management and securities issues identified, a copy of the damning preliminary findings were provided to Ohio legislators, state and federal securities regulators, law enforcement and later the State Auditor of Ohio.
I both agree and disagree with Siedle.
I do agree that there needs to be more full oversight of those who manage assets for public pension funds, and often those who have the responsibility to do so don’t have the skills or knowledge to provide effective oversight.
Also, given some of the history of pay-for-play scandals in California pensions and similar issues, some of the secrecy “requirements” for hedge funds/private equity investments that public pensions are getting into are just inappropriate for public pensions.
Where I disagree: Siedle likes to think that, only if those nefarious asset managers would reduce their fees, the benefits could be paid in full.
This is not just about Ohio STRS, but all such pension plans that have run into such trouble.
I, a very outside player, think he has the cause and effect mixed up.
Choices Have Consequences
I think the causal chain goes in this direction: the “standard” public pension benefits are set up to guarantee all the following:
a base pension amount that is related to their final salary
life-long retirement income
no exposure to investment risk for the retirees/participants (no change in benefits downward, no increase in contributions, etc.)
retirement age eligibility locked in at the age you started work
no exposure to the changing tax base
guaranteed COLAs
That is, it doesn’t matter that mortality has improved, that investments perform poorly, the tax base changes drastically, etc. — nothing in the deal can change once you’ve entered the public employee workforce.
This is a really expensive promise to make. But nobody wants to pay what that costs.
The way the public plans have tried to avoid asking for higher contributions from anybody, whether taxpayers or public employees, is by pursuing riskier investment strategies.
It doesn’t much matter if it’s dedicated internally managed, as with Calpers or Ohio STRS, where they may have a few outplacements for alternative assets, or if they outsource all their asset management.
The overpromising of benefits and not wanting to contribute much leads to the alternative assets, and then leads to high fees. That’s my causal chain.
So the bondholders and taxpayers are supposed to absorb all the risk. But it turns out they’re not doing that, and some of the risk is spilling on the public employees now.
Anyway, Metcalf and Tremmel (and Siedle) have sold the OTRA and others on the concept that if they can just get the assets fixed then they can get the COLAs back!
It’s just those nasty STRS employees getting in their way!
On the STRS side, it doesn’t take deep reasoning to see they know their jobs are being threatened. I’ve seen this sort of dynamic happen with Calpers and its particular management issues. So you get some real targets among weak managers, some who can play the political game, and then you get some collateral damage.
Speaking of which.
Stop with the Witch Hunts
Not that anybody will listen to me, because I understand why people are worked up over this: for STRS staff and management, this is their career, and their integrity is being questioned. They are being personally attacked. There must be nefarious forces at work! Hostile takeover!!!
On the teachers/retirees side, they are being squeezed by inflation and they don’t have inflation-adjusted pension benefits right now. Someone has come up with an investment strategy that will save them! The only reason somebody could be blocking this is because they’re eeeeeevil!!! How dare they!
Thus the competing anonymous accusations sent back and forth.
Oh, and one more item.
Are the Benefits Adequate?
I do not have a dog in this hunt, but when I saw the Ohio STRS participants aren’t in Social Security, that always makes my antenna twitch.
I will put my bias up front: I don’t think state and local employers should be able to skip Social Security. I don’t think any U.S.-based employer should be able to.
I know why state and local governments were allowed to. But it’s causing trouble as some of these pension systems are getting strained.
I am dropping this here, and I highly recommend Ohio STRS folks look into this as you do not have COLAs:
Social Security Bulletin: State and Local Government Employees Without Social Security Coverage: What Percentage Will Earn Pension Benefits That Fall Short of Social Security Equivalence?
Social Security is designed to provide a base of retirement income, to be supplemented in part by employer-sponsored retirement plans. However, approximately one-quarter of state and local government employees are not covered by Social Security, which federal law allows if their employer-provided plans provide comparable benefits. Yet many public pensions are less generous for recent hires, raising questions of whether those plans will still provide Social Security–equivalent benefits. Using plan actuarial reports, public-use survey data, and Social Security administrative files, we examine 66 plans and project that a significant minority of them are likely to fall short of providing Social Security–equivalent benefits, most often affecting workers who accrue medium-length tenures in state or local government early in their careers. In all, 750,000 to 1 million noncovered workers annually might be at risk of receiving pension benefits that fall short of Social Security benefit levels.
Developing, as they say, in the biz.
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