Ohio STRS Drama Continues: No Bonuses and Board Member Resigns
This is going to continue as there are competing interests
I will link my older posts at the bottom in case you need some context/background. Because I will just jump into it:
No performance bonuses for Ohio STRS investment staff
[June 25] ai-CIO: STRS Ohio Board Votes Against Performance Bonuses for Investment Staff
The board of the State Teachers Retirement System of Ohio has voted to deny 69 investment staff of the pension fund $10 million in performance bonuses for fiscal year 2025, a period which begins July 1, 2024.
The 5-4 vote on Friday was made across the factions that have emerged within the fund’s board. A faction of STRS Ohio board members, known as the reformers, wants the pension fund’s assets to be passively managed through index funds as well as increase cost of living adjustments for the fund’s roughly 500,000 members.
According to STRS Ohio data, the pension fund has consistently been in the top 10% of performance relative to peers. Over the past 20 years, the fund has been in the top 3% of performance according to performance data from the fund’s consultant Meketa Investment Group’s plan sponsor peer group analysis.
As I have mentioned before, it is not appropriate to look at investment performance on an absolute return basis for evaluating how well the investment staff did, when they are supposed to be supporting a long-term liability like a pension.
There’s something called performance attribution, where one can carve out the various bits:
strategic asset allocation (deciding the broad asset targets for the fund, like 30% broad equity, 40% public bonds, 30% “alternatives” — this is a very rough version)
sector selection within each asset class (within equity, for instance, choosing energy, financials, consumer, entertainment, at different weights) over particular periods
choosing specific “names” within each sector to invest in, over particular periods
The strategic asset allocation tends to be fairly stable or dependent on the demographics/nature of the liabilities. The board may approve the asset allocation, and the investment staff has different responsibilities to do the other parts.
The investment staff can then be measured on benchmarks appropriate for what they have control over. If their task is to select specific “names” (aka specific companies) within the energy sector in which to invest in, for equity investments, then the performance would be measured by comparing against how the broad energy sector did, not how the entire equity markets did or how all possible investments could have done.
At the board meeting, some board members argued that a loss of performance-based compensation means that some investment staff could leave the fund. Acting executive director Lynn Hoover noted at the meeting that the fund has seen more than 200 professionals leave the organization in the past five years.
“200 is a heck of a lot of people that have separated or retired from the organization, and I have no reason to believe that won’t continue going forward and we have to plan [for] that, that’s a significant amount of expertise that we have to train and get ready to be able to manage the assets and professionally run the system, this is not sustainable and I would not recommend we continue down this path,” Hoover said at the meeting.
That does sound like a lot of people.
I wonder how many staff Ohio STRS has as employees.
Internally, STRS Ohio is managed by an executive director, three deputy executive directors and seven senior staff members, and employs about 500 associates.
Uh, 200 people from an organization of that size? That’s an awful lot of turnover.
[That said, there has been a lot of turnover in the financial services biz in the post-pandemic era, not unique to Ohio STRS.]
Back to the ai-CIO piece:
In 2017, cost of-living adjustments were suspended for five years for several of the pension fund’s beneficiaries. Following a $5.3 billion loss in fiscal year 2022, some beneficiaries of STRS Ohio wondered why investment staff were receiving bonuses while COLAs were not being issued. Another board meeting in July will continue the discussion of what will happen to the performance-based incentive program for the upcoming fiscal year.
Of course, given my definition of how performance is measured in investment, if one loses less (relatively) than others in a similar situation, then yes, one may get a bonus. You were a good steward of the money.
However, what has kicked off this whole issue has been the lack of COLAs for many retirees. In a time of high inflation, retirees have been on edge about this. The members of Ohio STRS have become more active in looking at the governance of their pension fund.
But notice the vote was 5-4, and there are supposed to be 11 members of the board. There’s a story on that:
Ohio STRS board member stepped down
[June 25] News 5 Cleveland: Ohio teachers’ pension fund board member resigns amid controversy, archived meeting proves AG isn't lying
A member of the chaotic teachers' retirement pension fund board in Ohio has resigned amid the ongoing controversy — possibly changing power dynamics within the system.
Steve Foreman, known as a "reformer," stepped down as of Friday evening, he told me.
This tip came as we obtained a now-archived video meeting proving Ohio Attorney General Dave Yost's claim that board members were promoting a $65 billion partnership with an investment firm that lacks "legitimacy."
You can go to the link to see the bits about all the back and forth, with respect to the fund QED.
I just want to get to the nut:
The State Teachers Retirement System of Ohio (STRS) board is made up of 11 members. There are five elected contributing teachers and two elected retired teachers. The governor gets to appoint one investment expert. The speaker of the House and the Senate president get to jointly appoint an expert. The treasurer and director of the Department of Education and Workforce both get to designate an expert.
….
Right now, there are two vacancies — Foreman's seat and former Chair Dale Price's seat. Price resigned following the reformers removing him as chair.
Price's term expires this summer, so there was an election to find his successor. Reformer Michelle Flanigan is set to take his place in a few months.
Foreman's seat wasn't up for reelection until Aug. of 2026, so the board will need to start taking applications for his replacement.
One of his final acts on the board was voting not to give STRS staff raises, which educators applauded.
So, one can posit cause-and-effect of the meeting leading to Foreman’s retirement (he’s calling it a retirement and not a resignation. Either way, he will be off the board. I do not care what name he calls it.)
Other Commentary/Coverage
Toledo Blade Editorial: STRS reform has begun
Reform has begun at the State Teachers Retirement System of Ohio.
The board blocked $10 million in the proposed 2025 budget for a performance-based incentive program that has become a huge part of the pay package for the STRS investment staff.
The staff bonuses have been avidly opposed by retired teachers because they add between $50,000 to $300,000 annually to the pay package of the STRS investment staff while retirees have only received 4 percent in total cost of living adjustments since 2017. They had expected 3 percent annual benefit increases, so they’re behind by 20 percent.
STRS leadership says bonuses are industry standard and portrays the staff as exceptional. Treasurer Robert Sprague’s appointed STRS board member, Alison Lanza Falls of Port Clinton, fought to keep the bonuses, claiming otherwise staff will quit. Ms. Lanza Falls spent 30 years on Wall Street and it shows. If the entire investment staff at STRS left and the pension was put on auto pilot in an index matching the broad market, history shows performance would improve.
The Nevada Public Employee Retirement System operates on this model, with just two investment department employees, paying 1/100th of 1 percent in fees on their indexed funds. Nevada’s 10 year annualized return is 8.9 percent, easily beating the 7 percent assumed rate of return STRS needs to stay on track.
As Ohio Auditor of State Keith Faber’s Special Investigations Unit pointed out, STRS has trailed the S&P 500 index for 13 of the last 22 years. The investigation was launched because of allegations the bonuses were earned through underreporting private equity expenses.
ORTA
ORTA is the Ohio Retirement for Teachers Association, and here is what they have to say:
ORTA is issuing a “truth to power” warning
The Ohio Retirement for Teachers Association (ORTA) is warning the press to closely follow what is happening at the State Teachers Retirement System (STRS). ORTA is issuing a “truth to power” warning.
During the past two STRS elections, ORTA’s reform-minded candidates, who advocate for transparency in investments and safer investment practices, have been resoundingly elected by our members. However, after each of these crucial elections, the STRS staff, in a concerning move, has involved Governor DeWine in an apparent attempt to disrupt the will of the voting members. In the most recent instance, a 14-page 'anonymous' document was delivered to the governor’s office and subsequently to Ohio Attorney General Yost (AG). The focus of this letter was STRS board members Steen and Fichtenbaum. Shockingly, without consulting the accused board members, the AG filed a suit against them based on unverified charges.
ORTA notes that both of these board members challenged the STRS Performance-Based Incentive (PBI) Benchmarks, which are used to award large and controversial bonuses. Steen revealed that the STRS Benchmarks were based on the investment staff’s own performance, yet bonuses were awarded. Fichtenbaum wants PBI benchmarks to be clear and relevant to what STRS projects to be their annual earnings assumption.
My additional comment
Choices have consequences.
This does mean many things. I originally wrote such talking about choices made with regard to retirement systems.
I had a post on the effect of COLAs. On funding (or, rather, not funding) pensions.
Also, on the shifts into alternative assets.
I didn’t get too much into internal management and outsourcing of asset management. Passive or active management. Mainly because the “alternative asset” post covers the issue of the need to chase yield when the funding doesn’t keep up with the need to cover promises.
There’s little difference between Ohio STRS’s allocation to alternative assets and the median allocation among public pension funds:
Unwinding those positions would not be cheap, before their maturity, for what it’s worth. But that’s a choice for another time. But liquidating any of their positions in equities or bonds held may be disadvantageous, whether “alternative” or public. It all depends.
By removing performance bonuses, one does not necessarily get any positive results.
They may simply end up outsourcing the performance bonuses to external asset managers.
“But we’ll just have an indexed strategy!”
A single index?
Or an index for each asset class that you were allocating to?
Remember a total return approach makes little sense for a pension, where cash is continually coming in and going out. You need to consider timing of cash flows. That is, duration.
And if you don’t know any of that….
….maybe you shouldn’t be involved in investing for pensions.
Prior Ohio STRS posts
In chronological order:
6 May 2024: Public Pension Governance Drama in Ohio
10 May 2024: Ohio Pension Drama Continues: Investigation Called on "Hostile Takeover"
16 May 2024: Ohio State Teachers Pension Drama Continues! Board Turmoil!
17 May 2024: More Ohio STRS Commentary: Alternative Assets in Pensions, Anonymous Memos, and Teachers Pensions in General [corrected/updated on May 22]
1 June 2024: Corrections and Clarifications on Ohio STRS: Audits and Investments