COLUMBUS, Ohio — The Ohio retired teachers’ pension board has approved millions of dollars in bonuses for their investment staff less than a month after grandstanding by eliminating the additional compensation to make a group of educators happy.
The State Teachers Retirement System (STRS) is embroiled in controversy. In summary, there has been constant fighting, two board resignations and allegations of both a public corruption scheme and mishandling of funds.
This all stems from a debate on how STRS should invest money — through the current system of actively managed funds versus an index fund. Active funds try to outperform the stock market, have more advisors and typically cost more. Index funds perform with the stock market, are seen as more passive, and typically cost less.
In short, "reformers" want to switch to index funding, while "status quo" individuals want to keep actively managing the funds. Recent elections have allowed the "reform-minded" members to have a majority of the board.
Reformers want a cost-of-living adjustment, or COLA. The COLAs were suspended for more than 150,000 retired Ohio teachers for five years starting in 2017. They were reinstated, but there has been a suspension of increases, significant for retirees who need this money and are dealing with inflation.
We have been covering this controversy from the beginning, including 10 recent stories dealing with the latest problems around the alleged corruption plot. To get a larger overview of the situation, we did a Q&A with viewers and readers.
RELATED: Answering viewer questions about Ohio's retired teachers' pension fund chaos
Recap
In May, consulting giant Aon terminated its contract with STRS. They provided board governance advice and services.
The same month, Attorney General Dave Yost filed a lawsuit to remove two members of STRS, stating they are participating in a contract steering "scheme" that could directly benefit them. Yost started the investigation after documents prepared by STRS employees alleged that Wade Steen and Chair Rudy Fichtenbaum have been doing the bidding of private QED.
Yost started investigating after STRS employees gave documents to Gov. Mike DeWine's office earlier that month. The office believes "numerous whistleblowers" at STRS wrote the 14-page memo, also including about a dozen other documents in an attempt to verify their allegations.
Click hereto learn more about the lawsuit.
In June, the board blocked their investment staff from getting performance-based incentives (PBIs). This was at the request of retired teachers, who argued it was unfair that employees were getting $10 million from the fund while they had restricted COLAs
In early July, I broke the story that McLagan, a data and analytics company, was quitting STRS. They had been providing compensation advice and research. They pulled out mere weeks after the board ignored their recommendation for staff PBIs.
"It's concerning when the board has seen not one, but now two consultants terminate voluntarily because they don't want to, presumably, be associated with this board or this system and the controversy that's going on right now," former STRS chief actuary Brian Grinnell said.
Grinnell shared his concerns about STRS after his resignation in May.
RELATED: Chaos continues with Ohio teachers’ pension fund as second advisor quits
The issues surrounding STRS depend on who you speak to.
Reformers
The reformers believe that STRS is mishandling the $94 billion pension fund and the staff is not being transparent with their money. They also believe the governor and AG are corrupt and trying to prevent reform-minded individuals from utilizing their newfound power to change the investment format — thus, a "sham lawsuit."
STRS, state
Both the STRS staff who wrote the memo and the state executives believe that Steen and Fichtenbaum want to change the investment structure to "steer" as much as 70% of current STRS assets, which is $65 billion, to a "shell company" that has "backdoor ties" to the members. STRS investment staff argue that they are doing the best of all the pension funds across the state and that the educators are being misinformed to further the "scheme" being put on.
Click here to learn more about the reformers, the STRS staff and the status quo.
Now
PBIs are essential for investment staff, Brian Grinnell said.
Eliminating bonuses could slash the income for STRS staff by half, which in turn could cause talented people to leave, he warned. If too many people leave, there won't be anyone to actually make money for the teachers.
"If they lose enough of that staff, they lose that capability and that can have significant long-term impacts on the system, on their ability to earn returns and provide the benefits they need in the long run," Grinnell added.
Not only would staff want to leave for better, more competitive jobs elsewhere — but fiduciary counsel George Vincent said it would be a violation of the board's fiduciary duty to eliminate PBIs.
Thus, a deal was struck with STRS board members on Friday to restore the bonuses — but not without debate.
"I feel like a gun is to my head right now," Steen said. "I don't have the resources I need from a compensation consultant."
"What you have is a recommendation that was rejected last month," Vincent responded. "That's the challenge that you face."
The board no longer has their compensation consultant to help them navigate PBIs because they quit.
While discussing what this policy would look like, board members proposed different plans to reinstate the PBIs but not have them be as lucrative.
Board member Pat Davidson, a reformer, worked out ideas with status quo member Alison Lanza Falls. Steen asked if they would be breaking their fiduciary duty if they just eliminated all staff in general and switched to index funding, which resulted in cheers from educators. Fichtenbaum, the chair, admitted they had to vote on something.
The board's actuarial consultant, Cheiron, gave an ultimatum, which was interjected an hour into the debate.
"If they adopt Mr. Davidson's proposal... they may need to reconsider their contract," Lynn Hoover, STRS acting executive director, said.
While under threat of termination from the third advisor, the board amended the proposal. What they ended up settling on is barely a change from the recommendations submitted by McLagan, numerous investment experts told me.
The policy before the elimination was a 10% reduction to PBI payments in any year where the board’s actuary determines there is not sufficient funding to change member benefits.
The new policy follows a format of PBI reduction for senior investment staff — 11 people. If there is no funding for any changes, that would be a 15% reduction. The only de minimis amount available would be 10%. If the SBP budget available is under $1.8 billion, then that would be 5%.
This is a temporary fix for a year, according to board member Pat Davidson.
"This is a band-aid to get us through until we can work with... whoever our new compensation consultant is to get a much better PBI policy that everybody understands, that we're 100% sure is adding value," Davidson said.
This "haircut" of at most 15% of compensation for 11 people could likely result in just a subtraction of $100,000 to $200,000 or so from the original policy, multiple experts told me.
The board was split on the vote, but the motion passed. Steen was adamantly against it and spoke to me afterward.
"When we have cost-of-living adjustments, I'll vote for the biggest bonuses possible," he said.
Steen said it might reduce the PBI by $1 million, so from $10 million to $9 million.
Former educators like Dean Dennis were disappointed.
"We don't want anything more or anything less than what we were promised," Dennis told me.
Reinstating the PBIs will be a "sore spot" for teachers, he added.
"They want an efficient system that works for them and sometimes they have the feeling that the system's working for the staff more than it's working for them," he said.
For him, this is personal. A full COLA would have meant seeing his family more.
"We always thought maybe we would be able to get an apartment and live close to our daughter who is 750 miles away — we planned that we would be able to do that," he said. "But once the coal disappeared, that dream disappeared too."
The millions in bonuses wouldn't be enough to restore the COLA, but educators said it would have been a step in the right direction to prioritize teachers.
Case Western Reserve business law professor Eric Chaffee is doubtful that cutting the PBIs will actually do anything substantial for the teachers, but he sees it as more of a move for optics.
"It's very symbolic," Chaffee said. "People are concerned here that ultimately, these bonuses are being issued when there are all sorts of questions being raised about STRS."
Symbolism isn't helpful when educators' pension and staff's income are on the line, Grinnell said.
"The disappointing thing is that it seems like there's a faction of the board that is working to actively undermine the staff, undermine trust in the staff and is not working in a productive manner to strengthen the system and to reassure people and to get them the benefits that they deserve," he added.
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