This is a long story – about teachers, power, pensions – and a lot (a lot!!!) of money.
Ohio Mud
In the past few months I’ve written several essays on political corruption in Ohio. The leaders of the state have been “steeped” in corrupt activity, from Gerrymandering to paying-off private industrial debt with public money. But somehow, Ohio comes across as politically “clean and pure”.
In fact, Ohio’s politics are as ugly as New Jersey, or Texas, or even Illinois. Our state just doesn’t bother to send folks to jail. (But one – ex-House Speaker Larry Householder, the notable exception to the rule. He “only” took a $60 Million bribe from power company Direct Energy).
Now, there is a battle over corruption at the Ohio’s State Teacher Retirement System (STRS). It’s been going on for the past several years (What’s the Deal), but this week, it boiled out into the open.
The System
The big picture: Ohio’s public school teachers have a separate retirement system from the rest of the world. Teachers don’t even pay into social security. They had no choices about how their retirement money was invested. It was “all in” to STRS, originally for at least thirty years of teaching to get a “full” retirement. (Teachers would get about two-thirds of their best three years). Teach an additional five years, and get almost equal to their best years as a pension.
The money; a percentage of the teacher’s salary matched by their school district, was “carefully” invested by the investment staff “wizards” at STRS. And for decades that system worked, living up to the self-anointed claim to be a “premier” retirement system. Retired teachers got annual Cost-of-Living-Allowances (COLA) of 3%. And for decades, they even received a “thirteenth” check at the end of the year. Insurance was cheap, and life was good for retirees.
The Market
But the near back-to-back stock exchange disasters in 2001 (9-11) and 2008 (housing bubble bust) shook the retirement world. Add that to the number of “Baby-Boomer” teachers reaching retirement age, and the “wizards” were concerned. Could they keep up with the financial needs of ballooning retirees with fewer “active” teachers paying into the system. In addition, actives were giving the option of splitting their contributions into a “defined contribution” plan, more like a 401-k. That money wouldn’t remain in the investment “pot”.
Meanwhile Ohio’s Republican Governor and state legislature gave the state retirement systems, including STRS, autonomous authority to change the structure of the pension plans, and to invest in private equity firms. It freed up the almost $90 billion in STRS investments for much more “creative” investing. It also let the legislators off the hook. They didn’t have to vote to cut retirees.
The Wizards
Retirement contributions increased from 10% to 14% of annual salary, now one of the most expensive in the Nation. School district contributions also increased to 14%. Retirement benefits were cut. The “thirteenth check” disappeared, insurance costs went up, and the COLA was cut from 3% to 2%. Ultimately it was suspended indefinitely.
STRS began hiring “private wizards” for the “in-house wizards”. Twenty percent of the over $90 Billion in investments went into private equity companies; $20 billion privately controlled and invested rather than direct open control by STRS. And the “in-house wizards” also went into the real estate business. Almost 10% of the Fund was invested in Columbus, New York, Texas, Illinois and California (STRS).
The nature of the investment fund became murky, as those “private” funds were shrouded in layers of non-disclosure agreements. Even when the overall portfolio lost billions of dollars in value ($5.3 Billion in 2022 alone), the in-house “wizards” still paid private equity fees. And they continued to get millions of dollars in “performance bonuses” themselves.
Meanwhile active teachers were paying more into retirement, and retired teachers were losing more and more of their spendable income. From 2014 to 2023, the “value” of their original pension lost 32% in purchasing power without a cost of living increase. The cost of health insurance increased, and many retired teachers were forced back into the job market just to make ends meet.
The Board
The Board that “governs” STRS is made up of eleven members. Four are appointed by the State Government (one each for the Treasurer, Legislature, Department of Education and the Governor). Two are elected by the retirees, and five are elected by active teachers. For decades the Board served as a “rubber stamp” for the investment “wizards”, routinely approving bonuses and even allowing the Executive Director control over the Board’s own agenda.
The Board didn’t exercise oversight, and didn’t seem to be concerned. And with the state government controlling four seats, and the major teacher union, the Ohio Education Association, controlling most of the other seven seats, STRS went on it’s “merry” way, despite the growing cries of retirees and the loss of confidence by many active teachers.
In 2021, retirees, dissatisfied with the “premier” pension that left them with lower standards of living, organized to elect a reform slate to the Board. The Ohio Retired Teachers Association (ORTA) teamed up with the Ohio STRS Members Only Forum (MOF, based on Facebook) and STRS Ohio Watchdogs to change the elected Board members. The goal: to get Board members more concerned with the impact of STRS cuts on retirees, and on “future retirees” as well.
The issue was clear: if the STRS fund had simply been invested in “passive” funds, indexed to the stock market, over the past twenty years the fund would have doubled. It didn’t take “wizards” to figure that out. Even with obvious buffers for market performance, the fund should have grown by billions, and never actually lost money. And STRS shouldn’t be paying millions in private equity management fees, and millions more in professional staff bonuses, regardless of loss to the fund.
The Money
It’s public money. It is the “fruit of the labor” of decades of teachers. (And for those who note that half of that money came directly from employing school districts – keep in mind that but for the teacher’s labor, that money wouldn’t be in the pension fund). It’s “survival” to the teachers and retirees who depend in good faith on the System. And clearly, it’s been mismanaged, with no one held accountable. And who benefits from this mismanagement?
First of all, it’s the “wizards”. The “wizards” work for STRS, get to set their own performance goals, hire the firms that determine whether those goals are achieved, and then pay themselves handsomely (last year, over $10 million in bonus money on top of six-figure salaries). Second, it’s the private equity firms, who make millions in management fees, and have non-disclosure contracts preventing public scrutiny of their actions, even by the Board members.
And, third, and perhaps most importantly, it’s the politicians who receive campaign contributions from those private equity firms. They are “vested” in making sure the pension fund monies are available for “their guys” to make money on. The politicians get their “cut”, even if it’s a legal contribution to a political fund.
And where does the Ohio Education Association (OEA), the teacher’s union, my union; stand? (In full disclosure – I am a former OEA local President). They are all-in behind the “wizards”, and refuse to answer why. It’s only speculation – but is there some tacit agreement between the union and the politicians they normally oppose? Is there some secret quid-pro-quo? It’s hard to know. But what is for sure is that OEA is positive in their support of the “old” board, many of whose members moved onto state-level OEA governance positions.
The Governor
Over the past three years, both “retiree” seats on the board, and three of the “active” teacher seats, were won by “reformers” in legal, audited, fair elections. (Only retirees can vote for retired seats, only active teachers can vote for active seats). When the last active seat was won by Pat Davidson, an ORTA and MOF reformer, it looked like real change was at hand. The Governor’s appointee, Wade Steen, had “seen the light” and come to the reformers’ side. For the first time, there would be a “reform” majority on the Board.
Governor DeWine stepped in. He removed Steen from the board, replacing him with – wait for it – a real estate and securities manager and $100,000 DeWine campaign contributor. Steen sued to serve out the remainder of his term, and after several months the Common Pleas and Appellate Courts agreed with him. The tens of thousands of dollars of Steen’s legal expenses were paid by ORTA. Steen regained his seat in April and went to the Board meeting to take his place. Then the lame-duck active representative and Chairman of the Board, Dale Price, walked out of the meeting without a motion of adjournment. That caused the Board to be unable to do business, and the meeting just ended.
The Doubt
Last week, Michelle Flannigan, a reform candidate, was elected to fill Price’s seat on the Board. Now with or without Steen, reformers will have control when her term begins in September.
And DeWine received an “anonymous letter”. It claimed that the reform board members were in the “thrall” and “colluding” with a business that does market indexing, called QED. In fourteen pages, the letter implies that QED has somehow “rigged” the multiple elections held for Board seats in the past three years. DeWine, just “doing his duty”, referred the letter to Ohio’s Attorney General Dave Yost, another beneficiary of the private equity campaign money. Yost promises to “protect” the retirement fund from “undue private influence”.
So here we are in “clean and pure” Ohio. If you’re a gambler (or investor), don’t bet on the reform majority actually taking control in September. Odds are, Yost will do a “speedy” investigation, and somehow disrupt things before there are seven votes to clean things up at STRS. The winners will be the governing party and, sadly, the Ohio Education Association, I guess.
But there’s no guessing about who the losers will be: the retired teachers of Ohio, and just as importantly, the students of Ohio. Why the Students? Because the “premier” retirement system was a big draw for new teachers, even making up for the reduced salaries. Now those rookie teachers can look forward to joining current retirees in one thing: a retirement filled with financial doubt.
