This is a long story – about teachers, power, pensions – and a lot (a lot!!!) of money.
Ohio Mud
In the past few months Iâve written several essays on political corruption in Ohio. The leaders of the state have been âsteepedâ in corrupt activity, from Gerrymandering to paying-off private industrial debt with public money. But somehow, Ohio comes across as politically âclean and pureâ.
 In fact, Ohioâs politics are as ugly as New Jersey, or Texas, or even Illinois.  Our state just doesnât bother to send folks to jail. (But one – ex-House Speaker Larry Householder, the notable exception to the rule.  He âonlyâ took a $60 Million bribe from power company Direct Energy).
Now, there is a battle over corruption at the Ohioâs 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:  Ohioâs 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 âall inâ to STRS, originally for at least thirty years of teaching to get a âfullâ 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. Â
The money; a percentage of the teacherâs salary matched by their school district, was âcarefullyâ invested by the investment staff âwizardsâ at STRS. And for decades that system worked, living up to the self-anointed claim to be a âpremierâ retirement system. Retired teachers got annual Cost-of-Living-Allowances (COLA) of 3%. And for decades, they even received a âthirteenthâ 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 âBaby-Boomerâ teachers reaching retirement age, and the âwizardsâ were concerned.  Could they keep up with the financial needs of ballooning retirees with fewer âactiveâ teachers paying into the system.  In addition, actives were giving the option of splitting their contributions into a âdefined contributionâ plan, more like a 401-k.  That money wouldnât remain in the investment âpotâ.Â
Meanwhile Ohioâs 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 âcreativeâ 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 âthirteenth checkâ disappeared,  insurance costs went up, and the COLA was cut from 3% to 2%. Ultimately it was suspended indefinitely. Â
STRS began hiring âprivate wizardsâ for the âin-house wizardsâ.  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 âin-house wizardsâ also went into the real estate business. Almost 10% of the Fund was invested in Columbus, New York, Texas, Illinois and California (STRS). Â
The nature of the investment fund became murky, as those âprivateâ 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  âwizardsâ 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 âvalueâ 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 âgovernsâ 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 ârubber stampâ for the investment âwizardsâ, routinely approving bonuses and even allowing the Executive Director control over the Board’s own agenda.Â
The Board didnât exercise oversight, and didnât 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 itâs âmerryâ way, despite the growing cries of retirees and the loss of confidence by many active teachers.
In 2021, retirees, dissatisfied with the âpremierâ 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 âfuture retireesâ as well.
The issue was clear: if the STRS fund had simply been invested in âpassiveâ funds, indexed to the stock market, over the past twenty years the fund would have doubled. It didnât take âwizardsâ 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 shouldnât 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 âfruit of the laborâ of decades of teachers. (And for those who note that half of that money came directly from employing school districts â keep in mind that but for the teacherâs labor, that money wouldnât be in the pension fund). Itâs âsurvivalâ to the teachers and retirees who depend in good faith on the System. And clearly, itâs been mismanaged, with no one held accountable. And who benefits from this mismanagement?
First of all, itâs the âwizardsâ. The âwizardsâ 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, itâs 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, itâs the politicians who receive campaign contributions from those private equity firms. They are âvestedâ in making sure the pension fund monies are available for âtheir guysâ to make money on. The politicians get their âcutâ, even if itâs a legal contribution to a political fund.
And where does the Ohio Education Association (OEA), the teacherâs union, my union; stand? (In full disclosure â I am a former OEA local President). They are all-in behind the âwizardsâ, and refuse to answer why. Itâs only speculation â but is there some tacit agreement between the union and the politicians they normally oppose? Is there some secret quid-pro-quo? Itâs hard to know. But what is for sure is that OEA is positive in their support of the âoldâ board, many of whose members moved onto state-level OEA governance positions.
The Governor
Over the past three years, both âretireeâ seats on the board, and three of the âactiveâ teacher seats, were won by âreformersâ 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 Governorâs appointee, Wade Steen, had âseen the lightâ and come to the reformersâ side. For the first time, there would be a âreformâ 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 Priceâs seat on the Board. Now with or without Steen, reformers will have control when her term begins in September.
And DeWine received an âanonymous letterâ. It claimed that the reform board members were in the âthrallâ and âcolludingâ with a business that does market indexing, called QED. In fourteen pages, the letter implies that QED has somehow âriggedâ the multiple elections held for Board seats in the past three years. DeWine, just âdoing his dutyâ, referred the letter to Ohioâs Attorney General Dave Yost, another beneficiary of the private equity campaign money. Yost promises to âprotectâ the retirement fund from âundue private influenceâ.
So here we are in âclean and pureâ Ohio. If youâre a gambler (or investor), donât bet on the reform majority actually taking control in September. Odds are, Yost will do a âspeedyâ 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 thereâs 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. Â
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