Spokesman: Ohio Gov. Mike DeWine not opposed to indexing for teachers’ investment strategy

The entrance to the Ohio State Teachers Retirement System headquarters in Columbus. Photo by Marty Schladen, Ohio Capital Journal.

The ongoing fight over the way Ohio teachers’ $90 billion pension fund is being handled has to do with huge bonuses, big fees and a proposal to divert two-thirds of it to an untested company.

But a spokesman for Gov. Mike DeWine last week said the governor did not object to the strategy many teachers and retirees want to use. Instead of plowing a big slice of the fund into high-fee, relatively non-transparent investments such as private equity and hedge funds and real estate, the reformers want to put the money into more passive vehicles that are indexed to the market as a whole.

DeWine has been in a battle with the reformers over how some want to invest the fund — but not over what they say they ultimately want to do, his press secretary, Dan Tierney, said in an interview last week.

“The governor doesn’t necessarily care if they continue the current investment strategy or if they change to an index fund,” Tierney said. “What he’s concerned about is that the funds be placed in trust with vendors or investments that are financially sound and meet the fiduciary duty that the board has.”

His statement could clear an impasse because one of the chief reformers — one whom Attorney General Dave Yost is in court trying to remove from the pension board — last week said he also was agnostic about who made the indexed investments .

Bad blood

Participants in the pension system, the State Teachers Retirement System of Ohio, have long been frustrated by what they see as a teachers pension trying to operate a mini Wall Street in downtown Columbus.

System employees have been getting big salaries and bonuses — more than half of its 500 employees are paid $100,000 or more and about a third make more than $200,000. Meanwhile, since 2017, retirees have gotten just two cost-of-living increases, 3% in 2022 and 1% last year.

The former STRS leadership has said that the infrequent, paltry COLAs were due to an aging group of beneficiaries and legislation intended to keep the fund actuarially sound.

But the austerity hasn’t seemed to apply equally to the pension fund’s staff.

In 2022, the pension board awarded fund managers $10 million in bonuses just two months before reporting annual losses of $5.3 billion. It had been a brutal year for investments, but the well-paid staff had underestimated losses by nearly 80% . Even so, the bonuses continued in subsequent years.

More generally, reform-minded teachers and retirees are suspicious of the “alternative investments” STRS staff has made with their money. As of April 30, the fund had almost $19 billion in private equity funds and other alternative investments, and another $8 billion in real estate.

Such investments are hard to readily value, and people make a lot of money off of them.

In 2009, STRS paid $65.4 million in fees to invest in private equity and hedge funds. By 2022, that amount had nearly tripled — to $175.8 million, according to numbers obtained from the pension system.

Over the entire period, such fees paid out by the pension system totaled $1.76 billion — just for the privilege of being able to invest.

Suspicion

The reform group has subsequently gained a strong majority on the board and vows to make changes. And reformers said they smelled a rat when DeWine and Yost earlier this month made much of a report from anonymous STRS staffers alleging a possible pay-to-play arrangement between two reformist members and an outside firm.

The reformers suspected that the STRS “whistleblowers” were trying to protect their gold-plated gigs and that the electeds were trying to protect a retiree-funded bonanza for friends in the financial industry.

The report accused two reform board members — Wade Steen and Rudy Fichtenbaum — of wrongdoing. It and Yost’s lawsuit say they improperly worked with two others to try to invest $65 billion of the STRS corpus in an index fund that would be free of the controversial alternative investments. Steen and Fichtenbaum have denied allegations of impropriety.

The proposal, once rejected by the STRS board, is controversial as well.

The fund that would get all that money, QED, was started by two men, one of whom has connections to former state treasurer Josh Mandel. In 2020, when the proposal was initiated, they had no experience, the fund wasn’t licensed and it might seem incautious to entrust 70% of retirees’ assets to it.

Steen, who was originally appointed to the STRS board by former Gov. John Kasich, has history with DeWine. A year ago, just as the reformers were poised to gain a voting majority on the board, DeWine tried to fire him , saying he’d missed too many meetings.

Steen disputed that, sued, won and was restored to the STRS board until his term ends later this year. Steen also disputes much of what AG Yost claims in his lawsuit, calling it “ defamatory ,” WEWS reported.

Agreement?

The board member last week also told reporters that while he was interested in placing pension funds in an indexed investment, he was not wedded to — nor even recommending — that QED be the vehicle for doing so.

“Now, I’m not even advising QED or anyone — what I’m advising is we need to look at index funding,” Steen said, according to WEWS. “We really need to take a look at that. That would dramatically reduce our costs.”

His statement suggests room for compromise.

Tierney, DeWine’s press secretary, said the governor only wants to make sure teachers’ retirement money is handled prudently.

“The issue with QED specifically is that they were not licensed at the time they were seeking the business … they had no track record, they had no clients and those were of grave concern,” Tierney said. “If they addressed those concerns and found a vendor who is licensed and has a track record, I don’t think the governor would have an issue if that’s the case. He doesn’t want to put his thumb on the scale of where the investment would go to.”

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