Oversight of Ohio’s $94 billion pension fund for retired teachers has plunged into chaos as the U.S. crisis over underfunded benefits for retired state employees has come to light.
Ohio’s state teachers’ pension fund is short $20 billion in the coming years to support its retirees. Cost-of-living increases for the nearly 157,000 retirees who rely on the pension have been largely mitigated over the past seven years as the fund tries to repair its finances. This has come at a time of rising inflation in the United States.
In response, the teacher-dominated board briefly blocked incentive bonuses for the fund’s professional investment staff and considered changing investment strategies and outsourcing asset management to outside firms. That, in turn, led to a proposal to transfer the fund’s assets to a firm with no history, triggering an investigation by the state attorney general into alleged self-dealing. The fund’s governance adviser has resigned.
The events at STRS Ohio, as it is commonly known, have led to an open battle rarely seen in the administration of U.S. public pension funds. An extreme manifestation of the shortages plaguing pension plans across the country is now beginning to make itself felt. The shortages are a long ticking time bomb, triggered by a combination of demographic changes and risky policy decisions. The largest and longest-lived generation in U.S. history is retiring with pension plans that have overpromised and under-returned to fund them.
The New York-based think tank Equable Institute wrote in a July report that the U.S. pension system, which faces $1.3 trillion in unfunded liabilities this year, is “stuck in pension debt paralysis.” This has put generational pressure on pension funds as they struggle to meet the needs of current retirees without running out of funds to support future retirees.
The problem is particularly pronounced at STRS Ohio, where seven of the 11 board members are active or retired teachers. The system has about 175,000 working members, a number that will likely be surpassed by the number of retirees in the near future – leaving fewer workers to fund the benefits of a larger, aging population.
“Given that the majority of the STRS board is made up of active or retired teachers, it is no surprise that they are pushing for increases in their own benefits without adequately addressing the risks and costs that would be imposed on state government and taxpayers,” said Zachary Christensen, a senior policy analyst at the Reason Foundation who has been researching the state of the pension plan at the request of the Financial Times.
Most U.S. government employees enjoy generous retirement benefits, such as inflation-linked cost-of-living adjustments (Coke), to compensate for their lower-paying careers in the public sector.
STRS Ohio has spent more than a decade cutting benefits since the state passed a law in 2012 aimed at improving the plan’s dangerously low funding status. The reform resulted in STRS’s coke increasing just 4 percent over the past seven years, during a period when inflation has risen 30 percent.
The austerity measures actually improved STRS’s performance, with the financing ratio rising from 56 percent in 2012 to 81 percent last year.
But the improvements came at the expense of retirees, who had to make do with a pension that lagged behind inflation. Robin Rayfield, a retired STRS member and executive director of the Ohio Retirement for Teachers Association, an advocacy group, said he lost $38,000 because of the Coke cuts.
“It’s a big change,” said Rayfield, 67, who receives a $70,000-a-year pension. “Every five or six years I have to buy a new car, even though I’ve been driving the same car for 12 years.”
He added that many of his poorer peers were facing “very difficult choices” between buying food and medicine due to falling Coke sales.
As retiree frustration over declining benefits grew, some STRS board members pushed for changes to the fund despite backlash from the investment team.
In a 14-page memo to Governor Mike DeWine and Attorney General Dave Yost in May, STRS investment staff alleged that two board members from the reform camp had risked “a clear breach of their fiduciary duties” by advocating that up to 70 percent of the pension plan’s assets be managed by an investment company with no track record.
Several investment experts said STRS’s 7 percent annual return on capital between 1999 and 2023 was among the best in the country and that a switch to index investing, even if successful, would not save enough to close the funding gap.
“It’s about improving risk-adjusted investment performance by maybe a percentage point or two, which is great,” says Josh Rauh, a finance professor at Stanford University, of index investing. “But that pales in comparison to the magnitude of the unfunded liabilities.”
Tensions escalated when DeWine replaced Wade Steen, one of his own nominees for the pension fund board, in May of last year, accusing him of a lack of attendance at board meetings. Steen denied the allegation and returned to the board in April after a local court ruled against DeWine’s order.
A few weeks later, Aon resigned from his position as governance advisor to STRS. Yost announced an investigation shortly thereafter.
Now the teacher-dominated board has voted to support a faction that wants to restore the Coke improvement.
The battle for board control is likely to continue. At a meeting last month, Ohio state Rep. Phil Plummer suggested STRS reduce the number of teachers on the board so the fund can “get people who have the knowledge, the background and the expertise to monitor who is investing our money.”
Steen, who is set to resign in September, is not convinced. “I don’t know how the 500,000 active and retired teachers in the state of Ohio would take this,” he said. “I think they would have a lot of trouble with the move.”
