What’s next for Ohio’s teachers’ pension fund?

COLUMBUS, Ohio (AP) — A battle is underway over the future of Ohio’s $94 billion teacher pension fund as would-be reformers try to deliver long-promised benefits to retirees with the help of an aggressive firm. investment promoting unproven AI. -Driven business strategies face intense scrutiny.

The eyes of Wall Street and the half-million members of the Ohio State Teachers’ Retirement System are on the state as the drama unfolds. A special meeting has been called for Thursday of a board nearly paralyzed by infighting whose chief executive is on long-term leave over misconduct allegations he denies.

Years of tension in the background came to a head on May 8, when Ohio’s Republican governor, Mike DeWine, announced that he had sworn in a 14-page anonymous memo and other documents that contained “disturbing allegations” about the STRS board and were being turned over to authorities.

Republican Attorney General Dave Yost launched an investigation the next day into what he called the fund’s “susceptibility to a hostile takeover by private interests.” He followed up with a lawsuit seeking to oust two reform-minded board members – Wade Steen and Rudy Fichtenbaum – for backing a plan to give $65 billion, or about 70% of STRS assets, to a fledgling firm. investment called QED. The team is co-led by two people, one of them a former deputy treasurer of Ohio, who lives in a condominium in suburban Columbus.

“This is not monopoly money; “It is hard-earned income that belongs to teachers,” Yost said as he began his research. “There is a responsibility to act in your best interests.”

The Ohio Teachers Retirement Association, a watchdog group for retirees, says Steen and Fichtenbaum have been unfairly targeted. The group defends reformers’ push for change as a fight against years of opaque management and greed.

Teachers, who are generally not eligible for Social Security and therefore rely heavily on the fund in retirement, are particularly upset by the dearth of cost-of-living adjustments and market losses the fund has experienced over the years, even as STRS investment professionals have done so. collected big bonuses. They have called for more transparency in the fund’s investment and payment practices.

“We’ve been calling for an investigation for years,” said Robin Rayfield, the association’s executive director. “Then our response to them would be: ‘Where have you been?’”

Rayfield said public education in Ohio will be “totally politicized” if DeWine and Yost succeed in taking down STRS reformers. He described it as the third leg of a stool that also includes the approval of a universal school voucher program in last year’s state budget and transfer of oversight of K-12 education from Ohio’s independent state school board to DeWine’s cabinet. An ongoing lawsuit challenges the latter as unconstitutional.

“Governor DeWine has done more to ruin public education than all other governors combined,” he said.

In recent years, the nearly $6 trillion U.S. public pension sector has increasingly swapped equities for riskier, actively managed alternative investments such as hedge funds and private stocks, a trend that senior researcher David Draine of the Pew Charitable Trust on public sector retirement systems, says requires the kind of transparency that Ohio reformers have sought.

“As public pensions are taking on risky and complicated assets, it is important that they are transparent about those investments: what the returns are on their performance, how much they are paying for them and what the risks are,” he said. .

However, critics say putting shadowy QED in charge of STRS investments carries an even greater danger.

Aristóteles Hutras, former director of the Ohio Retirement Study Council, a legislative oversight committee, believes the governor is rightly trying to shield STRS from reformers’ AI-driven optimistic visions for improving the fund, at which he calls “magical thinking.”

“STRS has survived a world war, a great depression, a great recession and a global pandemic, and is still paying benefits,” said Hutras, a Democrat. “This notion of QED, and essentially directing a contract, in my humble opinion, is the most serious threat to the solvency of STRS in the last 96 years.”

The then-chairman of the fund’s board of directors issued a statement after DeWine’s referral saying that STRS was cooperating but assuring recipients that the fund was secure, well-managed and in a “solid financial position.”

Among the claims in the 14-page memo, whose murky origins one board member says should be investigated, are that QED’s Jonathan Tremmel approached STRS in 2020 with claims that the fund was incorrectly calculating performance, points reference and investment costs. “He also claimed to have AI-based trading strategies that would solve the ‘problems’ of STRS,” the memo said.

Leaders rejected Tremmel’s initial pitch due to QED’s lack of professional records, clients, or history. His business partner, Seth Metcalf, who worked under former Ohio Republican Treasurer Josh Mandel, returned to STRS asking that QED be given a second look.

Around that time, the memo’s authors contend, Steen, Fichtenbaum and two other then-board members began raising nearly identical questions about STRS’s performance to the QEDs and began working behind the scenes to land an affiliate company, OhioAI. , pension fund business. Metadata for some letters and memos showed that they originated from Tremmel or Metcalf.

The Federal Trade Commission began to warn companies at that time proceed with caution with automated tools that could have biased or discriminatory impacts. Last year, the commission took his warnings furtherwarning companies that false or unsubstantiated claims about what AI could do for their customers could lead to enforcement action.

Neither Metcalf nor Tremmel returned calls seeking comment on their statements to STRS. In his lawsuit, Yost told the court: “The owner of this shell company continues to sell STRS a secret and unproven investment scheme while his own condominium is in foreclosure.” The attorney general accuses Steen and Fichtenbaum of “covert ties” to QED.

Steen denies Yost’s claims, including that $65 billion was ever on the table. He maintains that the reaction to his persistent questioning of STRS practices shows he has hit a nerve.

“It’s hiding behind litigation that is defamatory, but it’s not true,” Steen said after the May 15 board meeting. “I thought there was going to be a fair and impartial investigation. I’m guessing this might be the fastest investigation ever done in Ohio history. But we are going to defend this vigorously. None of that is true. Everything is false”.

DeWine called it a “big red flag” when Aon, a nationally respected consulting firm that had been hired to help address fiscal performance and management issues, abruptly terminated its contract with the pension fund earlier this month. .

“The unspoken implication is that the governance issues at STRS are so concerning that Aon could not continue its contract in good faith,” DeWine said in a statement. An Aon spokesman declined to comment.

STRS reformers have not backed down. Now controlling a majority of votes on the 11-member STRS board, they moved forward during the board’s May meeting to oust rival leaders and elect Fichtenbaum, a Wright State University economics professor emeritus, as president of board.

Many of the retired teachers who attended applauded after the coup. Nearby was a sign with a different STRS acronym: “Stealing Teachers’ Retirement Savings.”

“This needs to happen for years,” said Lee Ann Baughman, 82, who taught at an elementary school in suburban Columbus for 32 years. “It has been difficult for these retirees. Many of them have a part-time job, they are old and it has been very painful not to get what they were promised.”