Ohio teachers' pension reforms should not be 'sleight of hand' at expense of taxpayers

Zachary Christensen is managing director of the Pension Integrity Project at Reason Foundation.

Facing multiple investigations by state officials of a "hostile takeover" of its managing board by private interests, Ohio's State Teachers Retirement System must address how it will protect its role as a fiduciary to members and taxpayers.

Self-proclaimed reformers have for years aimed to increase benefits without increasing costs through convoluted investment strategies. But this approach is not reform, it is just a sleight of hand to add to the growing costs and risks of pensions on taxpayers and school districts.

As The Columbus Dispatch reported, Attorney General Dave Yost filed a lawsuit to remove two State Teachers Retirement System (STRS) board members “saying they breached their fiduciary duty to protect the pension fund.”

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The accusations involve an anonymous memo alleging improper connections of the system's board to outside parties.

The memo details a years-long campaign by a teacher advocacy group to hand more than half of the public pension system's $92.8 billion in assets to a private investment group named QED Management LLC, which promised savings in administrative costs and massive bumps in investment returns using untested trading strategies, presumably artificial intelligence as the proposed name of the partnership was OhioAI.

These projected outcomes were sold as a no-cost way to bring back teacher benefits that were previously cut to address growing pension costs and debt.

Why is QED problematic?

The issue was that QED had no clients and no track record to back these promises, leading to a resounding rejection by STRS investment consultants. They did, however, convince a teachers' advocacy group, the Ohio Retirement for Teachers Association (ORTA), that their approach was the key to getting benefits back, but the STRS board stood in the way.

The lack of any cost-of-living adjustments for retirement benefits has become a major topic of discussion for Ohio educators.

Reforms passed in 2015 gave the STRS board discretion to adjust this benefit and others—like contribution rates and retirement age—if it found that it was necessary to maintain a path to full funding of the pension system.

The cost-of-living adjustment was discontinued indefinitely in 2017 due to ongoing funding challenges at STRS, but many saw this QED proposal as their big chance to get those benefits back.

With the financial and influential backing of ORTA, proponents of the investment scheme engaged in a coordinated pressure campaign aimed at swaying STRS staff and trustees, eventually reshaping its governing board with elected members who are openly in favor of adopting any investment strategy as long as it pays for benefit enhancements. As the anonymous memo alleges, with the self-proclaimed "reformers" recently elected, the STRS board could make the system invest in QED, despite the warnings of the plan's investment advisors.

The ongoing tumult and recent investigations into the STRS board show a major problem with the body's structure. The majority of the board, seven of the 11 members, are elected by teachers. The remaining seats are filled by politically appointed experts.

Needs of taxpayers take back seat

While it is important for teachers to have a voice in their retirement system, these elected members have no connection or accountability to the policymakers and taxpayers who will ultimately foot the bill for any unexpected pension costs.

It is predictable, then, that the board increasingly leans into ideas to increase benefits, even at the risk of significant costs to taxpayers from, for example, an ill-advised investment.

Ohio school districts and taxpayers need an STRS board that will actually address the ongoing debt challenges facing the pension system, not looking for back-end opportunities to add to the funding problems.

Despite several sacrifices already made by active and retired teachers and school districts, Ohio STRS is still more than $20 billion short of paying for promised pension benefits, a debt that will cost school districts and ultimately taxpayers over $2.4 billion annually over more than 10 years.

Even worse, this steep path toward full funding of the pension system could easily become even more expensive for school districts if the plan's lofty investment return expectations are not met.

The allegations of collaboration to circumvent the STRS board's fiduciary duty are concerning.

Lawmakers should insulate the board from the influence of outside parties. It should also be clear to Ohioans that long-shot investment strategies that mask taxpayer risks are not the path toward improving teacher benefits.

Zachary Christensen is managing director of the Pension Integrity Project at Reason Foundation.

This article originally appeared on The Columbus Dispatch: Ohio teachers' pension reform shouldn't be investment hustle