The $90 billion Ohio teachers’ pension fund was the issue in a lawsuit filed Wednesday by Republican Attorney General Dave Yost seeking to remove two of its board members, and at a regular monthly meeting a few hours later the board voted to install one of those two as chair.
The upheaval at the State Teachers Retirement System has supporters and critics of the fund's management speaking out. The fund manages assets for around a half a million active and retired teachers and others in education in Ohio. It offers health care coverage, but retirees don’t get Social Security.
Gov. Mike DeWine called for an investigation of STRS after receiving an anonymous letter thought to be written by STRS staff, outlining concerns about ties between a private investment company called QED and Wade Steen and Rudy Fichtenbaum. Those board members are targeted for removal in the state’s lawsuit, which alleges the two "seek to steer as much as 70% of STRS’s current assets (about $65 billion in teacher pension funds) to a shell company that lacks any indicia of legitimacy and has backdoor ties to Steen and Fichtenbaum themselves."
“These are serious allegations. I have an obligation to turn it over to every agency, that might be impacted or might have an obligation to investigate," DeWine said.
"There was serious discussion about taking two-thirds of the money (in the STRS fund) and putting it in a very, very untested program, untested investing, a different way of investing, and entrusting that money to a company that had virtually no experience in doing that," DeWine said, referring to failed attempts in 2020 and 2021 to get the STRS board to bring on the private investment company QED. "So that was my grave concern."
According to the letter, QED co-founder Seth Metcalf, the former deputy state treasurer under Treasurer Josh Mandel, reached out along with co-founder Jonathan Tremmell to Steen, Fichtenbaum and other board members. But the letter said they were told QED did not meet STRS's investment criteria.
Why those two board members are named in the lawsuit
Steen, who had been appointed to the STRS board by then-Gov. John Kasich in 2016 and reappointed by DeWine in 2020, won a lawsuit to get back on the board after DeWine removed him last summer for missing meetings. Steen and Fichtenbaum have aligned with board members backed by retired teachers angered by a suspension of their cost of living adjustment (COLA) for five years. Members backed by retirees now comprise a majority of the STRS board. Just hours after Yost filed the lawsuit, those members voted to oust the board chair and put Fichtenbaum in charge of the board.
Those who support Steen and Fichtenbaum say the allegations are false, and that the lawsuit is an attempt to stop changes that could bring more transparency to the fund's investments. And they claim state officials want to stop that because of campaign contributions they receive from Wall Street and private equity interests.
When asked about whether they want to work with QED, Steen said on Wednesday: "I'm not even advising QED or anyone. What I'm advising is we need to look at index funding." Fichtenbaum said he wouldn't respond to that question.
At a meeting in a few weeks, the STRS board will consider hiring an investigator to look into who wrote that letter. The board also voted to extend until June 30 the paid leave for the executive director of STRS, who was suspended in November after staffers accused him of violent behavior and sexual harassment. Bill Neville’s leave was set to expire on Friday. A third party review released in February found no wrongdoing by Neville.
Critic says he saw trouble coming, but STRS disputes that
Forensic investigator Ted Siedle looked into STRS in 2021 after being hired by the retired teachers. His subsequent report blasted STRS for a lack of transparency, high fees and poor performance. STRS fired back, saying the report contained “numerous misstatements and allegations not supported by evidence".
Siedle said he's not working with Steen, Fichtenbaum or other members of the STRS board, but said state officials clearly don’t want the board to make changes with the fund.
“This is not a hostile takeover by a reform-minded board. It's a reform-minded board trying to restore integrity and fight back a hostile takeover that happened years ago," Siedle said.
The cost-of-living adjustment for STRS retirees were suspended in 2017, and restored in 2022. That same year, STRS paid investment managers $10 million in bonuses, though the fund lost 3% of its value, or about $3 billion. Managers got $9 million in bonuses in 2023.
Siedle said if STRS had been prudently managed, there would have been $90 billion available over the past 30 years to pay the COLA. That's a claim STRS has denied. And in March, the fund's actuary Cheiron said an on-going 3% COLA would add about $21 billion in liabilities.
But Siedle and other "reformers" have pushed for changes to STRS including re-examining private equity and alternative investments, which they say are secretive, risky and have exorbitant fees.
"Warren Buffett has told public pensions for decades now that they should index their money in fully transparent, low-cost index funds," Siedle said. "There's absolutely no need for richly compensated staff. There's no need for paying any staff bonuses and the money would be managed better. And the pension would be twice the size it is were it prudently invested in low cost, fully transparent index funds. And if there's anyone on the staff of STRS who thinks they're smarter than Warren Buffett, I would submit they're not."
STRS has said state law requires it to diversify its investments to minimize the risk of large losses, so it can't invest solely in an index. And it's said its alternative investments have outperformed the rest of the fund's holdings in recent years.
