What comes next for Ohio’s teacher pension fund? Prospects of a ‘hostile takeover’ are being probed

Columbus, Ohio — A battle is brewing for the future of Ohio’s $94 billion teacher pension fund as efforts by would-be reformers to deliver long-promised benefits to retirees with the help of an aggressive investment firm touting an untested AI-driven trading strategy come under scrutiny. be scrutinized.

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

Years of tension at the fund came to a head on May 8, when Ohio’s Republican governor, Mike DeWine, announced that he had obtained an anonymous 14-page memo and other documents containing “disturbing allegations” about STRS’s governance and that he handed them over to the 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 to fire two reform-minded board members — Wade Steen and Rudy Fichtenbaum — because they supported a plan to transfer $65 billion, or about 70% of STRS assets, to a young investment firm called QED. The outfit is co-run by two people, a former deputy treasurer of Ohio, out of an apartment in suburban Columbus.

“This is not monopoly money; it is hard-earned income that belongs to teachers,” Yost said in launching his study. “We have a responsibility to act in their best interests.”

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

Teachers, who generally do not qualify for Social Security and thus rely heavily on the fund in retirement, are particularly angry about the lack of cost-of-living adjustments and market losses the fund has made over the years known, even though STRS investment professionals have. big bonuses collected. They have called for greater transparency in the fund’s investment and payment practices.

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

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

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

The nearly $6 trillion U.S. public pension industry has increasingly traded equities for riskier, actively managed alternative investments in recent years, such as hedge funds and private equity — a trend that David Draine, Pew Charitable Trust’s chief research scientist, has of public sector pension systems, says it is demanding the kind of transparency Ohio reformers have sought.

“As public pensions take on both risky and complicated assets, it is important that they are transparent about those investments: what the return on their performance is, what they pay for them and what the risks are,” he said. .

However, opponents say putting the shadowy QED in charge of STRS investments poses an even greater danger.

Aristotle Hutras, former director of the Ohio Retirement Study Council, a legislative oversight committee, believes the governor is right to try to protect STRS from reformers’ rosy AI-driven visions of improving the fund, which he calls “magical thinking.” .

“STRS has survived a world war, a Great Depression, a Great Recession and a global pandemic, and still paid benefits,” said Hutras, a Democrat. “This idea of ​​QED, and essentially sending a contract, is in my humble opinion the most serious threat to STRS’ solvency in the last 96 years.”

The fund’s then-board chairman issued a statement after DeWine’s referral, saying STRS was cooperating but reassuring grantees that the fund was safe, well-managed and in a “sound financial position.”

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

Leaders rejected Tremmel’s initial pitch due to QED’s lack of professional registrations, clients or track record. His business partner, Seth Metcalf, who served under former Republican Ohio Treasurer Josh Mandel, returned to STRS asking him to take another look at QED.

Around that time, the memo’s authors allege, Steen, Fichtenbaum and two other then-board members began asking nearly identical questions about STRS’s performance to QEDs and began working behind the scenes to build an affiliate, OhioAI, pension fund company. The metadata of some letters and memos showed that they came from Tremmel or Metcalf.

The Federal Trade Commission around that time began warning companies to proceed cautiously with automated tools that could potentially have biased or discriminatory effects. Last year, the commission took its warnings even further, alerting companies that false or unsubstantiated claims about what AI could do for their customers could lead to enforcement action.

Neither Metcalf nor Tremmel returned STRS calls seeking comment on their statements. In his lawsuit, Yost told the court, “The owner of this shell company continues to sell a secretive and untested investment scheme to STRS while his own condominium is declared bankrupt.” The attorney general accuses Steen and Fichtenbaum of “backdoor ties” with QED.

Steen denies Yost’s claims, including that $65 billion was ever on the table. He claims that the response to his continued questioning of STRS’ practices proves that he has struck a nerve.

“He is hiding behind lawsuits that are defamatory and that are not true,” Steen said after the May 15 board meeting. ‘I thought there would be a fair and impartial investigation. I think this may be the fastest survey ever done in the history of Ohio. But we are going to defend this vigorously. None of it is true. It’s all false.”

DeWine called it a “huge red flag” when Aon, a nationally respected consulting firm brought in to address management and fiscal performance issues, abruptly terminated its contract with the pension fund earlier this month.

“The unspoken implication is that the governance issues at STRS are of such concern that Aon could not proceed with its contract in good faith,” DeWine said in a statement. An Aon spokesperson declined comment.

The STRS reformers have not retreated. Now that they controlled the majority of votes on STRS’ 11-member board, they moved ahead at the May board meeting to oust rival leadership and elect Fichtenbaum, an emeritus professor of economics at Wright State University, as board chairman.

Many of the retired teachers present applauded after the coup. Nearby was a poster with another STRS acronym: “Stealing Teachers’ Retirement Savings.”

“It has to happen for years,” said Lee Ann Baughman, 82, who taught elementary school in suburban Columbus for 32 years. “It’s been hard for these retirees. Many of them have part-time jobs, are old and it is very painful not to get what they were promised.”