STRS self dealing found in pay boosts

The lavish bonuses given out to managers of the State Teachers Retirement System of Ohio have long been criticized by this editorial board and others. Now a financial journal is weighing in with evidence that supports the case.

Two economists, writing in the Journal of New Finance found that STRS, in effect, maintains two books to get system administrators extra performance-related pay.

The article by Allen Mendenhall of the conservative think tank the Heritage Foundation and Dan Sutter of Troy University is not easy reading. Using academic language that only another economics PhD could love, they suggest that Ohio’s STRS is a good example of “governance problems” and that in Ohio it resulted in “approximately $9.3 billion in cumulative overstatement.”

The issue matters because excessive bonuses influence STRS managers to invest in questionable equities and in obtaining bonuses that are above what was truly earned.

The writers say that STRS uses unaudited, staff-produced investment performance reports to calculate bonuses. In 19 of 20 years between 2003 and 2022, the audited returns from the investments into which Ohio public school teacher funds were invested were significantly less than STRS claimed.

The remedy is obvious. Only audited investment results should be used to consider staff bonuses. Even better yet, stop paying mediocre money managers huge bonuses as if they’re Wall Street titans. An unmanaged market index fund has outperformed the STRS staff year after year.

The authors of the study say the difference between the projected earnings and the actual performances point to “institutional failures.”

And the writers recommend the same solution: tying performance-based compensation exclusively to the kind of products that can be observed independently.

STRS has been lobbying lawmakers for years to increase the taxpayers’ contribution to the teachers pension. Before doing so, STRS should acknowledge its performance bonus is excessively costly and burdening the pension fund with risky investments.

Taxpayers must not be forced to give STRS additional money until they produce trustworthy financial records.