Teachers’ pension fund gives bonuses

COLUMBUS — The Ohio pension fund for teachers on Thursday overwhelmingly approved nearly $9.7 million in performance bonuses for its investment team in the face of $3 billion in losses and protests from some retirees.

In all, the State Teachers Retirement System saw the size of its total asset portfolio shrink by $7.2 billion over the last fiscal year to $87.6 billion.

That’s down from just under $95 billion, where the fund began the fiscal year after an unusually robust performance the previous year.

About $4 billion of the loss came directly from operating losses as employee and employer contributions into the fund fell well short of the $7 billion paid out in benefits. The rest was due to investment losses.

The bonuses angered some retirees who had gone a number of years without cost-of-living increases. They have argued that the fund has routinely overpaid in bonuses and fees, even in good years.

“Our [bonus] plan is an incentive for our investors to outperform the benchmark...,” said the board’s chairman, Ron McFee. “It saves our fund money, and it mitigates losses in a downturn. Our report from our consultants this afternoon...reiterated that even in a down year, our managers outperformed the index to save this fund $1.8 billion in losses, so $9 million versus $1.8 billion in losses is why that [incentive] program exists.”

Board member Rudy Fichtenbaum, a retiree, was one of two “no” votes.

“The teacher members feel the same way about the promises made to them, and those promises have been broken,” he said. “If STRS is supposed to be a partner with members to provide retirement security, if that’s our mission, that promise has been broken.

“When inflation has gone up 20 or 22 percent since 2017, and the best that we can do is a one-time COLA which most members will not receive until 2023, that’s not keeping the promise...,” he said. ”The members have made a lot of sacrifices. I think it’s time that investment staff has to make some sacrifices.”

Investment losses for pension funds were inevitable given the stock market’s dive early this calendar year, at roughly the halfway point of the fiscal year. As of December, investments were up 7.1 percent, but the year finished down by 3.6 percent. That compares to five and 10-year average gains of 8.6 percent and 9.3 percent, respectively.

Previously strong performance had at one point boosted the investment portfolio to a peak of $98 billion, playing a role in the board’s decision this year to approve a one-time 3 percent COLA for retirees. That will play out despite the recent losses. The COLA will cost the system about $150 million more a year.

The system counts on a reliable investment return to bridge the gap between what active teachers and employers pay into the system and what is paid out.

The fund has noted that its investment team still did a better job than its benchmark peers, which lost an average of 5.6 percent. The fund has generally assumed a 7 percent annual return.

One brighter spot was a positive return on the fund’s real estate and private equity investments.

The stock market has since made somewhat of a comeback. As of the end of July, one month beyond the end of the fiscal year, the total value of the fund hand had rebounded to $90.6 billion, ”a very good month,” said Matt Worley, STRS chief investment officer.

Nick Treneff, STRS spokesman, said investment staff bonus decisions are based on one-year and five-year performance with the formula more weighted toward the five-year statistics.

Cathy Steinhauser, a retiree after 35 years with Circleville City Schools, urged the board to reject the bonuses or at least postpone the vote.

“You keep adding more debt to our pension system when you can’t even pay a regular COLA yearly for retirees.,” she said. “A one-time [COLA] isn’t good enough. The investment staff just lost $3 billion. Wow, you’re going to reward them after they’ve lost $3 billion?”

STRS board member Dale Price, an active Toledo Public Schools teacher, supported the incentives. He pointed to decisions made to improve the fund’s long-term solvency.

“We voted to cut our health care,” he said. “We voted to make ourselves work longer. We voted to eliminate a COLA opportunity we might have, all for the purpose of preserving the pension fund. [We are] a fiduciary not only for the 70-year-old retiree, the 52-year-olds very closing to retiring, but more importantly the 22-year-old college graduates that are just starting their teaching career.”

A long-delayed outside fiduciary audit, completed prior to but released in June after the stock market had begun its decline, found that the fund has been generally well run. While not a forensics investigation, that audit shed doubt on allegations of potential fraud and excessive pay and fees.

State Auditor Keith Faber this fall is expected to release a special audit of the system, looking at many of the same questions raised by some retirees.

Contact Jim Provance at: jprovance@theblade.com.