COLUMBUS, Ohio — Ohio Attorney General Dave Yost has filed a lawsuit to remove two members of the retired teachers' pension fund, stating they are participating in a contract steering "scheme" that could directly benefit them. However, the AG stops short of detailing the alleged "backdoor ties" between the men and an "illegitimate" investment firm.
We unraveled as much as we could to figure out why Yost may be investigating this as a public corruption scandal.
Overview
The State Teachers Retirement System of Ohio (STRS) board is made up of 11 members. There are five elected contributing teachers and two elected retired teachers. The governor gets to appoint one investment expert. The speaker of the House and the Senate president get to jointly appoint an expert. The treasurer and director of the Department of Education and Workforce both get to designate an expert.
There is a debate on how STRS should invest money — through the current system of actively managed funds versus an index fund. Active funds try to outperform the stock market, have more advisors and typically cost more. Index funds perform with the stock market, are seen as more passive, and typically cost less.
To get a larger overview of the situation, we did a Q&A with viewers on Thursday.
RELATED: Answering viewer questions about Ohio's retired teachers' pension fund chaos
The "reformer" perspective on investments
Some retired teachers are trying to take back their money, believing that the STRS board has mismanaged their $90 billion pension fund.
"I suffered a loss of $35,000 of direct payments that I was promised," retired teacher Robin Rayfield said.
STRS lost $5.3 billion in 2022 alone. In 2023, it lost $27 million invested in the failed Silicon Valley Bank. In addition to those — the cost of living adjustments, or COLAs, were suspended for more than 150,000 retired Ohio teachers for five years starting in 2017. In 2012, the qualifying retirement number was moved from 30 years to 35 years. Last year, this was changed to 34. Then, the board approved $10 million in bonuses for their staff.
Having the COLA freeze and now having a severely reduced COLA is one of the reasons why Rayfield's organization, the Ohio Retirement for Teachers Association (ORTA), has been helping elect STRS board members who want to change the system.
More reformers are being elected to the board. They are in favor of an index fund.
"The key to creating a stable retirement fund is diversification of that fund, meaning that if you want to minimize risk and end up with fairly stable returns, the best thing you can do is invest in a diversified portfolio with index funds," Case Western Reserve business law professor Eric Chaffee said. "They allow for diversification without that active management of the fund."
The reformers are also pushing for transparency.
"It's very opaque — we're not allowed to know what the fees are, how much money they're taking out of it, what the value of it is," he said, referring to the alternative investments, such as private equity. "None of the STRS board members can know what the value is and how much it's worth at any given time."
When the board approved the bonuses for staff, reformers spoke out, arguing that it wasn't fair. Chaffee said that bonuses are typical since it takes money to retain talent — but the optics are awful.
"When you see individuals involved with a public pension plan living lavish lives, it's a reason to raise eyebrows," the professor said.
I tried to look at Ohio Checkbook, the state-run site that shows how much public employees make, but the resource was not functioning properly. However, ORTA had captured data, which showed that STRS Chief Investment Officer Matthew Worley had an annual salary of about $466,000 as of September 2023.
The average salary for STRS investment staff members was roughly $230,300.
The "STRS status quo" perspective on investments
The Ohio Retirement Study Council posted a report that compared STRS with other statewide public pension systems from 1999-2022. During this time period, the average annual STRS return was 6.85%, while the Ohio Public Employee Retirement System (OPERS) was 6.14%, the School Employees Retirement System of Ohio (SERS) was 6.52%, Ohio Police & Fire Pension Fund (OP&F) was 6.76% and Highway Patrol Retirement Systems (HPRS) was 5.88%.
STRS staff members have pointed out this data on numerous occasions when addressing that the fund isn't failing like critics say it is.
"STRS Ohio’s investment consultant, Callan, shared that STRS Ohio’s total fund return outperformed its benchmarks and ranked in the top 10% of public funds tracked by Callan for the three-, five- and 10-year periods ending June 30, 2023," STRS spokesperson Dan Minnich said.
Pensioners have asked why, if the fund is doing well, do they not have an adequate COLA.
"In accordance with Ohio law, the Board’s actuary must determine that any benefit changes approved by the Board will not materially impair the fiscal integrity of the system," Minnich responded.
In May 2023, STRS approved a 1% COLA to eligible retirees. Retirees can start receiving a COLA on their fifth anniversary of retirement.
"The reason why, from a financial standpoint, that it makes sense to cut COLA is because they compound over time," Chaffee said. "That being said, people depend on this based on the inflation that we've seen in recent years — it is really important to see those types of adjustments."
Recap: Investigation and lawsuit
Last week, Yost started an investigation after anonymous documents alleged that two board members, Wade Steen and Rudy Fichtenbaum, have been doing the bidding of private investment group QED Systematic Solutions. According to the suit, the firm asked board members for $65 billion so that they could allegedly restore the COLA.
"We have strong evidence that there were serious discussions about taking two-thirds of the money and putting it in a very, very untested programming," Gov. Mike DeWine told reporters Wednesday.
QED was started by former Deputy Treasurer Seth Metcalf and Jonathan (JD) Tremmel. Metcalf worked under Josh Mandel in multiple capacities, including as general counsel. In 2020, they set their eyes on STRS, according to the main 14-page memo.
The documents claim that they — despite having no clients and no track record — tried to convince STRS members to partner with them.
They couldn’t impress the board members, mainly because of their lack of experience and also the fact that QED was not registered as a broker-dealer or investment adviser. The men also didn't own the technology to "facilitate the strategy," the documents say.
Then, an evaluation of QED was done by the board's outside consultant, Cliffwater. The company highly advised not to follow their project or use them.
The bidding has been allegedly done by Steen and Fichtenbaum, continuously pitching QED's direct documents to board members and proclaiming the company's talking points to other staff.
The concerns came from documents given to Gov. Mike DeWine's office. The governor's spokesperson, Dan Tierney, told me that an STRS staff member hand-delivered the documents. The office believes numerous whistleblowers wrote the 14-page memo, also including about a dozen other documents in an attempt to verify their allegations. As this was happening, DeWine found out that STRS' consulting firm Aon had cut ties with them.
Yost filed suit Wednesday morning, accusing them of being a part of an attempt "to hijack" the pensioners' retirement accounts.
The accused reformers deny all allegations.
Steen and Fichtenbaum "seek to steer" as much as 70% of current STRS assets, which is $65 billion, to a "shell company" that has "backdoor ties" to the members, Yost argued.
The AG states that the pair should be removed because they broke their fiduciary duties of care, loyalty and trust when "colluding" with QED.
This could cause a pay-to-play concern, Chaffee warned.
"Maybe things that are illegal will be uncovered, but things that are unethical could be uncovered as well," he said.
We asked the AG's office if he was looking into that.
"This is an ongoing investigation. Like I said yesterday, this lawsuit allows us to obtain the discovery documents necessary to finding answers to the allegations. This is a step in the process to ensure that we continue to fight to protect teachers’ hard earned retirement dollars," Bethany McCorkle, communications director for Yost, said in an email Thursday.
The reformers call this investigation and lawsuit a sham and a "ruse" to stop transparency.
RELATED: Ohio AG investigating alleged 'hostile takeover' inside teachers' pension fund
"Now we have a super majority, and now we can get all the information we need that they've been covering up or not being transparent about," Cleveland-area teacher Terry Caskey said.
DeWine is covering up for his Wall Street friends, she and other reformers added — but she is also concerned that this is a corruption scheme.
"I also think that the governor is going to pull out every stop to make sure that he has control of the STRS fund because I think that's a cash cow," she said.
Still, the lawsuit accuses the board members of directly benefiting from QED.
"While this scheme may benefit Steen and Fichtenbaum, it may spell disaster for Ohio teachers who have retired or hope to retire someday," it states.
But the attorney general stops short at how the men would benefit — and what "backdoor ties" exist.
Alleged ties
To determine what Yost was alleging, I cross-referenced the lawsuit and the documents sent to the governor. The "fiduciary breach" is alleged to stem from multiple organizations.
The documents say that once former board members rejected QED's request for $65 billion, the firm joined forces with ORTA and Save Ohio STRS (SOS) to “replace board members and staff with those who would support their proposal.”
SOS and Fixmypension.org sent out mass emails and mailers supporting Fichtenbaum's campaign to the STRS board. However, I was unable to find any campaign disclosure filings on the secretary of state's website.
SOS is registered on the sec. of the state's website as both an LLC and for-profit organization. I reached out to its creator, ORTA member Thomas Curtis, but did not hear back. I couldn't find any information about Fixmypension.org, considering the website is no longer active.
"If you try to influence an election in some way, then it's treated as an expenditure on behalf of a particular candidate or issued position and it has to be reported," CWRU elections law professor Atiba Ellis said. "The law treats such expenditures as coordinated expenditures."
Rayfield denied the allegations that ORTA was involved with SOS or QED in campaigning. It is unknown if QED campaigned.
"We don't have any money," Rayfield said, laughing. "What we have lent is our voice, and we do have a strong footprint."
He also reminded that the vast majority of ORTA members are retirees, and they are not allowed to vote in active member elections. Fichtenbaum, however, is retired.
Both the document and Chaffee raised red flags about ORTA's involvement in another matter.
Originally appointed by John Kasich, Steen has become somewhat of a martyr, many reformers told me. He was reappointed by DeWine when the governor started his administration, but the governor asked him to resign last year. Steen refused, so DeWine removed him. DeWine originally cited Steen’s alleged poor attendance at board meetings as reasoning.
"We were concerned that Mr. Steen was seen as advocating for a very particular investment firm in a way that a fiduciary board member — it just didn't seem right," DeWine's spokesperson Dan Tierney said. "It almost seemed like Mr. Steen was trying to tip the scales in favor of this particular company that didn't agree with the administration."
ORTA got involved once Steen was ousted.
"I communicated with Wade," Rayfield said. "I said, Well, do you wanna fight this? And he goes, 'Let me think about it because fighting the governor is a tough thing to do...' But nonetheless, we stood with Wade and I said, 'Well, ORTA could potentially help you fight this."
He checked with his board, and they "unanimously said, 'Absolutely, let's see if we can raise money.'" They ended up raising at least $40,000, but Rayfield said it could be $60,000.
"We've kept meticulous records of those donations and we have been able to pay Wade's legal fees," Rayfield said. "We were successful in getting him reseated."
He understands that Yost may think that is improper, he said, but that Steen's attorney thought otherwise.
I asked if I could look through the donations, and he said that he would need to check with an attorney. I asked if it was possible that QED donated.
"We didn't receive any money from QED or QED-affiliated people," he responded.
The idea that he "colluded" with QED or SOS is ridiculous, he said.
He has shook hands with Curtis and exchanged pleasantries but never worked together, he said. However, he is more concerned about being associated with QED.
"It seems to me that there's an effort to connect ORTA with QED — we're not affiliated," he said. "I mean, I know both Seth Metcalf and JD Tremmel who were mentioned in the document and mentioned in the lawsuit, but it almost seems like the attorney general is trying to censor who ORTA can or cannot talk."
All of this is just a distraction from the real problem, he added.
Still, Chaffee is warned of another corruption scandal. Supporting a campaign in exchange for a contract is highly illegal. State lawmakers learned that the hard way.
In March 2023, a jury found that former House Speaker Larry Householder and former GOP leader Matt Borges, beyond a reasonable doubt, participated in the racketeering scheme that left four men guilty and another dead by suicide. Two other men are going through the court process currently — and the third died in April, with his death also being a suspected suicide.
Householder took a $61 million bribe in exchange for legislation to give utility giant FirstEnergy a $1 billion bailout, named H.B. 6, all at the expense of the taxpayers. After he was caught, faced a jury and found guilty, he was sentenced to 20 years in federal prison.
The bribe money came in the form of campaign contributions, dark money donations, that are nearly impossible to track due to Ohio's lax campaign finance disclosure laws.
Moving forward
In an act of defiance, the reformers removed STRS chair Dale Price, who was on the status quo side, and replaced him with Fichtenbaum.
"I think that says that the majority of the members of the board believe that I have carried out my fiduciary responsibilities and they have confidence that I will continue to do that," Fichtenbaum told me during a break in the Wednesday meeting.
So why not just use another reputable investment firm instead of QED? I asked this to Steen Wednesday.
"Now, I'm not even advising QED or anyone — what I'm advising is we need to look at index funding," Steen responded. "We really need to take a look at that that would dramatically reduce our costs."
Fichtenbaum declined to answer this question to reporters on Wednesday. Metcalf and Tremmel have not responded to comment.
Chaffee added that it's possible that both the status quo of the STRS board and QED are bad options — all coming at the expense of former educators.
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