$96B Pension Crisis Looming Over Ohio Teacher Retirement System Has National Implications, Reform Advocates Say
Reformers are blowing the whistle on a crisis looming over the State Teachers Retirement System of Ohio (STRS). At $96 billion in investments, it is “one of the largest public pension funds in the United States,” but the fund, Seth Metcalf and fellow investment reformer J.D. Tremmel allege, pays out almost twice as much as it takes in every year and loses roughly $15 million every day.
While teachers pay 14 percent of their salary into the system, they receive only 11 percent in return, according to Tremmel and Metcalf. Due to shifting demographics and poor investment strategies, teachers haven’t received a cost-of-living adjustment (COLA) since 2017. Meanwhile, STRS staff have been awarded large bonuses based on benchmarks of their own devising, critics of the system say. Metcalf calls it the worst retirement deal in America, but it’s just one part of a massive national pensions problem with an estimated $1.34 trillion in unfunded liabilities.
The Ongoing STRS Controversy
The Ohio STRS board has been embroiled in controversy for several decades, and the current STRS board is divided: “Reformers” want to move most of STRS’s assets to an index fund and achieve greater transparency. The members of the “status quo” want to maintain an active investment strategy.
The reformers, many of them retired teachers, are backed by the Ohio Retirement for Teachers Association (ORTA). The Ohio Retirement Study Council, led by Republican state Rep. Adam Bird, has recently threatened to strip retired teachers on the board of their power.
The latest drama began in May 2024 when Republican Gov. Mike DeWine announced that he had received an anonymous 14-page memo (which was prepared by STRS staff) detailing a supposed “hostile takeover of a public pension system by private interests.” Specifically, the memo calls out Metcalf and Tremmel, along with former board member Wade Steen and current board Chairman Rudy Fichtenbaum.
Attorney General Dave Yost then filed a lawsuit aimed at removing Steen and Fichtenbaum, both reformers, from the board. He alleged that both failed to uphold their fiduciary duties, “stating they were participating in a contract steering ‘scheme’ that could benefit them,” according to the Ohio Capital Journal. DeWine had appointed Steen as the board’s investment expert in 2020 but then removed him in 2023. After successfully suing, Steen was reinstated in early 2024, tipping the balance of power in favor of the reformers.
Fichtenbaum is a retired economics professor from Wright State University, though the memo repeatedly characterizes him as lacking financial expertise and being motivated by “ulterior motives.” The memo portrays Steen and Fichtenbaum as trying to hijack over $65 billion, about two-thirds of the fund’s assets, to hand over to investment company QED, owned and operated by Tremmel and Metcalf. Metcalf is the former deputy treasurer of the state and was responsible for Ohio Checkbook, a software that promotes transparency by providing current state financial data.
The memo further accuses Metcalf and Tremmel of targeting STRS to “secure a lucrative arrangement” for their company.
When asked for comment about the STRS pension fund and the sustainability of its investment strategy, a spokesman for the governor’s office pointed The Federalist to the STRS memo, saying that it “details breaches of fiduciary duty.” He also stated that the STRS board “should make decisions that are financially and fiscally sound” but declined to comment on Bird’s attempt to take away retired teachers’ ability to vote.
‘Quod Erat Demonstrandum’
QED stands for the Latin phrase “quod erat demonstrandum,” sometimes used at the end of logical proofs, math proofs, or rhetorical arguments to signify completion with the desired outcome. The company is an unregistered, quantitative numbers-based investment firm, co-founded by Metcalf and Tremmel to fix STRS’s investment strategy.
Tremmel claims that STRS is incorrectly reporting its performance using fabricated benchmarks and awarding large bonuses to employees for underperformance.
Richard Ennis, an investment consultant who analyzed STRS’s benchmark, agrees. “The convention among large public pension funds like Ohio STRS is for the staff and consultant to work together to contrive a benchmark … that is opaque, complex, and purely subjective,” he wrote. According to his calculations, STRS underperformed a passive investment index by an average of 1.62 percent every year for 13 years.
This underperformance is not unique to STRS. Data collected by SPIVA (S&P Indices versus Active) shows that 84.96 percent of active large-cap investment funds underperformed the S&P 500 in the last three years.
Metcalf and Tremmel proposed a switch from STRS’s current model of active investment — trying to outperform the stock market with managed assets — to a passive index fund. “They need to take less risk and develop a stable revenue stream,” Tremmel said.
In a 2021 study, Ennis argued that there is “no justification” for the waste incurred by an actively managed fund. A fund that performs with the stock market is more reliable than one that tries to outperform it, and STRS could save money by not needing to pay managers. Another 2021 study showed that actively managed state pension funds “underperformed passive investment [funds] during the past decade by an average of 1.4% a year.”
Tremmel called an actively managed fund “a game for the smartest guys in the world who have unlimited resources,” not for Ohio bureaucrats.
According to Ennis, STRS could have earned an additional $12.5 billion over the last decade with passive investment. Fichtenbaum claimed they could earn an additional $4 billion a year — enough to restore COLA and lower employee contributions. Fichtenbaum reportedly suggested entrusting $250 million of the pension’s assets to QED as a test run and shifting more assets to their care over time if their strategy proved successful.
The memo critiqued Metcalf’s criticisms of the STRS as “false,” and the board chose not to pursue QED’s proposal, with STRS staff questioning whether QED investment strategies could achieve the advertised results. Metcalf says they were never given serious consideration.
Why the Rest of America Should Care
Despite allegedly losing $15 million a day, STRS Ohio is still “one of the largest public pension funds” in the country. But Tremmel warns that debt spirals like that currently gripping the Illinois pension system will happen in Ohio and other states if they don’t reform their investment strategies. If STRS continues to lose money, it will require a taxpayer bailout, which will increase property taxes in Ohio. This will worsen the demographic divide — retirees will stay in the state to continue to collect benefits, while current or potential employees will move to a more affordable state.
Because of shifting demographics as baby boomers retire, most pension funds nationwide are losing money. “It often leads to unpopular decisions like suspending cost-of-living adjustments as STRS did, increasing retirement age, or seeking higher returns through more aggressive investment strategies,” said Greg Lawson, a research fellow at the Buckeye Institute.
The looming crisis is personal for Metcalf. He has fond memories of visiting his grandmother’s farm and romping through the woods on her property when he was a child. His grandmother was a nurse and taught nursing for twenty years, but by 2023 her pension and Social Security payments no longer covered the farm’s property taxes and upkeep. Metcalf was forced to help her sell the property to a developer.
Metcalf says the first step toward a solution is transparency, accountability, and oversight — an objective performance benchmark, for starters. Tremmel thinks the top priorities should be to serve the teachers who pay into the system and fix the cash flow problem.
“Ohio sets a precedent,” Tremmel said. “If the bureaucrats skate, meaning they’ve convinced the legislature to change the composition of the board, now the other pensions across the country will say, ‘Hey, when things get sticky, this is the model we can go to.’”
Jacqueline Annis-Levings is a correspondent for the Federalist. She is a rising junior at Patrick Henry College, where she is majoring in English.
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