August 13, 2026 · Ohio Retirement Study Council · 8,233 words · 19 speakers · 146 segments
Good morning everyone and welcome to our August meeting, August 13 of the Ohio Retirement Study Council. Glad to see a good number of people in the room. Director, would you please call the roll?
Mr. Chairman.
I'm here.
Representative Brennan.
Here.
Representative Plummer.
Here.
Mr. Vice Chairman.
Here.
Senator Blackshear.
Here.
Senator Blessing is excused.
Ms. Miller.
Here.
Dr. Potichel.
Here.
Mr. Shearer.
Here.
Director Carraher.
Here.
Director Foley. Present. Mr. Danish for Okinawa. Yes.
Present.
Director Higgins. Here. Director Rourke. Here. Director Toole.
Sorry, here.
Mr.
I was eager.
Mr. Wilson for the AG.
Here.
You have a forum, sir. Very good. Thank you, Director. Next item on the agenda is the minutes for the June 11th Retirement Study Council meeting. They're in your folders. They're also on your iPads. Are there any additions or corrections to the minutes? Seeing none, they stand as approved. The next item on our agenda is the custodial bank relationship amendment. We have a staff recommendation, and so at this time I'll call Mr. Bernard to the stand. and let's hear your recommendation, sir.
Mr. Chairman, members of the council, good morning. I hope you all have power at home. This amendment will be very familiar. We heard a dash one version in June. So just a reminder on that amendment, it would move the custodial responsibilities over each state retirement system's funds and investments from the treasurer's state to respective state retirement boards. This version of the amendment, and I believe it's because deferred comp had not yet moved over to PERS, but what happens in this amendment is that the custodial responsibilities for Ohio Public Employees Deferred Compensation Program move as well from TOS to state retirement systems. We find this very consistent with what we said in the previous version of this analysis, and we would recommend that this version be passed. I'd be happy to go through the full amendment, but as seen as this was done in June, again, it's just adding the deferred comp and we would recommend approval of this amendment.
All right. Thank you for that presentation. Thank you for its brevity as well. Any questions from the members of the council? Excellent job. I see no questions. Thank you, Mr. Bernard. All right. I would move that the council adopt this staff recommendation,
and I recognize Vice Chairman Romachuk for a motion. Thank you, Mr. Chairman. I second the motion.
All right. Thank you. Director, please call the roll.
Mr. Chairman.
Yes.
Representative Brennan. Yes.
Representative Plummer. Yes.
Mr. Vice Chairman. Yes.
Senator Blackshear. Yes.
Ms. Miller. Yes.
Dr. Potajal. Yes.
Mr. Shearer. Yes.
Motion carries.
Excellent. Thank you, members of the council. We'll keep an eye on that amendment through lame duck. And let's go to the next item. And we have Director Carraher is already making her way to the podium. So we're going to look at 2025 annual health care reports from both PERS and Highway Patrol Retirement System.
And Director Kerher, you may begin. Thank you, Chairman Byrd, Vice Chairman Romanchuk, and members of the Council. You have OPER's 2025 health care report in front of you, but let me break out the most important aspects of it. So let me start by giving the obligatory required disclosure that health care is not required. It is discretionary. However, we firmly believe that it's a critical component of a secure retirement. And as such, we will do everything we can to preserve it. And that's why we changed our model in 2015 to a health reimbursement arrangement plan. As I've explained to you, previously, we didn't make those changes for our retirees. Our health care trust fund basically would have run out of money within 10 years. And we were constantly changing the health care plan requirements to be able to continue the solvency. So we created a separate health care trust fund back in, I think, 2005, and we actually transferred the money, which is why when you look at the investment reports, you will also see that OPERS is the only one that has that health care trust fund, and we do allocate it separately, and we monitor it separately. But we also ceased allocating any portion of the employer contribution rate, which, of course, is the only place that health care can be funded from, back in 2018. Despite that decision, and largely because of the assumptions and the way we set up the funding, our health care remains strong. The most recent net position increased to $14.8 billion in 2025, which is up from $13.2 billion in 2024. And our solvency period, which is unlike the amortization period, and the solvency, you want it longer, it's how long the trust fund will last, has increased to 27 years. Our health care expenses increased slightly. We are paying out about $625 million from last year's expenses, and that's up from about $560 million the year before. But I will point out that is a significant decrease from our peak, which was $1.8 billion a year, which is why that $10 to $12 billion, $14 billion trust fund wouldn't last very long, spending almost $2 billion a year. Monthly health reimbursement arrangement allowances are provided to eligible retirees via deposits into what we call their HRA account. The base allowance is determined by the OPERS board, and right now it's $1,200 per month for pre-Medicare retirees and $400 per month for Medicare retirees. The retiree receives a percentage of that base allowance calculated on a combination of years of service and age at retirement. monthly allowances range between 51% and 90% of the base allowance for both pre-Medicare and Medicare retirees. So in other words, Medicare retirees were credited last year from somewhere between $204 per month to $360 per month based on their age and service at retirement. Pre-Medicare retirees were credited somewhere between $612 per month and $1,080 per month, again based on their age and service at retirement. The board monitors the HRA allowance each year. We look at it relative to what it is able to buy out in the market all over the state, and it's adjusted accordingly. Last year, our annual average cost per participant paid by OPRS was about $10,000 for pre-Medicare recipients and about $7,600 for re-employed retirees and about $3,600 for Medicare recipients. All these amounts were similar to the previous years. There are slightly more than 119,000 age-in-service retired members who received an HRA. and just above 10,000 disabled members who were receiving an allowance and about 199 survivors, beneficiaries, and others who received payments for a total of about 130,000, almost 200 total recipients who received payments through their HRA. OAPERS provides premium reimbursement for those who are not eligible for premium-free Medicare Part A. We provide 100% reimbursement for the Medicare Part A premium and 50% to their spouse. OATHPERS also provides voluntary dental and vision coverage to all OATHPERS benefit recipients and eligible dependents. Those are administered through MetLife. For our member-directed participants, they pay into a retiree medical account. The members with an account as of July 1, 2015, became vested at a rate of 20% per year, so basically based on five years, they'd be fully vested. For members establishing accounts after July 1, 2015, the member was vested after 15 years with a CLIP vesting. starting on the sixth year of participation. Overall, I would just summarize by saying that we are very, very proud of our health care program. We've been able to stay funded with a good solvency, and it has ceased to be a really big headache every single year, trying to figure out, is this going to last? And most importantly, our members are very satisfied with the program. So, Mr. Chairman, that concludes my report. I'm happy to answer any questions that you may have.
Very good. Thank you, Director Kerher. looking around the room to members of the council. Do you have any questions? Dr. Potagil.
Hey, good morning. Thank you for that report. Just a quick question on the look ahead. I know things are frozen through 2030 on the reimbursements, right, based on, and it mentions here that allowance levels could be considered earlier than 2031. So what algorithm, what would trigger a review to make sure those are aligned?
Well, good morning, Dr. Patagio, and thank you for the question. So I kind of smiled a little bit when you said that because, as I said, we establish the allowances and we communicate to our members that this is what it is and this is a time period you can expect it to stay that level. And we did say when we upped them the last time, we said this will last through 2030. But we have always – we look at that every year, basically, relative to the market. So it's based on the high, the low, where the average of our members are as far as what they receive, and we look at what has happened to the cost of the various programs that they can buy, and then we'll adjust it. So I smiled a little bit because we actually have a board item coming to the board next week to increase the pre-Medicare allowance from $1,200 to $1,300 per month. We've talked to them a little bit about strategic planning. So even though we weren't anticipating increasing it until 2030, the market conditions have shifted only for pre-Medicare. Medicare folks are fine based on our analysis, but the pre-Medicare folks do need to have an increase. So the board will likely approve that next week, and we will again communicate that will stay through 2030. But given the pre-Medicare market is a bit more volatile right now, so it could possibly have to go up before then. But again, the communication expectation is don't plan on an increase before 2030.
Okay.
Director Carreher, I see no further questions.
Thank you. Thank you.
Next on the agenda, and he is already proceeding to the podium, is Director Rourke.
Thank you, sir.
And you may begin.
Good morning, Chairman Byrd, members of the council. The 2025 HPRS health care reports in your materials, and I'll provide a brief summary and, of course, be happy to answer any questions. HPRS provided health care benefits to just under 2,000 retirees and their dependents at a cost of about $8.5 million in 2025, which was actually slightly down from the year before, and we're on pace for just a slight increase for 2026. This is largely due to the transition fully to a HRA model, much like the previous director spoke about. There are very few true win-wins out there, and I don't even like the word in most cases, but this is really one of them. The vast majority of our members are far better off from the completed transition of this model. As many of you may recall, we completed our transition of the Medicare-eligible population in January 2022, and then we completed everyone else in January 2024. Our most recent actuarial report indicates that we've nearly doubled the solvency of our health care funds since doing that. We were also in about a 10-year cash flow projection when we started down the path for this transition, meaning we would be out of health care benefits in 10 years. And that's after we had already picked all the low-hanging fruit. We had passed on many more costs to our members in trying to keep extending that solvency. and we're very happy to report that this has worked out really well for our members and for the system in that regard. We continue to monitor this change in terms of the impact to both the systems and the members. We hadn't had an increase in those allowance amounts for three years. This would be the third year with no increase. And the board just recently approved about a 13% across the board increase for those allowance amounts for next year, with the expectation that they would also stay in place for another three years. Continuing to look at all of those variables and anticipating the question from Dr. Potagell, one of the things that we would look at, obviously, is what the members are experiencing overall. we're early in this model so as we do a five-year experience study and better understand the overall impact on the system and the members we will be in a better position to recommend those future changes HPRS plans to continue offering dental and vision coverage at a subsidized premium And that concludes the overview of our health care report. I'm happy to answer any questions.
All right. Thank you, Director Rourke. Turning to Vice Chairman Romanchuk with a question.
Thank you, Mr. Chairman. Director, I had a little problem I didn't see in the report. I could have missed it. a funded ratio? What is your funded ratio for your health care plan?
For the health care plan, our OPEB report doesn't necessarily report a funded ratio for that. We do have a balance. At least I'm not aware of it being reported that way. We have a health care fund balance in the area of $130 million. We're spending much less now than we were before, so we know that that solvency, that cash flow projection, is going to last us for about 20 years.
Would it be possible in the future, follow up please? Follow up. Sorry, would it be possible in the future that we get a funded ratio?
Like, for example, OPERS, it's clearly in their executive summary it's 118%. We're, of course, hoping and looking for something above 100%, but unless we see the number, it's a bit of a guess. I think you can draw some conclusions from the solvency period, But I'd sure like to see that funded ratio as part of the report in the future, if that's possible, if that's not too much trouble. Through the chair, Senator Rumichuk, absolutely.
We'll look to make sure we report a funded ratio for that fund. Thank you, sir.
All right. Other questions from members of the council? Seeing none, thank you so much. And we now turn to the next agenda item, which is performance-based incentive policy. and we are going to start with PERS and just remind members of the council that this is our opportunity to provide questions and oversight, not approval. So thank you, Director Karaher.
Thank you, Chairman Byrd, Vice Chairman Romanchuk, and members of the council. OPERS's annual incentive compensation plan is included in your materials, so I'll try to summarize it and answer any questions that you have about it. As a little bit of context, we are in our 90th year of operation with pension and health care trust funds assets totaling more than $140 billion under management. Roughly 60% of those assets are managed internally. Last year, we paid out more than $8 billion in pension benefits and health care allowances to our retirees. And a lot of those were all reliant on our investment returns. The 2025 incentive compensation was paid to 58 staff members and totaled $5.4 million, which was about 73% of the maximum total possible. Last year, our total investment returns were 14.95%. That represented an increase of $17.5 billion in added value to the trust funds. According to CEM Benchmarking, which is a national benchmarking company that we and a lot of our peers participate in, Our total investment cost was 0.334%, which was lower than our peers' costs in the 15 public plans with sizes close to ours. The plan is designed to encourage strong, consistent investment performance for the system while keeping compensation competitive to attract and retain top investment professionals. It aligns the interests of au pairs, members, retirees, and staff. Basically, the plan oversight, just to kind of give you a perspective, we have annual oversight of the plan. We go through it every year with the board and approve it, any changes that we have. Periodically, every so many years, we do a deep, deep dive into it, asking some more fundamental questions. We do have checks and balances with internal audit and external accounting firms. Eligibility, the eligibility is only designed to be eligible for those that are true investment professionals. To receive an award, the employees must be in an eligible position at the end of the year and on the payout date and must meet the performance standards. The award is determined based on a maximum incentive award, which is on percent of salary. The performance is measured over both the most recent one-year period and over the past three-year period. And I do remember very much a large board discussion about, you know, is the third baseman going to contribute and how should they, the whole team wins and blah, blah, blah, blah, blah. You might get that one. I thought it was quite interesting. But the plan's performance metrics are a blend of individual goals and investment results, with a strong emphasis on long-term benchmark relative to performance. The structure is designed to reward and sustain outperformance and responsible stewardship of the public funds, considering all factors, including costs. So that's kind of an overall summary, and I'm happy to answer detailed questions that you might have.
Thank you, Director Carraher. I'll start the questions. You mentioned in your statement regarding how you rate on rank among your peers. Who are your peers? Is it not 49 other states?
Chairman Byrd, thank you for the question. Yes, but no. I mean, our real peers are the ones that are our size. And we also need to compare ourselves to those that manage internally versus manage externally. If you have – when you manage externally, it's actually more costly. Our staff can do it cheaper. So we want to compare ourselves to other funds. So we kind of look at the ones that are $100 billion plus. It's not necessarily fair to compare to a small fund that has $1 billion, for example, and it's all externally managed. It's a different set of circumstances.
All right. Thank you. So what I heard you say is that your peers are those states that are fairly large and also manage their investment internally.
An internal-external blend, yes.
Yeah. So how much do you think that PERS saves by doing it internally compared to what it might cost another state who has some kind of Wall Street company that manages their investment?
Chairman Byrd, thank you for the question. We actually do that comparison pretty regularly. Again, we're always challenging. Are we doing it the best way? So our most recent data shows that we saved roughly $235 million by managing internally. And that's a very simple calculation, kind of taking that and comparing it to if we manage a portfolio internally and we have part of it out externally, you can use the fees that you're charged on that. So overall, about $235 million a year.
Finally, you said you evaluate or reevaluate that situation, internal versus external investment management. How often do you evaluate that? Is that once a year or more?
Chairman Byrd, thank you for the question. I would say we, at a minimum, do it once a year. I mean, it's a continual type of an analysis. Our CIO is excellent about knowing kind of what's going on in the market. But it's something that we have our allocation come to the board once a year, so the board gets into a lot more detail on questions like that. And we also bring the incentive comp plan to the board every single year. So they really do dive into some of that, too. As we bring on a new portfolio, there's a lot of discussion a lot of times about we aren't positioned yet to maybe manage that portfolio internally. We don't have the expertise, but our goal will be to get to there. So it might come over a period of time, two or three years, and so the board's very aware of that. So pretty much our goal is if we can manage it internally, we do. But conversely, there have been times we used to manage our, I'm drawing a blank right now, basically our stock portfolio internally, and it was actually cheaper to do it externally. So that was one where it made sense. So we've switched it. So we very much pay attention to that.
Very good. Looking around the room. Yes, Representative Brandon with a question.
Good morning. So thanks for the report. So I was looking at a position of the report that says up to 100% of a salary. What's the maximum dollar amount could go first pay I apologize. Sorry. I thought I had, but so I'll repeat. So looking at the maximum incentive awards for 2026, for the positions eligible for the incentive of up to 100% of base salary, what's the maximum dollar amount OPERS could pay under the plan in 2026, and what has it been for the last few years?
Representative Brennan, thank you for the question. I don't have the exact answers, so let me just give you some rough ballparks, and I can follow up with the exact answers if you'd like. But as far as how much, I'll start with how much you're eligible for every year. It really depends on a combination of things. So it's obviously based on a percentage of your salary, which is going to change every year. But that is tiered by category. So, for example, there are very few people that are eligible for the 100% of their salary. Most people are eligible for 25 or 50, you know, based on, again, their tiering. A junior analyst is going to get a certain level. A senior portfolio manager is going to get a certain other level. So that changes as people move. The other key factor, of course, is what did performance do? Did we, as an overall portfolio, beat our benchmark or not? If you beat the benchmark, that's great. How much do we beat it by? because there's so so it's it's a little it's very dependent year to year so it's hard to kind of compare a year to year I can go back and pull the numbers but just to give you a percent of an idea on this year I don't have my phone because I don't do math in my head ever since the CPA exam but but essentially we I said we paid out 73 percent of the maximum eligible we paid out 5.4 million so if you divide 5.4 by 73 percent you'll get what that number is for that was totally eligible for the year so I can follow back up with you with that
Thank you. And follow-up question? Continue. Thanks. What level of performance above the benchmark is required to earn a portion of the incentive, and how is that established?
So, Representative Brennan, thank you for the question. It's a little convoluted, I guess. It's kind of, let me just sort of explain. With the portfolio, each year, the outside external investment consultants that are hired by the board, and in our case it's Makeda, will kind of establish an overall outperformance expectation, 41 basis points, for example, for the defined benefit pension plan. I think it was 36 basis points at one point, and those might not be the exact numbers now, but for the health care portfolio. So basically that's kind of the bar, and then above that gets the incentive comp. So it, again, changes every year based on the portfolio, based on a lot of things that are going on, but it is a very numerical calculation. It is scrutinized pretty heavily by myself, the director of internal audit, the director of human resources, our external investment consultant and our external auditors.
Final question. Please continue. Thanks. So if I'm reading it correctly, if you hit the benchmark, there's no bonus,
but you've got to be above the benchmark.
If you hit – Representative Brennan, thank you for the question.
If you hit the benchmark, there is a bonus. It is – I told you it is convoluted. So a portion of your total bonus award is based on this year's performance and a portion will be based on the prior three years. So there's a weighting that kind of comes in with respect to that. So only a portion of it is based on this year's. You will get some small portion of it, but then you will also have the three-year built in.
Thank you. Thanks, Mr. Chairman.
All right. Seeing no further questions, Director Karaher, thank you for your report. Next is STRS, and Director Toole has informed me that Mr. DeCenzo will be reporting on the performance-based incentive system in STRS.
Mr. DeCenzo. Welcome, sir. You may begin. Mr. Chairman, members of the council, thank you very much. Glad to be back here presenting on PBI again. STRS Ohio manages over $110 billion in assets, and as this council knows from RBK performance reporting, nearly 70% of assets are managed internally consistent with other large North American plans. Given the plan size, this internal management implementation style generates meaningful cost savings relative to peer institutions. CEM, the same cost benchmarking service OPRS uses, calculated that STRS Ohio saved $145 million in calendar year 2024, which is the most recent evaluation period available right now. This past May, the 40-year-old STRS Ohio performance-based incentive program was, again, approved unanimously by the trustees. We believe, and to paraphrase our policy, that the program incentivizes incentive performance and creates alignment between investment associates and Ohio's public educators by tying a meaningful portion of total compensation to performance. Over the years, STRS Ohio has been advised that putting investment associate compensation at risk is more effective at driving investment performance than fixed compensation would be. And those are actually
my prepared remarks. All right. Very good. I'm going to look around. Actually, before I look around the room I start the question You mentioned that I thought I heard the number 70 of your assets are managed internally How do you decide what controlled internally by that 70 What is the 30 What does that represent and who manages that
Mr. Chair, thank you for the question. So asset class by asset class and portfolio by portfolio, we make a decision similar to what Ms. Karaher said in the way OPERS does it as to what would be the most efficient way to drive the best net performance. And so sometimes that is oftentimes, nearly 70% of the time, that is through internal management teams and utilizing our operating leverage, and sometimes that is through external managers. And those decisions are, again, driven on what would drive the best net investment return.
Director Karaher mentioned rankings among peers. Do you have any data on how STRS ranks among your peer pension systems in regards to PBI?
I don't have a rank off the top of my head. I believe we're often either third or fourth amongst our 15-system peer group, which is very similar to Oprah's 15-system peer group. And depending on the year, we are sometimes sixth, sometimes we're fifth, sometimes we're fourth, but it changes year over year.
Do you think that the PBI system saves the system money?
I do.
Can you elaborate on that?
So I think as important as saving the system money, I think the PBI system generates better net investment returns. And so net returns are obviously inclusive of a consideration for cost. And so our job in the investments department, what benefits members most, is driving the highest net investment return. And so one component of that is the incentivization part, right, in which we put employee compensation at risk, earned only if they drive good returns. And the other component of the net investment return is making sure we manage costs to be as low as possible.
All right. Thank you. Looking around the room. Yes, Representative Brennan with a question.
Thanks, Mr. Chairman. Thanks for being here today. Appreciate your answer so far. I want to kind of piggyback off of Representative Chairman Bird's question. If the system were to substantially increase the percentage of assets managed externally, what additional investment return would external managers have to generate after all management fees, performance fees, carried interest, and other expenses in order to produce more value for members than STRS existing internal? And I know it's a mix of external and external investment operation. What would be your estimate there?
Through the Chair, Representative Brenner. Brandon, excuse me, thank you for the question. And so based on the $145 million number from just last calendar year that was available, every basis point for STRS Ohio right now is roughly $10 million. So it would have to be just to satisfy that cost difference an additional 14 basis points of return. 14 basis points doesn't sound like a lot, but again, that's $145 million.
Follow-up? Continue. If an investment professional meets the quantitative performance targets but makes a significant judgment or management decision that creates a risk for the fund, is there a mechanism to reduce or deny the PBI?
Through the chair, Representative Brennan, could you rephrase the question? It generates a risk?
Yeah, so let's say they meet their benchmark or exceed their benchmark, but then they make a decision that was inappropriate or, again, put the system at risk in some way. I mean, is there a disincentive or is there a, for lack of a better word, a punishment for that?
Through the chair, Representative Brennan, thank you very much. So, yeah, I'll answer your question in two different ways. One, sort of an event-driven single risk that is that as risky as you imply with your question is simply grounds for firing, right? And so that person would just be relieved of their position. To answer your question in a different way, we try to have preventative risk prevention measures in so much that the total fund, each asset class, and every internally managed portfolio has a risk budget. The total fund and asset class risk budgets are approved by the board. Individual portfolios are approved by me as chief investment officer.
Thank you.
Thank you. All right. Next question from Dr. Potajil.
Yeah, and you may just answer to what my question was, But I think sometimes when we look at these categories, we're thinking of a couple of people as generalists, and they're not, right? That there's expertise within the group. We're back to the people on the baseball team, right? Their basement's not the catcher, right? So just a little bit of background with, yes, they're all in this pool on incentives, but you've got some people who are particularly, they're expert in a particular focus on the market, right? And so they're spending more time there than maybe other people in that pool. So maybe a little bit about how that works to kind of get under the hood a little bit.
Sure. Through the chair. Dr. Patajil, thank you for the question. So our incentive compensation program is designed with allocations. And so every investment professional that's eligible for incentive compensation has a 20 percent allocation to the total fund performance, 10 percent to the one-year performance, 10 percent to the five-year performance. Every eligible associate also has a 20% or at least a 20% allocation to their asset class, and so that's sort of another team goal. The remaining 60% is allocated to that person's responsibility or responsibilities in terms of portfolios or areas in which they manage. And so to be a bit more specific with this answer, someone on our international equity team is responsible for maybe one or two countries. They may be our France expert or our China expert. Someone on the domestic equity team may be our industrials expert. And so they have a significant amount of expertise, and they're incentivized to make sure that they perform in that area.
All right. Mr. DiCenzo, thank you for your report, sir. And next is SCRS and Director Higgins. Now, Director Higgins, you are the rookie here, So, you know, sometimes at NFL training camp, the rookies get treated a little roughly. And so I'm just warning you in advance that there will be many questions. No, I'm not. Please continue.
Well, thank you for that. And thank you, Mr. Chairman and members of the council. It's great to be here and make my first presentation and look forward to working with you in the future. As far as the topic at hand today, we're very different. We're a smaller fund. We're around $23.5 billion. We're largely externally managed, 99% externally managed. But we do have a small program that is approved by the board, has checks and balances based on benchmarks approved by the board. The benchmarks are also reviewed by an independent investment consultant, and the performance calculations are performed by an independent third party. Those calculations are verified by the accounting division, which is separate from the investment unit. They are also reviewed by the chief audit officer that reports directly to the board. And the program considers the position, the asset class performance, as well as the total fund performance, and both one- and three-year returns. And while the performance-based incentive plan for a small number of investment employees is in the process now for the last fiscal year, For FY25, we paid around $1 million, but that was in result of value being added of approximately $200 million. And then for the last fiscal year that just ended, our net of fee return is 16.37%, which well exceeds our benchmark, and we're excited to see what type of value added that would provide. And with that, I really appreciate the time and would be happy to answer any questions.
All right. Thank you, Director Higgins. Is there any questions from members of the council? Wow. No questions. Better lucky than good. All right. Well, hopefully next time you have more of a Buckeye accent when presenting to the council. We're going to move on to the next agenda item, and that is issue brief profile of a member. And that is going to be presented to the council by Mr. Bernard, retirement study council staff member. Mr. Bernard, please proceed.
Mr. Chairman, members of the council, as we mentioned, at the beginning of this year in February, we were going to do another issue brief. That's what is before you here. And as I mentioned in February, the focus on this brief was not going to be on top-level financial information as far as a system. It was going to be much more focused on individual member experiences. And I am aware that most of the material that I give you that we create in-house is from that top level. What has happened with pension reform in 2012 is that there has been quite a bit of a divergence both between the systems and also within the systems themselves. And so members have obviously noticed this, and they have started making comparisons. But often that comparison is really done less rigorously than I guess we would like. They sometimes take general numbers and then apply it to specific groups. And so what we wanted to try to do is rectify that by basically enforcing a standard and then taking two retirement cohort groups, that is 2014 or fiscal year 2015 for STIRs and SIRs, and then look at another retirement cohort 10 years later, 2024, fiscal year 2025, and kind of look at how those have changed because you are getting a difference in experience for members, and that is notable. Now, I want to express my appreciation to the systems. The numbers in this issue brief come from the system, So great gratitude for their assistance and walking through me with points that we didn't understand what we are given. I will say that the purchasing power calculation, that is solely staff. So if there is any errors or any issues with that, that is solely on us. That is not on the systems, but everything else is their numbers. Now, I don't have very many prepared remarks beyond that. This is really meant as an informational resource and hopefully a way to look at individual member experience and try to standardize rigorously what some of these comparisons are going to have to do in order to make a fair comparison. But I am prepared to answer any questions.
All right. Thank you for your presentation. Mr. Bernard? I see no questions from members of the council. Thank you so much for your presentation. The next agenda item is rules. Mr. Hennigan.
Thank you, Mr. Chairman, members of the council. ORSC staff have reviewed the rules. They are in line with the revised code, and we have no further comments.
I see no member questions. Thank you, Mr. Hennigan. The next item on the agenda is old and new business. And so I'm going to bring up some business that's not on the agenda. And I was, members of the council, I would tell you that a couple of months ago, I was at a conference and I ran into members, a member of the Heritage Foundation. the Heritage Foundation let me know that there was going to be a report coming out on the PBI system in Ohio. And that article did come out in the Journal of New Finance. The title of that article, Retirement at Risk, the Political Economy of Public Pension Governance. And so that came out. That was dated June the 19th. And we did not meet in July. So we did not discuss it then. We're going to discuss it now just a little bit. And I would ask Mr. Bernard to go back to the podium for just a minute because Mr. Bernard, at the request of Vice Chairman Romanchuk, wrote a memo to the committee, to the members of the council, I should say, in regards to what this article stated. And I will say up front and in advance that if true, what is in this article put out by Alan Mendenhall and Dan Suter, they very concerning to retirees in Ohio And so you wrote a memo and I going to ask you to talk about that because the members of the council and Ohio retirees are very much concerned about what in this So could you briefly restate, Mr. Bernard, what you put in your memo to the members of the council regarding this article that recently appeared?
Mr. Chairman, members of the council, yes, I was asked in July to respond to this article. It was in the Journal of New Finance, and it stated it estimated a compound difference of approximately $9.3 billion between STRS, what they call audited and reported returns, and its impact on performance incentives. And so we were kind of asked to respond to that. So the article itself just, the article is in a theoretical framework of talking about governance issues, principal agent models, and incentive misalignment. And this often can happen when you have one group of people who are small who have a lot of information, you have another group of people who are diffuse in a larger population. So within that theoretical model, they are taking STRS as a case study in order to demonstrate or to make the case that a different approach would perhaps reduce or eliminate this misalignment issue. Now, I always say, theoretically, I'm aware of principal agent models to a tiny degree, but I'm not well-versed in them. So if we could just set sort of a theoretical piece of the article aside and just talk about this case study, because I think that's what's generated more of the concern. So what the issue was is that they looked at returns between 2002 and 2022, and according to the authors, a non-compounded figure equaled a 4.8 billion difference between their created numbers and numbers from STIRS. And so what I did initially is just try to understand where this number comes from, and the first thing you do is you just try to replicate it. So the STRS stated returns, I think is what they referred to them, those numbers are in the annual comprehensive financial report, and they match the numbers that we receive in RVK through RVK. So I was able to verify those figures, the STRS reported returns. As far as their audited, what they call derived returns or audited returns, looking, I was not able to verify their figures given the information that they provided in the article itself. There's very few citations within it, so we could not precisely identify where these numbers are coming from. So I think the key thing that I would say is I was unable to verify this figure based on the information within the article itself. That is obviously a concern. I think I'll pause there and see if there's any questions on that.
There is more in the memo.
there's a couple more pieces that were constituent-related questions that I didn't know if you wanted me to go into, but as far as the article itself, I want to stress
was not able to independently verify those figures. Well, I'll start with the questions, and I don't know if there's other questions, but the thing that I find very concerning about the article, that if true, and if it can be reproduced, and of course with a scholarly article, you expect that results should be reproducible. You state that you cannot reproduce them, and thank you for that. They're very concerning, because it says that we are paying out incentive bonuses based on information that doesn't stand up over time. And so I appreciate the fact that you mentioned that you're not able to reproduce them, and I think this is a very important issue that we're going to continue to look at. Is there any questions from members of the council on this article? Representative Brennan.
Thank you, and thanks for your analysis. I appreciate it. It was very, very helpful. My question is, SGRS's books have been looked at by the state auditor. They're audited by independent auditors. have there been from any of these audits any red flags that this article raises?
Not that we could verify. You can make any claim you want, but we need to be able to replicate it. And we need to understand where the numbers come from. And you need to be very careful with your methodology as well.
Follow up?
Please continue.
So to the retirees out there in STRS, including myself, what is your advice to us as far as this article?
I mean, to Rep. Bird's point before, I mean, this could raise some alarms.
Should STRS recipients or those currently paying into the system, should this raise alarms for those individuals or not?
Mr. Chairman, Representative, over the past six years, we have gone through multiple audits, multiple investigations. There's court cases. To this point, I haven't seen anything that would suggest that there is a major problem. And again, if you make a claim of fraud, it's probably important to make sure that it is well cited and that others understand precisely what you did. It is consistent, internally consistent. It addresses any methodological issues very forthrightly. And there are some issues that the authors themselves discuss as far as methodology that would explain away this difference completely. So I've looked at this article, and I have no more further comments on that.
So, Mr. Chairman, a follow-up?
Last follow-up.
So I guess what I'd like to do, or maybe we as a committee, is reach out to the authors and ask them to address your lack of knowing where these numbers are coming from and have them provide us with their citations.
Representative Brennan, I can answer that question. I have already reached out to both of the authors, and so I am going to be working on that issue. And I want either or both to communicate with Mr. Bernard and Retirement Study Council staff so that they can explain the methodology that allowed for that computation in the one column of Table 1. I want, we've got to have our staff, Mr. Bernard, be able to reproduce those results.
Thank you.
And so we're working on that. And thank you.
You and I are thinking along the same lines.
Representative Plummer.
Thanks, Chair. We'll count me in as a third person thinking on the same line because that was my question. Have we reached out to them? You know, we're getting a lot of pressure from retirees, and we have to do our due diligence and make sure this article is either true or false. So thank you, Chairman.
You answered my question. There you go. There's three members concerned about this article and whether the results are reproducible or not. Vice Chairman Romachuk.
All right. Yeah. Multiple members of this council are very concerned about this article. And if this article is accurately written and accurately calculated, the numbers, this is a concern for Ohio. It's a concern for our retirees. And so we will continue down this path.
If I can get either or both authors to come to Retirement Study Council, I am going to attempt to do that. If not, I'm going to at least get one or both to communicate with you so that they can explain to you how they calculated that column.
Which column was it in the table one?
They refer to it as the audited or derived. I forget which. But it's different from the STRS reported figure. And again, that number, the STRS reported figure, is verified that all the way down for RVK and in the ACFERS. So that is a number that is in financial reports. The other number is not, that I could locate. It was, again, not cited. When I read the article, the author stated that they chose Ohio because they had two different systems, and the article references STRS versus PERS, and compared them because in their estimation, they were awarding performance-based incentives based on different calculations, different numbers.
So I'll close with this. From your seat, do you see any difference in the way STRS or PERS calculate their returns in order to award bonuses?
Mr. Chairman, I can tell you that, and I just spoke with Dr. Karahar, they are both using the same verification process to calculate the returns that are used for these performance-based incentives. So I, from where I stand, from where I sit, from the discussions I've had, no, I don't see the difference there.
Thank you for your report, and we will follow up on this issue and see if we can get you to be able to communicate with one or both authors.
Mr. Chairman, if I may.
You have a question?
I do, and a comment. Okay. So thanks for all that. If I may ask another question, Mr. Bernard, is the PBI structure and STRS comparable to industry standards?
Mr. Chairman, Representative, I'm probably not the person to ask that. I'm not an expert in the investment field. it is, I can say, from looking at STRSERS and PERS, it is similar.
And follow-up comment, Mr. Chairman. On the flip side of your point, if we're not able to verify the numbers in the article, how do we as a council or whoever, how do we allay the fears of STRS members that have read this and taken it at its face value? That's my concern. If we're able to verify it, that's one thing, but if we're not able to, I think we've got to get the message out to members that these numbers cannot be verified and that the House is not on fire.
Representative Brennan, I think everyone knows that there are three members of this council that are STRS members, and this is a very important issue to you, me, and Dr. Potagil. I think it's important to all the members of this council because we all want to make sure that performance-based incentives are being awarded on accurate numbers. And so we need follow-up, and there will be follow-up. We're going to try to get some closure to this issue.
Thanks.
And you and I are on the same page on this. All right. I see no other questions, so Mr. Bernard, thank you for that. The next meeting of the council, I see no further need for old or new business. next meeting is Thursday September the 10th and subject to the call of the chair seeing no further business we are adjourned thank you