Ohio Retirement Study Council - 10-8-2026

to our October 8th Ohio Retirement Study Council meeting, and I'm calling this meeting to order, and I'm calling on the director to call the roll.

Representative Plummer. Here.

Senator Blackshear. Here.

Ms. Miller. Here.

Mr. Shearer is excused.

Director Foley. Here.

Director Rourke. Here.

We have a quorum, sir.

Mr. Boyko.

Mr. Chairman, members of the council, I'll be briefed to get to Mr. Vojko, but I did want to quickly kind of bring us up to speed just as a summary of how we got to this point. In late June, Drs. Mendenhall and Sutter, both of Troy University, published in the Journal of New Finance, a journal based out of Madrid, Spain, an article titled Retirement at Risk, The Political Economy of Public Pension Governance. In this article, and I'll use their words here. They state that they present empirical evidence showing that STRS's reported returns consistently exceeded audit returns and that this pattern is consistent with rent extraction. A different way to say that is the implication that STRS investment staff are misstating their returns for the purpose of getting incentive payments. That is a claim. In July, we were asked for a quick review of the article, and particularly the article's main table where a lot of these suggestions were made. And we responded to that article initially that we couldn't verify the numbers. Now the August meeting last month, two months ago, we were directed by ORSI to contact the authors of the article and try to get firm clarification of the data and also ask about some of their more general findings. We reached out to both Dr. Sutter and Dr. Mendenhall and to verify the article's claims and again to really find consistency to where the data came from. After some initial emails, which in many ways raised additional questions. We did not get any additional responses. On September 1st, in response to this, Director Rhodes sent a formal request to both doctors Sutter and Mendenhall listing what we thought were the likely sources of their information and asking for them to confirm that along with some additional questions about the data As of today, this morning, we have not received a response from that formal request. Then, so in the meantime, ORSC staff did a much more thorough dive on the paper itself, and then we had our consultants, PTA, our actuarial consultant, do a review and RVK, the investment consultant for ORAC, do a separate review. And these were all done independently. I know that Mr. Vojko is technical. It's going to be a bit in the weeds. But to give ORAC's summary, sort of high-level view of ORAC staff's opinion is that after a view of consulting comments, ORC staff's finding is that the author's approach is fundamentally flawed and contains significant data-related faults. And again, attempts to clarify that with the authors have been largely unsuccessful. So if there's any questions for me, otherwise I'll...

Thanks, Mr. Bernard. Thank you, Chair. So are these doctors, alleged doctors, employed by a university?

Troy University, Chair. I would recommend that we send them a letter and pretty much say they probably received a grant for this great information they gave us. They failed to back up their data. You know, it caused us some grief. It got a lot of people worked up. We've got to send them a letter and say, comply with our order to give us a supporting document, or they should be counseled from the university about misinformation. What do you think about that, Chair?

Okay.

Thank you, Mr. Chairman. And Mr. Bernard, I know you do a lot of research. I think that's probably your position with ORSC. One of them is primarily you're a researcher. Do you find that the data that is contained in this report to be properly cited?

Do you find that to be a bit unusual with your background and your number of years as a researcher for data not to have the proper citations?

Okay, thank you.

Last month, Mr. Bernard, you cited that you were not an investment expert. And so I guess my question is, you know, maybe you're not an investment expert. Do you feel like you're properly trained to at least analyze research that was presented in this article?

Tell me about that.

I may have more questions later for you on that issue.

Happy to be here, sir.

So please continue. Thank you. Could I start, Mr. Chair, with a request that when you are seeing about five minutes left in the time you've allowed me, give me a wave or have the executive director give me a wave, because there's a few examples that I want to make sure I end with that take the very complex report that I hope you've read, because we put a lot of work into it. I know that it is complex.

Exactly.

Absolutely. So I don't usually talk about myself, but this is, you know, given that we have obviously had some critical comments to make about this particular article, I thought that I'd at least put my credentials on the table for what they're worth. You know, in our business, you have to be very humble. The market and investments are very humble, as is organizational operation and execution generally. But I have been a trustee on both public and corporate defined benefit plans, D.C. plans, insurance funds. I've been the chief executive officer of a $50 billion state DB and D.C. plan. I've been a senior consultant for 22 years, providing advice to fund boards, fiduciaries on investments, investment organization, governance, asset liability, risk management, and even investment staff compensation structures. So at least I've been around the block. But again, it's important to stay humble.

It's not like accounting for a corporation. They have their own rules that are set by independent bodies. And so the answer to your question is yes, it is. It is more complex and somewhat unique to institutional investing and particularly for pensions. And so, you know, that's a long answer that summarizes as yes.

What was our task? The staff reached out to us on your behalf and said, conduct a comprehensive and entirely independent and professional assessment of the allegations the methodology the data use and the conclusions of the article We had not read the article before. We don't know anything about the authors. And regarding the independence of that task, we did not collaborate with STRS, the STRS board or the STRS staff. We did not collaborate with the actuary. We did not even collaborate with your own staff until we had completed our own work. And we still have not done anything more than had a cursory conversation at the end of that process with the STIR CIO. We have not even talked to the actuary. This is our work, and it is completely independent. We were not influenced by anybody else's views. And I want to make an offer here to both the members of the ORSC, but also to the authors. And that is that we want accurate work. And so if the authors would like to review our analysis, we're totally open to that. We're totally open to providing them our calculations. And we're totally open to having a meeting with them if they would like to discuss our report. This is, I must say, in somewhat contrast to the difficulty that your staff has had in getting information from them. But we are an open book. So let's turn to the article itself. When I started reading the article when I first got it, I, again, didn't know the authors, didn't know anything about the article. The first 10 pages of the article are essentially what you might call a recitation of all of the problems of public-defined benefit pension plans. And as I read it, it just – page after page, by the time I got to page 8, 9, and 10, I actually thought, because I didn't know exactly where the article was going to go, that they were going to recommend that the STRS DB plan be closed and be replaced by a DC plan, which has happened in a few other states as well, critics of DB plans. But that's not where they headed. They headed in a completely different direction. But I thought those first 10 pages were kind of head-scratching, and I didn't know exactly why they were in the article in the first place. So let's turn to the article, and our report has very somewhat technical conclusions and findings in it. I'm not going to go through the whole report, although I'm happy to discuss any part of it with you, but I want to give a more layman's point of view that translates our report into something that I hope will be more understandable. So our first conclusion is that, quite frankly, it's the general conclusion. The article is fatally flawed. The analysis that's behind it is fatally flawed. Let me repeat that word, fatally, fatally flawed. And the reasons for that are laid out in detail in our long report that we submitted to your staff and to you. That's the overall conclusion, but let's get into some of the details. The article, as we read it, does suggest that the authors have an interest in public DB plans and their governance and the technicalities of how their performance is reported. But what astonished us is that their knowledge and understanding about almost universally employed best practices in institutional fund performance measurement, actuarial finance, or the basic tenets of incentive compensation structuring, which I will deal with at the end of this presentation, really shockingly weak. So, for example, there's no mention of the custody bank and the book of record, which is central, absolutely central to the independent valuation of assets in a pension plan. Head-scratching. There's no mention of the role of the board in setting things like incentive compensation, benchmarks, et cetera. And I've never heard of a staff setting its own performance measurement system and its own incentive compensation, which would have to be the case if the investment staff were somehow manipulating the ability to get performance-based incentive compensation. So a head-scratching again. So we conclude from this that after going through all the analysis that our detailed report lays forth in somewhat mind-numbing detail, and I apologize for that, but it's best to be highly specific, as Mr. Bernard has pointed out. The article really fails to completely prove or even create a plausible hint that there's deliberate inflating of fund performance at STIRS or any other public fund, for that matter, And that much less such behavior is deliberate and it artificially inflates investment compensation. It just doesn't get there. And again, the details are laid forth in our report in great detail. you would think that if you were going to make a claim that someone was misbehaving in this fashion, that in order to not be reckless, you would want a bulletproof analysis. We didn't find a bulletproof analysis. And again, we offer to the authors to review our own report and to point out any errors that we might have made. What's interesting, too, is that after those ten pages of all of the recitation of all the problems of public defined benefit plans, the article ends with a simple – it's almost like the lion burped at the end of the interaction, so to speak. and that was to make a recommendation as to what measure should be used for incentive compensation. It turns out, as I will point out later, that we think it's just a terrible recommendation, and it defies sort of all the basic tenets of incentive compensation structure. So the fifth thing I would say is along the way, and if you've read our report, your staff's report, your actuaries report. The article contains numerous data and procedural flaws all along the way. Apparently, the data was, and we don't know exactly where the data comes, but we tried to reverse engineer it, and it seems to have come from just picking numbers off a CAFR report largely That as laid out in the report and in the actuary report that simply not sufficient analysis to even remotely come close to supporting the claims that they make. But also along the way, and we're not ascribing any motivation, bad, good, to the authors. We don't know the authors. It may be that the problems that we see in the article are just analysis that wasn't completed or that was faulty in concept. We're not claiming that they have bad intentions. We don't know them. We're not going to do that. But I will say this, that along the way in the article, they use terms that are pejorative in nature. So let me give you one example that really caught my attention, that STIRS uses two sets of books. Now, typically, if you were reading the newspaper and you heard a story about a corporation or an investment fund that had two sets of books, what's your immediate reaction? Oh, there's something bad going on there. Well, it turns out that there's nothing bad going on there. This is best practice. This is what you would find if you went to any other state in the nation and you looked at how they analyzed their performance because the two different methodologies answer two different questions that are critically important to the legislature as the ultimate plan sponsor, to the board, to constituencies. And one is, what is the funded status or the ability with assets in hand to pay the benefits that have been promised? Very important question. It's analyzed by the actuary. They use money-weighted rates of return and net fiduciary position. Nothing wrong with that. It answers a very specific and important question. It doesn't tell you anything about how the investment staff operated because it contains an enormous amount of information and cash flows that affect that number that the investment staff probably isn't even aware of, certainly not in their normal daily work on investments. Time-weighted rate of returns have been constructed over the years by such bodies as the CFA Institute with enormous both academic and practitioner input over time to try to isolate how are the investment decisions affecting our outcomes, specifically without all of the other stuff that goes into changes in the net fiduciary position, which sometimes can dwarf, in some years can dwarf, the investment contribution to that number. And so these two sets of books are not two sets of books. They answer two different questions. And the question that is most relevant to their claim of manipulation in order to advance incentive compensation is time-weighted returns. That's what focuses on how investment decisions have affected the fund. But they also imply, and they say this in their report, so not only are there two sets of books, But they say that time-weighted rate of returns are essentially kind of – and this is my term, not theirs – kind of shadowy. They only used internally They only used to evaluate the investment staff and they are not subject to external review accountability standards those sorts of things You can see that in the language they use in their report. This would come as an enormous surprise, an enormous surprise to the custody bank that is the fund's book of record, the ultimate decider of what the fund's investments are worth. It would come as an enormous surprise to the fund's independent consultant, which does not report to the staff, reports to the board, not to the staff. And it would come as a huge surprise to the CFA Institute that has spent an enormous amount of time constructing the rules by which time-weighted returns should be executed. So I scratch my head. These are things that should be known, particularly if you're going to make allegations of this sort, and they should be included in the analysis. Now, in fairness to the authors, there are several times in the report where they kind of hint that there may be some things that would affect their calculations that show what they perceive to be evidence of manipulation. For example, on page 17, they say something like, we acknowledge that the methodological differences between STRS and PERS, their proffered sort of benchmark or comparator, could account for some portion of this observed divergence, which is so important to them. They are so right about that, because if you look at our report, it turns out that these differences, particularly net cash flow, are enormously important in understanding why time-weighted rate of returns focused on what the investment program is doing and the actuaries' net fiduciary position calculations, why they would differ. They are mechanically guaranteed to differ if there are substantial net negative cash flows, which both STRS and PERS have, but STRS has a much larger negative cash flow. Now, I say that not because it's a bad thing. It's just a structural element that emerges from the benefits that were legislated and the contribution policy and the other cash flows that come in and out of the fund. It's a very normal thing for a demographically mature plan, which has a lot of retirees relative to the active employees in the fund, to have negative cash flow. So I don't want to leave the impression that that means there's something bad going on at STRS or PERS. It's a structural element of public DB pension plans that are growing more mature. The authors make no reference to this other than this. We acknowledge there may be things that would account for some portion of our observed divergences. Like I said, they are so, so right about that. And they make the conclusion, and I'm about to try to turn this into sort of layman. I'm exceedingly fond of metaphors, so I going to try to do this They make the immediate jump that well the only thing that could explain these divergences is of course bad behavior on the part of STRS And what we do in our analysis is say once you take into account those other things that they kind of hit might be out there, particularly negative cash flow, but there are other ones as well. Some of them are in your staff report. some of them are in your actuary's report, where they have chosen numbers that always tend to have the effect of enlarging that divergence between the two measures, you find out that STRS and PERS are very similar in nature. Unlike the claim that they make that PERS has a completely random, bi-directional set of differences between those two measures, but STRS has a very directional and sustained difference, the fact is that once you make the changes that are required, for example, only looking at PERS DB plan and not lumping in, which had to be a mistake on their part, I can't imagine, the DC plan, the health plan, into the same calculation, which, of course, is not relevant to looking at DB plans, you find out that their patterns are very, very similar. And so it just completely undermines their whole notion that there are differences that can only be accounted for by bad behavior. These differences are, in fact, structural in nature. And PERS and STRS both exhibit them not quite to the same degree because their negative cash flows are not quite the same.

I can do that. I'm going to, like I said, I'm exceedingly fond of metaphors. So let me first tackle the notion that the only explanation of these divergences has to be bad behavior. I was thinking about this and I had this image of Ohio. I had two people, maybe the authors, maybe other people, I don't know, standing underneath an apple tree in October. Apples falling out of the tree, hit them on the head, they get upset, and their immediate conclusion is there's a bad person up in that tree throwing apples at us. What they really should be thinking about, what they've really discovered, is it's October in Ohio. apples are ripening and when apples ripen enough they fall out of the tree and there is this thing called gravity so they discovered gravity uh is is the way i look at it uh there is no bad person up there there's it's october in ohio it's an apple tree and there's this thing called gravity that's what they discovered another is um this notion of why their single recommendation of tying staff investment compensation or performance compensation to net fiduciary changes in net fiduciary position is a terrible idea. So, for example, let's assume there are two barrels, one on the left and one on the right. Those are the funds. This barrel has a gigantic hole at the bottom. This barrel has a little hole at the bottom. That's leakage. That's negative net cash flow. That's benefits being bigger than contributions coming in and other cash flow changes. So both of them have negative cash flow, but they differ substantially in terms of how fast the asset. So you hire Tom and Sally to go to the lake back and forth all day long and bring water to try to fill the barrel up. The barrel's height is the net fiduciary position. Except that poor Tom, he's got a barrel that has a lot of negative cash flow. So he may make 10 times as many trips as Sally does, but he can't get the barrel up to a high net fiduciary position because it's got big negative cash flow at the bottom. Sally makes a couple of trips. There's very little leakage, and Sally and Tom essentially are the investment program. So, you know, would you penalize Tom for for actually hauling a lot more water to that barrel because it leaked out the bottom and he didn't drill the hole in the bottom? That's just the barrel he got stuck with. And would you reward Sally for having a nicely filled barrel because so little of it leaked out? This just doesn't make sense. There's no universe that I can think of where such a compensation structure makes sense, where you would punish the person who actually did the better job and you would reward the person who didn't do as good a job. So with that, I'm going to stop and I'll stand for questions.

Thank you, Mr. Chairman. I'm just curious that – because I struggle sometimes, honestly, with the idea of performance bonuses. But would you view this with performance bonuses generally, that there is an incentive to take riskier investments?

clear. But I was very glad to hear what you said with respect to, you know, what your research in capping that, because for me, yes, you do want to stop the private sector poaching and having competitive salaries and whatnot. But, you know, irrespective this report, this is spilling over into a much broader discussion, which is why I brought that up. Thank you, Mr. Chairman.

Thank you, Mr. Chairman. I don't have any real experience, I suspect, when it comes to public pension systems, but I do have quite a bit of experience in the business world. going on 40 years. That's hard to believe. As I was sitting here thinking about the number, I can't believe it's been 40 years, but frankly it has. And you've mentioned more than once during your remarks about best practices. And there's some best practices that both occur that are the same in the business world as they are in the pension world. And some of those things that have come up with their report and maybe with a couple things that you mentioned is, one, they picked a time period that had an outlier in it, what I call an outlier, and that was year 2022. In business, we don't do that. Or if we do do it, we also do analysis without the outlier, so we can kind of see real long-term trends. So that's number one. That's not a best practice, in my view. The second one that doesn't meet the smell test of best practice is not being able to tie out numbers. That is like accounting, that's finance 101 in the business world. And then the third thing that struck me was gross versus net. I mean, you can't get any more amateur hour when you're mixing up those two types of figures. So would you concur that those three items that I just mentioned are not best practices? And that really makes the report almost, in my mind, it's not worth reading the rest of it as soon as you learn about these three faults.

Anyone else? Mr. Royko, I'll ask, do you think that the authors of this article proved their point?

Any idea why they picked OPERS, O-P-E-R-S, in Ohio as a comparative?

Did I hear you say, sir, that you don't know where the data came from that they used?

Do they cite it at all?

You said in your comments that you you I think you said this at the beginning.

I have the great pleasure to work for you, and I've seen you do things like review budgets, review asset liability studies, review fiduciary reviews. Those in my judgment my professional judgment are way more important in terms of ensuring that the pension plans in the state of Ohio are well run are financially viable and that you and the legislature and other constituencies know why they're behaving the way they are. So this time is actually in my view a distraction from that. But again, it's just my professional view. Do you see any reason for concern among retired teachers and active teachers in the state of Ohio?

You answered my second part. Thank you, Mr. Boyko, for your report, sir.

The chair would recognize Representative Plummer for a motion.

Is there any objection in the room? Does anybody want to second that? Thank you, Senator Romanchuk.

Hearing none, that motion is so moved, we will ask the Journal of New Finance for a retraction. We will take a vote then. Please call the roll.

Yes.

Mr. Vice Chairman. Yes.

Senator Blessing. Yes. Senator Blessing.

Yes.

Dr. Pottejo? Yes.

Thanks, Chair. Second motion. Since we did our due diligence, we contacted the authors of this article who failed to respond and give us a proper documentation to support their claims here. I'd like to make a motion to send a letter to the proper authorities at Troy State University with a report for their review and possible action.

Before I second, Mr. Chairman, I would like to request that the letter include a question of who funded the report and why STRS was picked among all the systems throughout the country. Thank you, and I second.

Chairman, that's a great amendment, and I'm good with it. Thank you.

Mr. Chairman.

Representative Plummer.

Mr. Vice Chairman. Senator Blackshear?

Senator Blessing?

Ms. Miller?

Dr. Patagel?

Motion carries. Thank you. We thank the members of the council for a thorough vetting of the article. We thank Mr. Voico for doing some extra work on our behalf. And we call Mr. Voico back up for the next agenda item, investment performance.

Thank you for that motion. I will recognize that motion. Is there a second? Ms. Miller seconds. Please call the roll.

Yes.

Yes.

Yes.

Yes.

Yes.

Yes.

Yes.

Thank you very much, Mr. Chair. You're making me work hard today, and I deserve it. I'm going to work, and I'm going to go briefly this time because I know you've spent a lot of time on the other topics. So I'm going to work from the summary memorandum, and I'm going to talk a little bit about things that I might not have mentioned in the past that I think are important to fill out, continue to fill out as best I can, the knowledge and the understanding of the ORSC with respect to institutional investing, and particularly for that of the Ohio Fund. So the first thing that I would say is that if I look at page two of our summary memo, that's the memo, not the big book with the 10,000 data points in it. On page two, there's a table, figure one, total fund performance versus total fund benchmarks. What is a total fund benchmark? Total fund benchmark is the performance expectation that the board sets, not staff, the board sets working with their independent investment consultant to judge whether or not the actual execution of the program did better than what would have been expected if they just got the median return from the asset classes invested in them. And the good news is that three of the six plans in the six-month period that just ended did beat their performance benchmarks, total fund benchmark. And remember that it was a tumultuous time. There was liberation, the start of the tariff wars, and all of that sort of thing. And we don't put a lot of weight on 180 days' worth of investing, but because it is the most recent period, I thought I'd mention it. I want to turn, though, to page three, which is something more important, and that is we're looking at asset allocation. I have said this before I say it again it is an absolute belief in institutional investing that most of the return that an institutional fund gets and most of the risk it takes is set the moment you set the asset allocation that is how much equity you own versus how much bonds versus how much real estate, et cetera, et cetera. And our observation about the funds in Ohio is that they remain diversified. They are stable. You'll see that house stable in a moment. And the asset classes that they used are universally used throughout public pension plans, as well as, quite frankly, institutional funds generally. But I do want to make clear that asset allocation is indeed powerful, and small changes or small differences can actually make a significant difference in terms of returns achieved with that asset allocation versus another. and risk-taken or risk-experienced one versus another. And I'll get to that in a moment. So if we turn to page four, one of the things we like to look at on your behalf in terms of oversight of the pension plans is at the top table on page four. And that is, are there big and sudden changes in the asset allocation, which we've just said is incredibly important, because if they're gigantic, I mean, if they're like 5% is moving from equity to bonds, it is signaling a major, major change in the direction of the investment program and its risk and its potential return. But what we see here is actually what we've observed for the most part in the past, and that is that the changes are incremental, and they're not surprising either. For example, in the first row, you see that a number of your funds have reduced their exposure to domestic equity, meaning U.S. equity. U.S. equity has performed magnificently, is at relatively to its history, at very high valuations. We see many funds across the U.S. just slightly trimming their exposure to an asset class that is done way better than its long-term return pattern. We see one of the funds, PERS, actually increasing equity in the international area. International equity has trailed U.S. equity for a long time, but has started to perform better relative to U.S. stocks. Again, not a surprising move to observe that. In the case of STRS, they've actually reduced their equity exposure to both. Again, not that different. One of the things that is a little different is to see PERS-DB reducing their fixed income allocation. But if you look on the far right, where did those percentages of the asset of the total fund go when they were removed from fixed income? They went to other alternatives. And I suspect that if we dug deeper into that, we'd see things like income-oriented infrastructure. We'd see private credit. We'd see sort of fixed income-like exposure. But that's something that we didn't dig into specifically for this pattern. And you see that STRS moved assets from equity to fixed income. This is something that we're seeing quite a lot of and quite a lot of interest in. I suspect that we're going to see more. If interest rates stay where they are and bond yields stay where they are we going to see more of this kind of change So bottom line to you as oversight body there nothing unusual in this relative to what we observing across the country and what we're observing in the capital markets, and they are incremental enough to not alarm us with respect to concerns over large impulsive changes. If we turn to page 5, I want to say that if you look at the top category, we look at 1, 5, and 10 years of returns for the Ohio funds versus where their current assumed rate of return is. That's the gray bar. You can see that in many cases, like with STRS, OP&F, SIRS, they have significantly outpaced their actuarial return. Why is that important? The actuarial return that the actuary and the board set is the basis or largely the basis for the contribution stream. So when investment returns exceed it, it means that the investment programs are contributing to the ability to pay benefits and add to net fiduciary position in a manner that was greater than expected, at least for these periods. And that, in turn, helps restrain contribution expenses. So that's good news as well. Not all of them exceeded their assumed rate of return by a huge amount. Highway Patrol, for example, did exceed it, but only modestly, but then they have the highest assumed rate of return, so their bar is higher that their contributions are derived from, if you will. So at the table at the bottom, this is something when we first appeared before you, we commented that the Ohio funds had relatively high assumed rates of return. And it was a point of caution that we brought to you. And why would we do that? because remember what I said about contributions being not entirely but substantially affected by the assumed rate of return that the boards adopt with the recommendation of their actuary. And a high expected rate of return tends to reduce contribution levels. So if you're wrong about that, you will undersave, so to speak. So it concerned us. Now here we are some years down the road, every one of the plans has reduced their assumed rate of return so that it now, as one of the considerable factors that changes contribution levels, tends to signal to the contribution stream that we may need more contributions. It's a conservative move. It's one that we see across the country. And so if you drop down to the bottom, you will see the first take, which will be greatly expanded as the data comes in, about where the sort of central point is for public defined contribution plans. and now all but Highway Patrol falls in that sweet spot of kind of 6.75 to 7%. We think this is a conservative move, and again, from an oversight perspective, and we're working for you, an oversight body, this is probably something that ought to make you feel positive about the conservatism of where the boards at the various funds are heading I almost done Mr Chair I just wanted to say that if you look at asset allocation differences they do show up significantly So you noticed in the earlier tables that visually the asset allocations were all diversified, but unless you had the data in a table, they didn't look all that different. But they are different, and you can see that in the table at the bottom of page six in the sense that Highway Patrol's returns are significantly different than the others. we would bet that if you wanted us to do an attribution analysis of that, which is a big piece of work, but they are often done to try to understand outliers, that a lot of it is rooted in an asset allocation that they have put together. And it doesn't mean that it's a bad one. It means that they may be expecting something to happen in the capital markets that this particular asset allocation is going to be extremely well suited to confront. Last point I'm going to make, and then I'll exit stage whatever left, is page 7, my favorite chart, which when we look at returns, we pound the table and say you have to ask how much risk is being taken while you're pursuing those returns. These two charts are one of the best examples of trying to answer that question. If you are in, you can see that there's a T. Let's look at the top one, five years. There's a T. That center point in the T is the median return of all of the funds that you see here, including Ohio's, but all of those other grade blocks are public funds. and it shows the intersection of the median return and the median volatility risk that was experienced in achieving that median return. So if you are to the left and higher, it means that you had higher returns than the median fund in this example, and you can see how dispersed it is, and you did it with less experienced volatility risk, which is a good thing. Volatility is the enemy of long-term compound returns that are needed to fund benefits. So you can see that SERS and STRS and OPNF and kind of I would put Highway Patrol in there but barely are in that northwest quadrant. And that's a great place to be. You can see where PERS is. They are achieving the median return or something very close to it, but they're taking more volatility risk than the others. Is that a bad thing? It's something to keep an eye on. You may recall early on in our engagement with you, there were a number of Ohio funds that were courting and experiencing volatility risk that was further out to the right. And what that means is that, yeah, they were achieving returns that were satisfactory, if not better, but they were courting more risk to do it. That's not the case in the last five years. And in fairness, it's not really the case if you look one down in the case of 10 years. And so, you know, we conclude that with a exception, a mild exception or two, the risk taken by the funds and the returns achieved seem to be fit very well when you put them in the contract. of all of these gray dots, which are all public funds that have some comparability. So I'll stop there, Mr. Chair, and I'll stand for questions, or I'll exit.

Not 100% sure it's worth mentioning, but doesn't page 7 and two graphs you've just finished explaining, with regard to risk and return, suggest on both of them, the five years and ten years, that STRS is bearing less risk and getting the return above average. So the fact that there could be some monkey business going on at STRS trying to increase risk for the purpose of paying more bonus money doesn't tie out, if you will, with these two graphs. Is that a fair statement?

I agree with you, sir.

Very good question.

I love being in Ohio.

Mr. Chairman, members of the council, G136-0797, this is a generic amendment. And it would modify the existing authority under Highway Patrol regarding COLAs. So just as background, as you know, during pension reform, prior to pension reform, all the systems had annually provided a 3% simple COLA. During pension reform, that was changed for all the systems. And in Highway Patrol, there was authority given to the board to modify that COLA, depending on their funding status. And then there was also an additional limit on that modification that there were certain people that had certain level of federal poverty level that had to get a 3%. Okay, so that's existing law. What the generic amendment is doing is providing greater flexibility to the board. So just as a broad summary. And I think it fair to say that the amendment is attempting to address declining purchase power within the confines of the funding situation at Highway Patrol Now an additional background as we had in the issue brief that we presented last month, we were noticing some significant declines in purchasing power, in particular in Highway Patrol and in STRS. And that those two systems had dropped, if you're looking at the population of those folks who had retired just after pension reform, that their purchasing power had dropped into the 70%. Now, so they have had, so Highway Patrol and STRS have had the most significant, and they're pretty comparable, as far as purchasing power loss. Now, additionally, because both of those systems are assuming 0% COLA is going forward, I think we can assume that there's going to be more declines in purchasing power as we move forward. Now, I should note that it's not fully defined in the ORSC's principles governing pensions, but there is the statement that the retirement benefit should be adequately maintained during the period of retirement, and that there should be a plan of pre-funding post-retirement increases. Therefore, how staff has understood that is that there is a long-term goal of maintaining some level of purchasing power. However, that is completely dependent on funding levels. So I think that's the context of this generic amendment, is within the existing confines, what can we do with COLAs to preserve as much as possible declines of purchasing power. So specifically what the amendment would do is there's three changes to the authority. Number one, it would change the authority of the HPRS board to provide an absolute dollar limit in the COLA that they provide. So for instance, right now, how a COLA would be provided is a percentage increase that is the same for the entire population, with the exception of the federal poverty level group that we'll set aside for a moment. So if one person's benefit is $100, and there's a 3% COLA, they would get $3. If another individual's benefit was $50, a 3% would be $150. So there's sort of parity in equal as far as the percentage. What the amendment would do is set an absolute dollar limit. So the board could say, okay, 3%, but no benefit would increase beyond $1.50. So that would, it would be less difficult. That would give them more space, so to speak, to provide a COLA, albeit a lower one potentially, but one that would be commensurate with the funding that the system has available. So that's one change. ORC staff would recommend that the ORC recommend to the General Assembly to approve this change permitting the Highway Patrol Board to set a dollar limit for future COLA grants. The second change is the removal of this guaranteed 3% COLA based on the federal poverty limit. Now, in code right now, the population that is required to get a 3% COLA increase, they need to have not greater than 185 of the federal poverty limit Now that is in 2026 The original intent of this provision, as we understand it, was to provide retirement security for Highway Patrol's oldest retirees. However, I think if we look at the past 10 years in the implementation of this, I don't think that has really worked in the way that it was intended. It's not really being targeted towards any particular – it's not being targeted to those in most need. The second issue that's coming up is that there are totally natural, fair things that a member can do to reduce their benefit so that they would receive this 3%, which is also not really the intent. There's nothing really wrong with that, but it could incentivize that type of behavior. So as time goes on, and again, we don't expect colas to be provided, more and more people are going to fall below this 105% level, and that could have all sorts of funding implications for Highway Patrol. So OROC staff would also recommend that the OROC recommend approval of the elimination of the guaranteed 3% cola for that federal poverty level. And we think, generally speaking, the dollar limit should be anticipated to be a better way of addressing those with lower benefits. Finally, number three, a new authority would be provided to the Highway Patrol Board to establish a supplement of benefits. Sometimes this is called a 13-check, similar to that authority that is in STIRS. Now, traditionally, the ORC has opposed this type of benefit with the feeling that it violates intergenerational equity, that you're choosing one group of retirees to provide a benefit to and not to others in the whole group. Staff would note that this is the same type of intergenerational equity concern rises with intermittent ad hoc COLAs, but we did want to mention that the ORC has traditionally not supported that type of supplemental benefit. Now, however, given the loss of purchasing power, a supplemental payment would provide another avenue to provide a limited purchasing power protection, even in years where there is perhaps not sufficient amounts to provide a permanent COLA. Having said that, ORC staff are not going to recommend to this council to approve a provision that's been so consistently opposed by the ORC. However, we do acknowledge that the constraints on Highway Patrol and the limits to its ability to protect purchasing power. Should the ORC recommend approval of this provision, staff would recommend that statutory restraints of some kind be placed on the board providing this benefit. And this could be done in many different ways, but they would all be structured around the actual funding condition of the plan. And this would be consistent with prior recommendations of the ORC and also the STRS sustainable benefit plan. It has similar types of protections for the fund And again the attendable limitations would be to tie supplemental payments to the funding status of the fund but also, generally speaking, this idea of providing more authority to the board, more flexibility to provide a COLA in order to protect purchasing power as much as possible. And I think that would be our summary, and those would be our recommendations.

Thank you, Chair. Just a quick question. So we're going to go to a dollar amount, and we're going to remove the guaranteed 3%, right? So it sounds like a balancing act to me. Will any retiree lose money in this equation?

Through the chair, Representative Plummer, I think what you're asking is if a future benefit would be less for a retiree compared to the provision that's in place now. Is that correct? Well, in PERS, we have a guaranteed 3% for a certain group of people.

To the chair, Representative Plummer, yes. There would be a change in the way the benefits are provided. Currently, we have this automatic COLA that applies to those that have less than 185% above the poverty level based on a family of two. That's a $40,000 pension. Our average pension is only $47,000. So this group continues to grow. And the majority of that group is actually surviving spouses. So when we're looking at what the initial intent of this statute was provided for, was to help those retirees that needed it most. And what we found was there's very few retirees following into this group of automatic COLA. And in fact, the ones that do fall into that group, they're those that left early and took a reduced pension, so chose to create that situation of a lower benefit and then receive an automatic COLA that bridges the gap between some of those folks that stayed for full agent service. So it's just a flawed model that we have in place.

Any other members of the council? I have questions for Director Rourke. Seeing none, I will make a motion to adopt this staff recommendation. Senator Romanchuk?

Very good. Thank you. Please call the roll.

Yes.

Yes.

Yes.

Yes.

Yes.

Yes.

Yes.

Thank you, Mr. Chairman. Excuse me. The SCRS fiduciary audit subcommittee met this morning and voted to recommend that Funston proposal before you today. In response to the ARFA approved in June, the ORC received three proposals, and the ORC staff did verify the references of all three vendors due diligence. We received proposals from Funston with a total not to exceed $462,712.50. Siegel with a total not to exceed a cost of $622,000 and Weaver with a total not to exceed the cost of $288,500. The committee, and also in my opinion, and the committee approved recommending to the full board the Funston proposal as the best overall proposal. The methodology, work product, the timeline proposed by Funston is exactly what the ORC outlined in the RFP. While Weaver and Siegel appear to have previously completed components of this fiduciary audit RFP, we have concerns that neither of them may have actually completed an entire fiduciary audit of the scope. For the cost of this audit, I think we need to be sure the firm we choose is capable of the entirety of the project. And with that, Mr. Chairman, I move that the ORSC select Funston conduct the SCRS fiduciary audit and direct ORSC staff to engage for with.

I second.

Senator Blackshear.

Senator Blessing.

Ms. Miller.

Dr. Potagil.

Motion carries. Thank you, Dr. Potagil, for your work on this recommendation. So now we turn to Mr. Menard. Again, next item is standardized report forms for calendar year 2027.

These were standard several years ago, and each year you approve next year's forms. Now, also, we include requests that have been made over the course of the year to try to prove it, make things a little bit clearer. That is before you now. So we are seeking approval of these forms to provide to the systems. And I'd be happy to go through any individual change that has been made. These were provided to the systems in June, I believe. And then we got their comments back in August.

Mr. Chairman.

Representative Plummer.

Mr. Vice Chairman.

Senator Blackshear.

Senator Blessing.

Ms. Miller.

Dr. Potajil.

Motion carries. All right. Mr. Hennigan is up next. The next item on the agenda is rules. Mr. Hennigan, please proceed.

Any questions for Mr. Hennigan? Seeing none, thank you very much. All right, older new business before the council. Anyone? Ms. Miller?

Awesome. All right. It's just not a term that should be probably ever repeated again. Very good. Thank you for that. Thank you for that. The next meeting will be Thursday, November the 12th, subject to the call of the chair. That's scheduled for 10 a.m. on that date. And with that announcement, we are adjourned.