What's behind benefits vs. bonuses in Ohio teachers pension fund?

COLUMBUS, Ohio (WCMH) -- JD Tremmel, co-founder of investment group QED, knows that Ohio's retired teachers have gone years without promised annual cost-of-living increases, and he believes it's because their $96 billion pension fund underperforms the market.

"They deserve better than this," Tremmel said. "They deserve to have what they were promised. And under the current format, unless the taxpayers of the state of Ohio bail them out with $15 million a day, it's not going to happen."

Tremmel said he believes the STRS pension fund is poorly invested and not sustainable.

"They're underperforming by the amount of their fees and trading costs, plus a little bit of the alternatives," he said. "I mean, it's difficult to be uniquely stupid somehow. It's difficult to be uniquely smart."

"So when you say that, are you saying that are they mismanaged?" NBC4's Colleen Marshall asked Tremmel.

"It's most certainly mismanaged," he said. "I mean, they should just be buying it. They should passively manage it with an index fund."

That's part of the proposal QED presented back in 2020. Instead of having the internal STRS investment staff control the billions in retirement funds, transfer some of the pension money to better-performing index funds.

"You started this out, did you not, to make money?" Marshall asked. "I mean, you wanted to have STRS funds sent to QED so that you could invest them and you could make a profit not just for them, but for yourself?"

"Most certainly there's an economic component to it," Tremmel said. "The discussions we had with board members, we weren't going to receive any fixed fees, which is simply a percentage of the profits above an index."

QED would get paid when the investments performed better than the market.

Tremmel said that last year, in the hands of the STRS staff, the pension fund performed nearly a billion dollars below what it could have made through a passive index fund.

In 2020, QED was pushing the index fund proposal through then-board member Wade Steen, and current board president Dr. Rudy Fichtenbaum. Steen and Fichtenbaum are the targets of Ohio Attorney General Dave Yost's civil lawsuit. Yost claims they were working with QED for a hostile takeover of the pension fund.

Tremmel admits to communicating with Steen, even texting during board meetings.

Marshall asked if Tremmel thought that was inappropriate.

"It's highly unusual," he said. "I'm not sure if it's inappropriate. I mean, I think from a fiduciary standpoint, they should rely upon people they believe who have an expertise in a subject matter. To the extent that we help educate board members about the issues in STRS, and you know, encourage them to ask certain questions to gain more information. We're not going to apologize for that. We think that's the ethical thing to do."

Tremmel told Marshall that ethical questions should be asked about how STRS reports its financials, because the pension system is operating two sets of books. He said STRS has an annual audited financial statement that shows the actual net returns, including investment losses and that is the set of books that's been used when retired teachers are denied cost-of-living increases.

But there's a second set of "unaudited" monthly financial statements that don't account for losses or expenses. That's the set of books, he said, that is used as the basis for six-figure bonuses for the investment staff.

"So the money that they have in the audited financial statements, that actual net money does not match the return that they're reporting to the world, and in the stakeholder groups," Tremmel said. "And it doesn't seem like a huge amount, you know, maybe a half a percent, but half a percent on $1 billion of $100 billion is $2 million a day. I mean, 252 trading days, and so over a 30-year period, it's material."

Tremmel said that unaudited number is reported to stakeholders, but it's not real.

"Now the one -- the audited money -- is to pay benefits," he said. "The other return is simply to pay staff bonuses. It's not a -- it's not a real number. And it's off for the past 20 years by $11 billion."

"So were they setting the bonuses on the set of numbers that you say aren't real?" Marshall asked.

"Correct," Tremmel said. "That's what they're being paid bonuses off of, and they've been paid $141 million of bonuses off of the fake number."

"STRS Ohio respects the legislature's decision to restructure the Retirement Board," a spokesperson said in a statement. "We are committed to working with state lawmakers to ensure a smooth implementation while upholding our mission to provide Ohio's public educators a foundation for their financial security."