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Response to Allegations in the Anonymous Document

By Rudy Fichtenbaum May 14, 2024

Since I was elected to the Board, I have fulfilled my duty as a fiduciary, acting with integrity and in a professional manner. I have done nothing but represent the interest of members, both active and retirees. When I was elected, I ran on a platform to restore the COLA for all members, reducing management costs, and ensuring the solvency of the pension. I have done nothing wrong and will continue to fight for the interests of STRS members. What follows below is a point by point of rebuttal of the scurrilous charges made specifically about me in response to anonymous allegations that were, according to, delivered to the Governor’s office by an STRS staff member.

On page 5: “One could speculate that board members Fichtenbaum and Steen had other incentives to promote QED…” One can speculate about anything, but this statement clearly implies that I have been received some incentives. What would those incentives have been? The truth is, I have not been offered or taken a dime from QED or anyone else for my work with STRS, nor have I taken any gifts or been promised anything of value by QED or anyone else for my work with STRS.

Also on page 5: “Through their coordination (presumably this refers to me and Steen) QED would secure a lucrative arrangement with STRS … and ORTA members would receive a COLA, regardless of their impact on the system.” First, it would not be just ORTA members who would receive a COLA, it would be all STRS members if STRS were able to provide one. But this is a gratuitous statement. The “regardless of their impact on the system” is patently false since as we all know, the Board’s wishes notwithstanding, no COLA can be given unless the STRS Actuary certifies in its annual valuation required by section 3307.51 of the revised code that “an adjustment does not materially impair the fiscal integrity of the retirement system.” There can be no COLA if it will materially impair the fiscal integrity of the system! So, what does the statement “regardless of their impact on the system mean”? It is just character assassination and a scare tactic.

On page 6, the claim is made that QED’s proposal had already been vetted and rejected by the board’s investment consultant Cliffwater. What did Cliffwater say when vetting the proposal? Remember, I challenged Cliffwater’s CEO Steve Nesbit at the November 2021 board meeting, telling him that I had listened to the roughly 4 hours of due diligence – back and forth between Cliffwater and QED – to which he replied, “They were recording me!” What was said by Cliffwater in those recordings?

On the feasibility of the trading idea: “This is all predicated on the idea, that there’s this structural arbitrage with respect to the beneficial liquidity characteristics, or the asset liability matching puzzle, that a pension has to solve versus the more complicated one that bank has to solve.” On the existence of an arbitrage: “Yes, there’s technically a regulatory arbitrage. It all theoretically makes sense.” On operations: “The infrastructure plan seems to be on par with Two Sigma and Renaissance Technologies.” On risks: 1) “Potential future regulatory changes resulting from OhioAI.” 2) “Hedge funds will be upset that OhioAI is profiting from their data.” 3) “Banks may someday view OhioAI as a competitor.”

Also on page 6, there is a statement alleging that Fichtenbaum said one of the partners would be Stein. This claim is preposterous. Bob Stein, a former Board member, was one of the presenters at the November meeting. He attended via phone. The claim that I said Stein would be one of the partners is a flat out lie. Listen to the tape of the meeting! If the author(s) of this letter cannot get even that basic fact right, how can we put any credibility in their allegations?

On page 7: One of the few accurate statements in the anonymous document characterizing my role in this matter was that we proposed a motion stating, “the Ohio attorney general…appoint a special counsel to negotiate a business partnership named Ohio AI between the State Teacher’s Retirement System and QED.” Our view was that there would be no way to negotiate a contract to form a partnership without understanding how the trades would work, so there would have been an additional due diligence performed in that process. At that point, if the Board was not comfortable going forward, it could simply not approve the contract. End of story. Our motion never proposed giving QED $65 billion.

One of the claims that Steve Nesbitt from Cliffwater made at the November 2021 board meeting was that the proposal was an all or nothing proposal. But again, the recording of the due diligence meeting told another story, mainly that the proposal was not all or nothing but could be ramped up from a modest starting point. But the proposal was scalable – one could indeed ramp it up from a modest starting point – something that was pointed out in the due diligence with Cliffwater, despite Steve Nesbitt’s claim to the contrary at the November 2021 board meeting. As is noted in the anonymous document, we proposed doing an initial test run giving QED access to $250 million and subsequently ramp up if the strategies were successful. $250 million is half of what STRS lost on its Panda investment!

Also on page 7: When we were asked if we knew who owned QED, we replied that we did not know; we replied in that manner because, while we knew Tremmel and Metcalf were principals, we did not know if there were other owners. For example, when Tremmel met with Matt Worley, Jonathan Spring also attended that meeting. Is Spring a QED owner? Are there other owners? I don’t know! So, I stand by the reply we gave at the November 2021 board meeting.

On page 8: “STRS Legal submitted a confidential inquiry to the Ohio Ethics Commission and shared information with the Attorney General’s Office (and have continued to provide additional information and updates to both entities).” But the Board was never informed of this inquiry! This statement also tells us that at least one of the people involved in crafting this anonymous document either received reports from the legal department or works in the legal department. Isn’t withholding such information from the Board a violation of fiduciary duty? The Board Chair and staff had a copy of our presentation to the November 2021 board meeting two weeks in advance. If the Legal department believed that our making this presentation posed a legal risk or was a potential ethics violation, then didn’t they have the responsibility to inform the Board and not allow our presentation to take place?

Also on page 8: I am accused of repeating the claim that STRS was using “fake” benchmarks. Here is what we know about STRS’s benchmarks. For alternative investments, STRS used its own performance through FY2021 in the total fund benchmark. On page 14, the original draft of the Auditor of State (AOS) Special Audit of STRS said, “STRS computes its total investments return benchmark based on budgeted asset allocation, investment staff assigned to AI can reduce the benchmark they are measured against by over-investing in PE funds and reducing the investment in opportunistic/diversified instruments.” The draft report then presented a table illustrating the point for the year ended June 30, 2021. The original draft then went on to say,

We agree that it is a mathematical certainty that computing the total fund benchmark based on budgeted alternative allocations rather than actual allocations will reduce the alternative’s benchmark if two conditions are met: 1) PE funds outperform opportunistic/diversifed [sic] instruments. (Note that STRS expected its PE funds to outperform Opportunistic/Diversified instruments by two percent, the difference between the Russell 3000+1% and Russell 3000-1%.) 2) The percentage of actual PE assets exceeds the budgeted percentage. Both conditions were met in fiscal year 2021. Had STRS used actual percentage of investments instead of budgeted, the total funds’ benchmark would have increased slightly based on the additional balances held in PE. This slight difference in the benchmark computation could effect [sic] whether bonuses were earned in years where the actual earnings were very close to the benchmark.

In the meeting the Board and senior staff had with the Auditor’s team, in which the Auditor’s team presented this draft report and asked for comments, no one from the Board or the staff commented on the text quoted above. I was most certainly aware of the text quoted above during the meeting. In fact, at the end of this meeting, I walked up to the lead person on the Auditor’s team to point out two typos in the text quoted above (the misspelling of diversified in point 1, and the use of the word effect rather than the correct word affect). But then mysteriously, when the final version of the report came out, the text quoted above was omitted, even though it received no mention during the meeting. Unlike the authors of this anonymous document, whose objective is apparently to assassinate my character, I will not speculate as to why the text quoted above was omitted from the final report, but it does seem to support my criticism of STRS’s benchmarks.

Moreover, when STRS started investing in Alternative Investments beyond Real Estate, during 2002-2007, their benchmark was the return on public equities + 5% (most of the time using the Russell 3000). Then, in 2008, they switched to Russell 3000 + 3%. For 2009 to 2012, they used Russell 3000 + 3% (for PE) and Russell 3000 -1% (for OD). For 2013-2021, they used Russell 3000 +1% (for PE) and Russell 3000 -1% (for OD). Finally, in 2022, they adopted the current benchmark: Cambridge Associates Private Equity and Venture Capital Index one quarter lagged (for PE); and a combination of Cambridge Associates Private Credit Index one quarter lagged and the HFRI Fund of Funds Composite Index (for OD). Please note these are five different benchmarks, and each of the first four was clearly easier to surpass than its predecessor.

I am not going to go all the way back to 2002, but I did compare the performance of STRS’s Alternative Investments relative to its stated benchmark during 2013-2021. During this period, STRS only reported performance and benchmarks for Alternative Investments over 5-year periods as explained on footnote 7 of each year’s ACFR. The table below shows 5-year Alternative returns and benchmarks from 2013-2021. For 2022-2023, the table shows the 1-year return and the 1-year benchmark for the current benchmark. Currently, STRS does not report 5-year numbers comparing Alternative performance to benchmarks because not enough time has elapsed since it started using the current version -- version five! -- of its Alternative benchmark. Clearly, the table demonstrates that STRS’s performance relative to its benchmark has been abysmal.

[ See Table at the End of Message]

The compound annual average the difference in performance for 2013-2021 is -3.51%. So, using the 5-year averages, STRS lost to its Alternative benchmark by an average of -3.51% for each five-year period. For 2022-2023, the compound annual average was 1.66%, so STRS beat its new benchmark by an average of 1.66%. Of course, all those years of losing to benchmark didn’t stop the investment staff in those areas from getting bonuses.

Merriam-Webster defines the word (noun) fake as “one that is not what it purports to be.” That seems to fit the pattern of changing your benchmark because you don’t like the results. If you are running a race and you cannot improve your time by running faster, you can always improve your time by shortening the distance of the race.

Still more on page 8: “Fichtenbaum concluded that Cliffwater sabotaged QED because it feared that QED’s imminent success would put Cliffwater out of business.” That is a statement that I do not recall making. What I did say, as is noted on page 11, is that the proposal would eliminate some investment jobs because of the use of index investing.

On page 9. “Fichtenbaum also increased his calls for indexed based investing – a necessary step in implement QED’s “Index+” solution.” In fact, when I ran for my seat on the Board, candidates were asked the question, “How would you prioritize the key issues that the State Teacher’s Retirement Board should focus on?” My response was, “Consider more passive management of investments to reduce costs and increase returns.” I provided that response before I ever met anyone from QED. I went on to say, “The current approach to solvency has been to increase risk and reduce transparency. Almost 30% of STRS investment are in “alternative” investments and real estate. Many of these are very risky, expensive and impossible to value with certainty. A better approach to reaching solvency is to raise employer contributions, while working to reduce costs and increase returns by considering more passive (rather than active) management of assets.” So, it should surprise no one that I have continued calling for more passive, i.e., index investing.

When I was elected to the Board, I was elected by a grass roots movement started by ORTA with the support of OFT and AAUP. ORTA crowd sourced the funding for a forensic audit by Ted Siedle of STRS, and the OFT was the largest single contributor to that effort. The main outcome of this audit was a growing movement among members challenging both the status quo and the endless stream of propaganda flowing out of STRS. My campaign was truly a grassroots campaign, and I took first place by a large margin in a three-way race for two board seats, running against two incumbent Board members. The main way that I campaigned was using Facebook as a platform to communicate with the growing number of members who were dissatisfied with the lack of a COLA and having to work 35 years, instead of 30 years for an unreduced retirement. It was during this campaign that I began to understand the deep dissatisfaction that members, both active and retired, had with the STRS investment staff and the executive leadership team of STRS.

After being elected to the Board, I was able to start asking questions that many members both active and retired had: question about whether STRS was truly being run for the benefit of members or whether members’ interests were subsidiary to those of the investment staff and executive leadership; after all, the investment staff and executive leadership earned huge salaries and received lavish bonuses both while members’ benefits were being cut and subsequently. 1) As a fiduciary, I questioned the effectiveness of STRS’s active investing program and whether it was serving members. 2) As a fiduciary, I questioned whether STRS was using benchmarks to measure performance or simply to justify lavish bonuses for the investment staff, while active members were working more years and retirees had no COLA. 3) As a fiduciary, I asked why STRS had not been advocating for a substantial increase in the employer contribution, knowing that an investment program alone, even if it were being run in member’s best interest, would not be enough reverse the aforementioned cuts. 4) As a fiduciary, knowing that getting a substantial increase in the employer contribution in the immediate future was unlikely, I asked why STRS was not exploring other possible sources of revenue for the pension. 5) As a fiduciary, I worked to extract candid answers and complete data for the Board from STRS’s consultants, investment staff and executive leadership, and further to push these three parties to communicate honestly to members – in a word, to improve transparency.

In conclusion, this anonymous document contains many false and misleading statements about me, apparently designed to assassinate my character and discredit the work that I have done on behalf of our members to restore benefits and improve transparency. Sending these allegations anonymously demonstrates that the author(s) is (are) afraid to reveal their identity and in so doing are hiding their motives. Could it be that they are simply afraid that with a newly elected majority of reformers on the Board, their days of collecting outrageous salaries and lavish bonuses, while active teachers work longer and retirees face an ever-decreasing standard of living, lacking a permanent COLA, are coming to an end? As a fiduciary, I have always acted with integrity, making decisions and advocating policies that are in the members’ best interests.



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