Ohio School Workers Fight Retiree Benefits Freeze

COLUMBUS, Ohio (CN) – A group of public school workers claims Ohio’s School Employees Retirement System lacks the authority to implement a three-year freeze on cost-of-living adjustments for retirees.

Their lawsuit filed this week in Franklin County Common Pleas Court also details the state’s alleged squandering of a pension surplus over the past decade and its supposed failure to capitalize on market growth over the same time period.

“On October 9, 2017, the SERS Board of Trustees voted to freeze the annual cost of living adjustment (‘COLA’) for retiree pensions for three years in order ‘to address immediate financial challenges and long-term funding goals,’” the complaint states. “In other words, the SERS pension fund, with market value assets of some $13.7 billion, a fund that pays hundreds of millions of dollars to outside investment managers to make less than the market indexes, can’t afford to pay retirees earning a small but meaningful pension of just some $1,223.33 per month an additional $30.58 a month.”

The Ohio Association of Public School Employees, or OAPSE, and dozens of individual members sued SERS, Ohio Attorney General Mike DeWine and public sector consulting firm Cavanaugh Macdonald Consulting LLC on Monday, claiming SERS lacks the statutory authority to sanction such a freeze.

Represented by Thomas Drabick Jr. of Columbus, the union members, including school board workers, bus drivers, cafeteria workers, and custodians, allege that Ohio law – as amended by last year’s House Bill 49 – requires an annual review of their pension benefits.

“The authorizing statutory authority specifically provides that: ‘the retirement board may annually increase each allowance, pension, or benefit,” the lawsuit states. “By authorizing a three year COLA freeze, SERS overlook the statutory requirement for an annual review of the COLA.” (Emphasis in original.)

According to the complaint, OAPSE currently includes over 157,000 active working members – the majority of whom are female – that contribute 10 percent of their wages to the pension fund, while over 79,000 retirees collect an average monthly pension of just over $1,200.

OAPSE says the freeze is an attempt by the defendants to correct their collective failure to manage and grow the fund since 2000, when it reached a “high water mark” of 102 percent funding.

SERS increased benefits in 2001, but allegedly failed to acquire additional funding sources, which led to a drastic decrease in the pension’s funding over the next several years.

“As a direct result of expanding benefits without providing for increased funding sources,” according to the complaint, “by 2008 SERS had squandered its envious 102% pension funding ration. In 2008, the funding ratio fell to 81%, still strong, but inadequate to withstand the turbulent financial markets that persisted through 2008 and 2009. … By 2012 the pension funding ratio was down to 62%.”

The union says from 2001 to 2017, the value of the pension fund grew 64 percent, to a value of over $13 billion, while the Dow Jones Industrial Average increased over 108 percent.

During the same time frame, the S&P 500 grew over 103 percent.

But OAPSE claims the markets’ 40 percent growth advantage over the pension fund is only part of the story. It says SERS has spent a whopping $852 million on outside investment management fees since 2007.

“The monies spent by SERS for outside investment consultants is at best a disgrace and at its worst evidences inept public policy choices, if not outright criminal conduct, by SERS, its management, and actuary,” the lawsuit states. “For example, from the conclusion of fiscal 2007 through fiscal year 2009, the SERS fund value lost $3.5 billion dollars. For the privilege of losing $3.5 billion, SERS paid its external investment managers $137.5 million.”

“Moreover, since 2001, while the SERS fund balance has increased by 64%, its external investment expenses have increased by over 213%. Somebody is getting rich here, and it is not the retirees who receive meager pensions from SERS,” the complaint continues.

The union and its members seek judgments that the three-year freeze is void and that House Bill 49 violates Ohio’s “one-subject rule,” which requires every piece of legislation to serve a single purpose.

The lawsuit claims the cost-of-living adjustment provisions in the bill, which is nearly 3,400 pages in length, bear no relation to the bill’s purpose, which was to establish the state’s biennial budget.

SERS said in a statement that it is reviewing the lawsuit but believes the cost-of-living adjustment changes “were legal and prudent.”

“For nearly two years, SERS held several open meetings with representatives from all advocacy groups, including OAPSE, to discuss possible benefit changes and their effects on SERS and its membership,” it said. “We modeled the effects of numerous combinations of changes before deciding on the COLA changes that were implemented. We are disappointed that OAPSE’s opposition to these changes was not registered during the open process when they could have been addressed with input from all interested parties.”

A spokesman for Attorney General DeWine declined to comment on the lawsuit.

The union’s attorney and the consulting firm did not immediately respond Friday to requests for comment.

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