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If you are one of the millions of people celebrating the trimming of federal fat, you’ll want to know that anewtaxpayer threat ofstunningproportions is rising, fast. This time it’s not coming from Washington, D.C.; it’s coming from your statecapital.
A $1.3 trillion pension crisisis barreling toward American taxpayers, and common-sense solutions are being actively ignored.The most likelyresult:You will no sooner enjoy thefederaltax and spending breaks of the Trump years than you will beforcedto bail out state employee pension funds, which are insolvent after having been mismanaged for decades.Unlessurgentreforms are made, yourstatepropertytax tab will increase by a percentage thatoneshuddersto calculate.
My own state of Ohio is, regrettably,at the center of this crisis. According toa new report by the nonpartisan Equable Institute, theState Teachers Retirement System of Ohio(STRS)is between $20 and $30 billion in debtand will be unable tofullypay back the teachers who funded it throughout their careers.Equable alsonotedin its report that a stunning 44% of unfunded liabilities are from underperforming investments.
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How could this happen? How coulda$90+ billion fundbe so poorly managed as to be at a loss?The short answer is ugly: bureaucratic hubris and a sense of entitlement.
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Ohio STRS employees have taken unnecessary risks with the teachers’ fund by investing in alternative assets such as private equity and hedge funds that have not yielded the returns that more conservative approaches would have produced.STRS actively manages itsgargantuanportfolio, resisting a shift toward passive investment strategies despiteoverwhelming evidencethat active management consistently underperforms.To justify these choices and disguise underperformance, they have engaged in a practice all too common among public pensions in the US—they have contriveda benchmarkthat no one else can reproduce, allowing them to claim success while taxpayers shoulder the consequences.
Adding insult to injury,public records requests haverevealedthat for years, STRS has awardedand spent liberally onluxurious perksfor themselves, such as $1,500 monthly plant-watering contracts, a cafeteria with a baby grand piano, and concierge services.Meanwhile, it has failed to deliver the most basic ROI to its funders, includingmeaningful cost-of-livingadjustments (COLAs) to the teachers who contributed to the system their entire working lives.
Investment shortfalls are not unique to Ohio. Across the United States, public pension funds have persistentlyunderperformed passive indexes since the Global Financial Crisis of 2008. In fact,comparative researchhas found that U.S. public pension funds have underperformed their private-sectorcounterparts – andpublic pension systems in Canada and Europe – byapproximately 50 basis points annually.
You may be wondering where the teachers’ unions are – why aren’t theyringing alarm bells on behalf of the teachers?
Sadly, teachers’ unions haven’t just failed to fix the system—they’ve helped break it. For decades, their representatives on the board of STRS have blocked transparency, resisted accountability, and vilified those who dared proposechanges.
In June, a union-backed slate of STRS board candidates campaigned on promises of reform. Yet once elected, they quicklyembraced the status quo—rubber-stamping staff bonuses and calling for a taxpayer-funded bailout. In response, the legislature began to take meaningful action,restructuring the boardand passing a budget thatinitiates a transition to a flat income tax—important steps toward protecting Ohio taxpayers. But these initial reforms must be followed by stronger measures, including demands for full transparency and accountability from STRS.
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The situation in Ohio is dire and taxpayers there must be warned of what’s likely to come. Also: Taxpayers in all states deserve to know that a bailout in Ohio will likely be the start of a wave that spreads across the country.Other state pension funds are watching, and ataxpayer bailout in one statewill setaterrible, expensiveprecedent.
Meanwhile, themessageof a bailoutto irresponsible bureaucratsisunconscionable:Mismanage billions, ignore your fiduciary duty, and you’ll still get paid – justpass the bill to taxpayers.
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Fortunately, there is an alternative to this doomsday scenario of taxpayer bailouts.Transparent, passive investment strategies – likethose used by many of the world’s best-run funds – can and shouldreplaceunnecessarily risky investment strategies.
State legislatures across the country, starting in Ohio, must act now to protect taxpayers from the $1.3 trillion hole in America’s public-employee pensions.
J. Kenneth Blackwell is the former mayor of Cincinnati, Ohio State Treasurer, and Ohio Secretary of State.