Angeletti report: Day 3 of Board Retreat

John Lazares had requested that time be allotted to Steve Buser so that he could speak to the Board regarding the 35 year rule. Board members still have questions about this rule and so Dr. Buser attempted to translate what he believed to be true about this rule and what he wishes he had known about it at an earlier time and for less money to the system.

In June of 2005, the accrued liability was 73.6 billion dollars. The value of assets was 53.6 billion dollars (not including health care). The unfunded liability was 21 billion dollars. S.B. 190 has lots of other things in it in addition to this 35 year rule but this bill raised the base for active members to 2.2%.

If S.B. 190 had passed without any 35 year enhancement, the unfunded liability could have been reduced by 18 years. If all components of the 35 year rule are considered and one runs it out to infinity, it is a wash.

The benefit of the 35 year rule to the system is that it encourages members to delay retirement and the system is 330 million dollars ahead because all of these members are paying into the system for five additional years.

A member who retires with 30 years experience is expected to live for 15 to 20 additional years. A member who retires with 35 years experience is expected to live 7 additional years. However, senior members are staying in the system longer anyhow in order to pay for health care.

The history of this enhancement involved the legislature, which thought that STRS had accrued too much money, and they wanted STRS to do something with it. A majority of members benefited by the 35 year rule. Brown added that he had heard that the 35 year rule was initiated to attract science and math teachers to the education field. He also heard that it was initiated to combat a pending teacher shortage.

At an earlier time, 2% to 2 1/4% was donated to health care, but in retrospect STRS should have put much more into health care. Brown reminded that no plan was written in black and white in order to be flexible regarding what the legislature might ask STRS to do. The impact on the funding period changes. For example, if the funding period is 8.25 = unfunded liability is less than 30 years, if the funding period is 8.04% = unfunded liability is 55 years, if the funding period is 7.75% = unfunded liability is 110 years, and finally if the funding period is 7.50% = unfunded liability goes to infinity. Bob Slater said that under current assumptions, STRS could reach an unfunded liability of 30 years by 2015 with another 4% to dedicate to health care assuming an 8% return. Dr. Buser was interrupted frequently during his presentation, and I did not feel that had a chance to say what he wanted to say.

On the positive note of Slater's 2015 outlook, Steve Mitchell introduced a plea for raising reimbursement to STRS staff. He is very concerned about needing to attract and hire acquisition officers in the International Real Estate division. He has lost some key employees and reminded the Board that 75% of his investment people are delivering above their benchmarks. Those people who handle the International and domestic equities are beating their benchmarks.

Buser, Meyer, and Lazares all had points to make concerning this topic, and Brown said that they were raising their voices and starting an argument. Lazares reminded Brown that he spoke of respecting other Board members at yesterday's session and that he must now show respect for these Board members who wanted to express their opinions. Brown apologized.

It was clarified that across the board increases in reimbursement were NOT intended. It was suggested that salary ranges be set for key managers up to certain levels without across the board increases. The idea of possibly adjusting salary ranges to 60% for non-investment managers and 75% for investment managers was suggested.

Fisher felt that the Board was micro-managing. . . that Mitchell knew what was needed. She reminded the Board that there had been no increase for the investment staff for 4 years and yet this staff had delivered phenomenal results for the system. She quoted John Osborne, who had recommended 6 million dollars for the investment managers. He had felt that STRS could easily pay up to 8 million dollars for our investment staff and had reminded the Board that it would cost them 74 million dollars for external investment managers with no evidence that external managers could do any better than our internal investors.

Asbury reminded the Board that their options were

1. pay our internal managers

2. index the fund or

3. hire external managers.

Puckett asked the question, "Can we attain it without an increase in investment?" (I think he was asking if STRS could pay out this 6 to 8 million dollars increase in reimbursement without needing to make more money through our investments to cover this additional money.) No answer was given to his question.

Meyer reminded the Board that they are responsible to help STRS avoid big risk and asked, "How much risk are we willing to take?" He reminded them that at yesterday's session, the Board had suggested getting 8% return using internal managers. He is undecided.

Andy (staff) added that STRS had just completed their own compensation study (AON). "Let's be pro-active and make some adjustments to the investment and non-investment staff." Greg (Business Manager in the I.T. Dept.) emphasized that his group supports Mitchell's investment staff. . . most all of the non-investment staff supports the investment staff in some way. The AON study results have been published and indicate that compensation at STRS is low.

Leone interjected that the market has done well the last 18 to 19 months with a 12% growth this year and last. "Why are these investment managers going to leave?" he asked Mitchell. No answer. Meyer said we need to measure people against benchmarks.

Mitchell then reminded the Board that Adam Barnett (?) had referred to 40 basis points. "Google is underweighted. What is the Board going to do? People know about the AON compensation study. They are looking to the Board now. Investment and non-investment staff will walk. They know that there will not be another compensation study for 4 or 5 more years. Maintaining 40 basis points is going to be hard to do."

Flannagan then made the comparison of two of her daughters. One is a teacher who will have her low salary job for life. The other daughter has a job in the corporate world and is bouncing from job to job in order to get a better salary. Her comparison exemplified the difference between the world of education (public sector) and the world of corporate business (private sector).

Mitchell again reminded the Board that only 1 or 2 acquisition officers were left in the International Real Estate area, and he needs to replace more asset managers. Leone said that non-investment staff received bonus checks for 6 years. . . that 70 people got bonus checks of $70,000.

Knoesel reminded the Board that the non-investment staff gives a high level of service. That they had been paid a lower salary for 5 years. She volunteered that there has been a one-third turnover in the call center and that errors on pension estimates had been made due to new people on the job in the call center.

Asbury said that the AON study told the Bd. where the market is and that increases in reimbursements would be made on a case by case basis only. Fisher emphasized that when staff reaches performance goals, they insure productivity. The judgment of the AON study was that STRS compensation is low and needs to be brought up to the middle of the market.

Rider (facilitator) said that STRS members receive red carpet service because this is what members say they want. He said that staff has a key role in providing this service. He asked the Board, "Compensation? Planning? Where do you want to be? You must acknowledge where you want to go." Leone said that it is not a question of employees not being deserving. It is a question of the money. This is where this conversation ended.

Laura Ecklar, director of Communication Services, conducted the next part of the morning's agenda titled Agreement on Key Messages. She discussed the relationships with different audiences, which is public relations and a management function of her department. She said that STRS' success depends on responses to the public. She referred to the many entities mentioned in yesterday's session led by Terri Bierdeman in the Environmental Scan. She related that the last two and a half years have been low points in STRS history due to downturns of impressions of STRS and downturns of the market.

Changes have been made at STRS and her dept. has tried to communicate & share these changes with the membership. She said, "We must do the right thing and then tell that we have done the right thing."

Members feel that pensions are the number one priority. Excellence of service and red carpet treatment are important. The health care issue has become the critical issue. At a time of disconnect with members, immediacy is important Ecklar said. In an effort to reinforce the STRS staff, on-going research is essential. E-mails, phone calls, letters, newsletters, face to face discussions, and surveys are used by her dept. to gather opinions and the results are that membership is extremely satisfied with STRS.

Her dept. must stay in sync with the membership. Comparing old and current STRS newsletters is an interesting exercise. Health care and operational expenditures were not even mentioned in the old ones because they were not important to members. Social security was an issue to members and when STRS responded to it, then members said, "Keep it up, STRS."

Her job is informing, advocating, and researching. She then asked the Board if there were other key messages which they would like to add to what has already been done. Knoesel said that the caliber of service is extremely high. Buser then asked, "Do we cut back resources for staff?"

Leone asked, "When things happen like the staff paying more for health care, is there ever an attempt made to explain?" Asbury said that the staff is reminded of the plight of the retirees as well as the many benefits of working at STRS. He said that the STRS staff has an ABC committee (like the ones in the schools) to keep the staff informed. Making sure that members know the rationale for the resulting changes is important he said.

Fisher suggested that another employee survey might be in order and results could be segregated by categories. Knoesel then offered that delivery of service, innovation, and cutting edge suffer when resources are tight. Buser asked if cuts are being made differentially. Asbury asked, "Where would we put our priorities if all was well?" The answer was investment and non-investment staff.

Ecklar said that the big topic everywhere right now is health care which helps STRS get the attention it needs. Asbury said there was a need to engage the young teachers and collaborate with them concerning their financial needs. Fisher suggested that STRS consider providing services of this kind to young teachers . . STRS could charge for the workshops. Puckett said that STRS already provided workshops but could tailor them to include personal/financial counseling. Ramser felt this effort was already being offered.

Fisher reminded the Board that they must give Ecklar the heads up when things are coming down the pike in the next 9 months so that she could be proactive and not reactive. Buser then interjected that cheaper studies of more contingencies were needed. Brown offered that STRS should not hide behind history but try to find solutions. Fisher asked, "What is STRS communicating that is being misunderstood?" Billirakis said that the problem was that teachers get their information from teachers' lounges and the Internet. He asked, "How can we address that all of our membership gets the same information and that it is accurate?"

Ecklar brought up the 35 year issue as an example. "STRS has been the source of the most reliable information concerning this issue," she said. She felt that getting out and about and offering more face to face interaction was vital. Regarding the need for an additional stream of revenue to support health care, she said that the active teachers understood the need, they didn't like it, they weren't happy, but they accepted the consequences.

Regarding communication, Leone said that when he speaks with teacher groups, some groups know nothing about any problems of any kind at STRS and some groups know everything. Chapman suggested having advisory groups to collect concerns similar to the CORE group which meets periodically with Dr. Asbury and his executive staff. Flannagan liked this idea.

Ecklar cautioned against leaning to one group's concerns and reminded that there were 439,000 members. She said that lots of members belong to groups like CEA-R but don't necessarily want to be engaged. Ramser emphasized the importance of keeping accurate information out in the public eye all of the time. Leone suggested that Board members reach out to their own constituents to correct inaccurate information. He said that this was part of the role of a Board member.

During the working lunch to discuss policy, Bob Slater offered clarification on S.B. 190. He said that if all gains for actives and retirees in this bill had been rolled back in 2005, the funding period of 55.5 years would drop to 39.1 years representing a difference of 16.4 years. If the gains for actives only had been rolled back in 2005, the funding period of 55.5 years would drop to 41.6 years representing a difference of 13.9 years.

During the discussion of changes that need to be made to accomplish STRS goals, it was emphasized that these changes would be discussed further at the February and March STRS Board meetings and the Board could make changes, could vote or not vote at that time. It was reviewed that a Health Care Committee would be reinstated.

A copy of the OPERS compliance guideline was shared and it was noted that the Police and Fire Pension had an identical compliance guide. Meyer noted that there was a continuing education requirement, and he stated that he did not want to travel to satisfy this requirement. Asbury reminded the Board that members have a fiduciary responsibility to do this, and STRS has an obligation to report to the ORSC who has and who has not done this.

Meyer then asked if participating in Board meetings would satisfy these requirements. CEUs are given for some of the activities of the Board members. It was decided that the staff would prepare highlighted copies of the OPERS compliance guidelines including the continuing education plan to have ready for the Bd. members.

A suggestion was made that the Executive Director's report be delivered BEFORE the Public Speaks portion of the Thursday afternoon STRS meeting so that visitors can hear this report.

There followed a discussion of the process of electing the Board Chair and Vice-Chair. Fisher objected to the exclusion of the appointed members from being Chair & Vice-Chair. Leone asked if the Board voted to change the policy or suspend the policy. Asbury said that Ramser & Brown were the only ones to fill these offices, and they did not have the required two years remaining in their terms.

Regarding Fisher's concern, Asbury and Ecklar said that long ago there had been a rotational system but that the appointed members (Attorney General's rep, Dept. of Educ. rep, etc.) were never included in the rotation. In the discussion which followed, it was realized that there would be a need to stagger terms for appointed members of STRS so that there would be at least two members staying on the Board when one leaves. This mistake will be corrected.

Fisher asked if there would be an automatic succession of chairs or not. Puckett stated that it seemed fair and appropriate that appointed members serve as Chair and Vice Chair. Another requirement for the Chair/Vice Chair is that a member has been on the STRS Board for one year. Leone felt it should be an elected member only to serve in this capacity. Flannagan agreed saying that there would be suspicion by constituents that appointed members were not for their best interests. Ramser said that the fear and suspicion that the statutory appointees bring an agenda is unfounded. This issue was tabled and will be brought back for an up or down vote at a later time.

A discussion of the public participation of the STRS meetings followed. Buser suggested that we promote Knoesel's call center and have members send emails and calls there.

Leone questioned prohibiting members from using Board or staff names when addressing the Board. He also expressed his desire to allow Board members to respond to incorrect information or give answers if so desired. Fisher felt that if a Board member wanted to respond to a member's question, then that Bd. member should just indicate such. Ramser felt it might lead to a back and forth argument.

At this point, Leone cited two examples. In the first example, he said that Billirakis and Puckett were on the STRS Board when he spoke before the Board and said that money was used for scholarships. Eugene Norris corrected Leone on the spot and that stopped Leone in his tracks. Leone said he was wrong.

In the second example, Leone spoke to the Board complaining about the purchase of sculptures in the STRS building. Billirakis admitted that the Board should not have purchased the art. This admission stopped the controversy in its tracks.

These were two excellent examples of reasons to allow for Board members to be able to speak. Chapman suggested that statements be directed to the Chair. He felt that response was okay but not a lengthy dialogue.

Flannagan said that Board silence could be interpreted as guilt or indifference. She suggested that the Bd. member could tell the person that she/he would like to speak to them later. Then she suggested that perhaps Damon should respond to the member first, then make a request of the Chair who either gives permission or not.

Leone related that if the 35 year enhancement in the OEA comments at the September meeting could have been nipped in the bud then and there. The Board had NEVER discussed this issue at all. This issue was tabled and will be brought back later to be voted up or down.

Boles shared that all documents & references will soon be identified by number and will be available to be accessed by email hopefully by May.

Brown asked if the present six committees was okay and reminded members that they would be deciding how to handle disability cases soon. Fisher felt that the committees were working well.

The next item of business was a discussion of the SID (Special Improvement District of Columbus) led by Terri Bierdeman. She shared the history of the district of which the STRS building is a part. Due to a concern about the decline of property values, meetings were held to bring together neighbors including STRS, COSI, Capital Law,etc. A majority of property owners agreed that they wanted to levy a special tax assessment and this was accomplished and will begin in 2007.

STRS will have to pay an additional $30,000., Motorist Mutual will pay $41,000, and Grant Hospital will pay $66,000. The money collected will be used for security, safety, outreach to homeless, clean up promotion, landscaping, & promoting new development. This is a done deal and since STRS has been a leader in being a part of SID and because it gives STRS more recognition at City Council government, Bierdeman proposed that STRS join the signature. By participating in this, STRS would also have a voice in the neighborhood. It represents $650,000 plus any grant money obtained. It is a five year SID. The Board approved this request.

A Board attorney (Bill) introduced a Board member suspension policy. The policy says that a contributing Bd. member or retired teacher member of STRS who is convicted of or pleads guilty to a felony, a theft offense or a violation of any of the ORCodes listed on the document shall be deemed vacant.

It states that in some circumstances it may be in the best interests of the system to suspend Board members who receive a bill of indictment, but prior to conviction, for one of the above stated offenses. The Board may, by majority vote, suspend a member indicted for one of the offenses set forth above if the indictment alleges:

1. risk to the system's assets

2. self-dealing by a Bd. member or

3. a conflict of interest between the Board member and the system.

It states that the Board may seek legal counsel familiar with fiduciary law to determine if one of the above factors is alleged. Suspension under this policy does not result in a vacancy. A Bd. member who does not plead guilty to, or is convicted of, any of the enumerated offenses, that member's seat shall be deemed vacant. (It should be noted that copies of this document were given only to the Board members. Dr. Leone requested that Eileen Boles supply copies to all in attendance in the audience.)

Following the reading of this document, questions and discussion ensued. We were told that there were 102 laws which deal with ethics. Each case will be handled individually. An ethics violation does not trigger suspension unless it includes a conflict of interest. A conflict of interest can be decided by the Board or a judge or counsel. IF a member is convicted, his/her seat is lost (suspended). This policy will be included in the other policies and voted up or down at the Feb. Bd. meeting.

The last item for discussion at the Retreat was a Follow Up - A Wrap Up. The review included exploring what ifs for health care and pension, finalizing planning parameters, and finalizing Bd. policies. Puckett requested a list of liabilities for health care with a ballpark estimate. Buser requested a cost of compounding COLAs and said he would meet with Bob Slater to accomplish this. Mitchell referred to the "spirited discussion of compensation in the morning session" and stated that he felt it should be added to the parameters. Brown added that the compensation could go either way. It is what the Board wants to do in the long term. But compensation WAS added to the list of parameters at adjournment of the Retreat.

If there are errors or omissions, etc., please let me know. I apologize if there are mistakes.

By Mary Ellen Angeletti