STRS Update #1 - March 27, 2006; by Dennis Leone, STRS retiree Board member

Personal reflections after six months on the STRS Board (9-15-05 to 3-15-06)

The Good News

1. The Board voted unanimously to adopt a new Board Member Suspension Policy that will enable the Board to suspend one of its own members if he/she is indicted for a violation of Ohio ethics statutes, or if said Board member has been indicted for a conflict of interest, for placing STRS assets under risk, or for "self-dealing."

2. The Board voted unanimously to adopt a new Vendor Ethics Policy that will require the STRS Executive Director to inform the Board if an STRS vendor or contractor admits to, or is found to have committed, a violation of business or professional ethics. The policy, which was recommended by Board member John Lazares, requires the Board to evaluate the nature of such violations to judge whether or not to continue its working relationship with said vendor or contractor.

3. The Board voted unanimously to revise its policy for public participation at meetings so it is clear that individual Board members may choose to respond to remarks made by speakers or STRS members at the meeting. This policy revision was the result of the STRS Board Chairman declaring that I was out-of-order at the November Board meeting when I attempted to answer a question that was asked by an STRS member during the public participation portion of the meeting. The Board determined separately -- after a free-spirited debate -- that only elected Board members will be allowed to serve as Board Chair and Board Vice-Chair.

4. Investment earnings (market rate of return on investment assets) for Fiscal Year 2005 were an impressive 12.25%. Earnings during the first eight months of Fiscal Year 2006 have been even better -- at 13.0%. Quite a change from the down years in 2000, 2001, and 2002. Total assets at STRS currently stand at $65.5 billion. The Board has taken steps (see #5 below) to ensure that we can retain and attract top investment employees who are able to earn money for STRS.

5. The Board voted unanimously to restructure, in a reasonable fashion, the compensation levels of certain STRS employees and the bonus potential of investment staff. The plan places limitations on who will be eligible for a base salary increase, and restricts increases to 68 of 521 non-investment employees. Investment staff will be eligible for bonuses only if they meet their benchmarks. Maximum bonuses for investment staff will occur only for those who achieve an "outperformance" of 52 basis points. Subjective and discretionary factors will no longer be used for measurement purposes in determining investment bonuses. The compensation restructuring keeps STRS competitive with other pension systems, but also stays within the current budget. STRS is employing 115 fewer people than in 2001. I was very pleased with how this turned out. At least four Board members (including myself) were initially intending to vote no, but things were worked out in executive session to the satisfaction of all Board members.
6. The Board voted unanimously to add one internal auditor to the STRS staff (making STRS comparable to other pension systems) and to have the auditing staff report directly to the Board instead of to the STRS Executive Director. The Board's Audit Committee (Brown, Meyers, Leone) will sign off on the final evaluation of the Internal Audit Manager. (In prior years, important recommendations made by the internal auditors, with respect to spending abuses, were ignored by some at STRS, necessitating -- in my opinion -- this clarity for evaluations and who reports to whom.) The hiring of an additional auditor also will ensure that the prior concerns spending abuses will be properly monitored.

7. The Board voted 9-2 to purchase a very much needed new IT system that will replace the current obsolete system. The IT system handles all information matters pertaining to the STRS membership and it processes our monthly pension checks. John Lazares and I voted no on this issue, not because we were against getting a new IT system for STRS, but because we asked to see the $13.3 million contract (with a company called Vitech) before the vote. I learned the following day that the reason we didn't see the contract was that it simply wasn't ready and needed final staff revision. John Lazares and I contend that Board members should not be voting on such issues without having the contractual details in hand.

8. The Board's two-member Elections Committee (Fisher and Leone) has required the STRS Executive Director to notify all STRS Board candidates, immediately after they signed up to run for the Board, that they (and their election committees) may not use the STRS logo for any reason. Improper and unauthorized use of the STRS logo occurred during the 2005 STRS Board election.

9. The Board voted 10-1 to support House Bill 272, which -- if passed -- will prohibit full-time rehired retirees from utilizing STRS health insurance. The Board's vote included a request that STRS be permitted to delay the implementation of the new law for three years (because of employee contracts and negotiated union agreements). Board member Mary Ann Flannagan voted no because she desired a four-year waiting period. A point of contention regarding H.B. 272 is whether full-time rehired retirees who work in the private sector will be prohibited from utilizing STRS health insurance. I foresee some possible legal problems with this.

10. The Board worked together more during the regular meeting in March of 2006 than it did in any of my first five Board meetings. The greatest strength of the Board is that the members are not afraid to ask tough questions. While one Board member publicly labeled me as "intrusive," I believe the majority of the Board recognizes it is our obligation -- as caretakers of a $65.5 billion pension fund -- to be as "intrusive" as we need to be. I respect the expertise of the three investment specialists who were appointed to the Board, and I do not think it is too much to ask them and other Board members to respect the fact that some members of the Board have more expertise in the public arena. Board member Steve Buser, who was appointed by the State Treasurer, is an extremely valuable asset to the Board. He really digs for answers, and he is an STRS retiree himself from Ohio State.

The Not-So-Good News

1. The STRS unfunded liability (the number of years needed to have our assets equal our projected pension obligations) now stands at a huge 55.4 years. This is not good for STRS. The STRS Executive Director must present a plan to the Ohio Retirement Study Council for how STRS intends to reduce the unfunded liability to 30 years. Legislative approval for increasing the STRS contribution rate by 5.0% (2.5% from actives and 2.5% from employers), combined with a continuation of good investment earnings, would go a long way toward solving this issue.

2. The Board asked for data pertaining to what impact Senate Bill 190 (passed in 1999) -- which included the 35-year/88% rule and other pension benefit improvements for retirees -- has had on our unfunded liability. Had S.B. 190 not been adopted, our unfunded liability would be 17 or 18 years less today. While the Board is not considering a repeal of S.B. 190, and is not considering taking away any benefits retirees are receiving as a result of the legislation, it is my opinion that it never should have been passed. It also bothers me that the prior Board chose not to maximize financial assistance for retirees' future health care during the time period S.B. 190 was under consideration. We have a two-tiered system today -- one for those who retired before 1999, and another one that clearly favors those who retired in 1999 and after. It should have never happened in my book.

3. The payroll growth of active STRS members -- which increased between 4.50% and 5.94% every year between 1998 and 2003, declined noticeably to 3.91% in 2004 and 2.19% in 2005. For nearly 10 years, it was safe for STRS to project an annual payroll growth of 4.5% per year. If current trends continue, the Board may need to project significantly less coming in from the payroll of active members. This, as you might guess, also impacts our unfunded liability.

4. The Health Care Stabilization Fund is solvent only until 2021, assuming no changes in the employer contribution rate.

5. Ohio's teachers paid STRS $26 million for service credit in 2005 for their out-of-state experience. What I did not know until recently is that the service credit that was purchased in 2005 represented only 27.7% of the total cost of the credit. In other words, the total value of the service credit purchased was $96 million, which means that STRS picked up the $70 million difference. When I purchased five years for my Virginia experience, I paid what STRS told me to pay. I had no idea that I was paying only a fraction of the actual cost of the credit. This has to change in my opinion. When school boards -- through early retirement buyout plans -- purchase credit for teachers, they pay 100% of the actual STRS cost.

6. The Board voted 6-2 (three were absent) to direct the STRS staff to prepare retiree health insurance premium cost projections for 2007 that include a "catch-up" provision -- which means a premium for 2007 that makes up the difference for the minimal 3% increase in 2006. Board member Steve Buser and I voted no on this matter because we believe a different message was given to retirees a year ago. While it was clear to all that the 3% premium increase for 2006 was abnormal, and that retirees should not expect anything near that low in 2007, I have no recollection of being told that retirees should expect a gigantic increase in 2007 as a "catch-up" from the 2006 rates -- especially for spouses under the plan. Unless the STRS staff comes back with something significantly different, the premium increases for the 30-year non-Medicare retiree could increase between 12% (Basic Plan) and 15% (Plus Plan), while the increases for the spouse of the same retiree could increase -- get ready for this -- between 27% (Basic Plan) and 32% (Plus Plan). Speaking for myself, I would have voted no on the 3% increase last year had I known that increases of this magnitude were coming in 2007. Had I known we'd be looking at a possible 27%-32% increase for spouses in 2007, I would have preferred a much higher increase than 3% for spousal premiums in 2006 in order to keep down the cost increase in 2007. The Board was not given such projections. I have requested the staff to do as much as possible to keep these projected rates down for 2007, especially the projected rates for spouses. I also have asked to see the "claims history" that apparently will drive the 2007 rates.

7. "Adverse Selection" continues to be a problem. This is when a retiree in good health, especially those on the catastrophic (Basic) plan, drops his/her STRS insurance because a cheaper plan can be obtained through the open market. Consider this: My wife and I are on the STRS catastrophic (Basic) plan. Being in fairly good health, we didn't come close to hitting the deductible last year and nor did we exceed the maximum amount for prescription drugs. This means that we really never "used" the insurance plan, and the amount we paid monthly was to protect us for a single catastrophic event, like a car accident or a heart attack. What should I do if the rate for my wife's STRS plan goes up 27%? Since the healthier retirees and healthier spouses actually help pay for the insurance for those with health difficulties, shouldn't we try extremely hard to keep someone like my wife in the plan. Raising the spousal plan 27% will aggravate "Adverse Selection." I have asked the staff to consider ideas that might mitigate this problem. Looking back, the 3% increase for 2006 was designed to do just that.

8. The Board voted 7-4 in December to settle the lawsuit filed by STRS non-investment employees regarding the non-receipt of their final bonus check in 2003. Those who voted yes felt they were eliminating the chance that STRS would have additional legal costs associated with prolonging the matter, which I respect. I voted no for several reasons. John Lazares and I tried and failed to convince our peers that it was improper to vote on such a settlement agreement without having a document in hand. The Board simply directed that a settlement be executed that was based on a memory of what was discussed in executive session. As it turned out, the law firm representing the Board stuck a sentence in the document (filed with the court) that the Board never authorized in executive session. In my opinion, the Board received terrible legal advice on this matter. I offered a substitute motion, which also failed, that would have required STRS to first pursue having the settlement costs paid by Herb Dyer and the prior STRS Board members who didn't know what they were approving when they voted.
9. During the STRS Board meeting in January, the Board went into executive session to discuss two proposed policies under the belief that they might represent "imminent or pending litigation" at some point in the future. John Lazares and I objected to these matters being discussed in executive session. It is my opinion that discussing these matters in executive session was illegal. I will not be a part of future executive session discussions when such things are discussed. I feel we were not given good legal advice regarding the executive session in question. My hope, for everyone's sake, is that my peers on the Board will never do this again.

10. In February, the Board voted 7-2 (two were absent) to permit Board members Jeff Chapman and Mary Ann Flannagan to attend a professional development conference on pensions and retiree benefits near Orlando, Florida, for an amount not to exceed $7,000. John Lazares and I voted no, not because we are opposed to our peers receiving professional development, but because we believe: (A) STRS needs to do more to organize such conferences in Ohio by utilizing expertise already in this state; (B) All five Ohio public pension systems need to work together to reduce costs by jointly sponsoring the presenters to come to Ohio; and (C) It is too much money, in our opinion, for Board members to spend at a time when retirees are struggling to make ends meet.

11. The law firm representing STRS in the lawsuit involving the non-investment staff bonuses was paid $300,000 in December without formal Board discussion and without a Board vote. John Lazares and I expressed our opposition to all on this matter. I received support only from Mr. Lazares and Board member Steve Buser for there to be Board discussion before payment. I felt Jim Petro's office should assume the legal bills -- given that Petro himself voted against bonus checks (through his representative on the prior STRS Board), and given that Petro, due to his own conflict of interest, stepped back and selected the law firm to represent STRS. I intend to advance a proposed policy in the future that will prevent bills of a certain dollar amount to be paid without a formal board vote. The staff of the STRS Executive Director, based on email communications and telephone conversations with Board members, reached the conclusion that a majority of the Board was in favor of the bill being paid. I still question the legality of what happened.

12. It has been necessary for me to vote no each month on the Executive Director's monthly operating budget for STRS, and I will continue to vote no, because the budget: (A) Provides payments to staff, costing STRS $1.6 million per year, for unused vacation time and unused sick leave on annual basis -- which is in addition to the severance check they receive upon separation or retirement; and (B) Provides annual "Service Awards" to all STRS employees (except investment staff) for amounts between $125 and $1,000 simply because they work at STRS -- which I consider the same as an employee 13th check -- costing STRS $187,000 per year. I, perhaps, could support a "Service Award" for the lowest paid STRS employees -- those not eligible for the compensation restructuring that was just approved by the Board -- but not for the highest paid employees. (Teachers at the top of school district salary schedules do not receive a "step" increase.)