A few words from Damon

From Damon Asbury, Sept. 1, 2006

Message From the Executive Director

In talking with STRS Ohio members during my time as executive director, I have learned that you expect the Retirement Board and staff to be prudent managers of system funds -- whether in the allocation of our investments, the administration of our benefits or the day-to-day operation of the organization.

It is this latter topic, the expenditure of operating funds, which I would like to address in this message. The Retirement Board and staff have worked together to significantly reduce system expenditures. In our newsletters, we have shared with you that the current operating budget for this fiscal year is 7.1% lower than the peak budget for the
2002-2003 fiscal year. Over the past three years, we have reduced staff and board travel, as well as expenditures in such areas as staff benefits, communications, utilities, and professional and technical services. Staffing levels have also been reduced by more than 100 associates to a current level of 628 staff members.

When we develop each year's operating budget, STRS Ohio staff members look carefully at every line item and prepare a thorough and detailed analysis of their planned expenditures for the coming year. Before this budget is adopted, it is reviewed not only by the Retirement Board, but also by the Ohio Retirement Study Council. But the "budgeting" process doesn't stop there. Throughout the year, STRS Ohio staff constantly monitor expenditures and continue to implement steps to reduce costs. As a result, last year's operating expenditures were actually $4.9 million less than what was originally budgeted. The previous year, actual operating costs came in $6.8 million lower than budgeted. In short, the prudent management of system funds is not confined to just a few short months each year -- it is part and parcel of the daily decision-making our associates undertake to make system operations as lean as possible without jeopardizing delivery of pension benefits and services and health care coverage to members; adversely impacting investment operations; or failing to meet fiduciary responsibilities or legal requirements.

At the June 2006 meeting, the Retirement Board approved a new procedure that requires all administrative and/or project-based operating expenditures of $100,000 or more be approved by a formal vote of the board prior to payment. This action put an additional procedure in place for board oversight, but as noted above, it is by no means the only procedure to control system expenditures. For example, in addition to the budget approval process that occurs each spring, STRS Ohio's own internal auditors, who report directly to the board, regularly test administrative expenditures for compliance with Board and administrative policies. Their findings are reported to the Retirement Board Audit Committee, whose membership is currently Conni Ramser, Geoffrey Meyers and Dennis Leone. In addition, during their annual audit of financial statements, auditors appointed by the Ohio Auditor of State randomly select administrative expenditures to test whether the payments are in accordance with legal requirements and Board Policies. Their findings are also reported to the Retirement Board Audit Committee.

At the August Retirement Board meeting, we put this new procedure in place for the first time. In the list of expenditures of $100,000 or more I presented to the board for its approval was the projected payment of $135,000, as a portion of a total fee of $315,000, to a firm to direct the recruitment and hiring of four real estate professionals for our Investment Department.

In talking to some of our members, I can certainly appreciate the "sticker shock" that accompanies a fee such as this. We did attempt to fill these positions using our own Human Resources staff. Unfortunately, the caliber of the applications received did not meet the job specifications.

STRS Ohio's real estate assets, which currently total about $5 billion, are largely managed internally by STRS Ohio staff. Over the past 10 years, the returns from this asset class have exceeded the performance benchmark with a return of approximately 14%. To put this in perspective, for the 2005-2006 fiscal year alone real estate associates added value of $300 million over the benchmark.

During the past four years, the real estate department has experienced a net loss of 16 staff members, who were not replaced. Now, as our investment plan calls for additional allocations to real estate, we face a critical need to add four additional senior-level people at a time when the market for such individuals is very competitive. Four separate recruiting firms were interviewed; the one chosen had the lowest fee. This firm is well known in the real estate industry and has the recruiting expertise with this select group of applicants that we do not possess in-house, and can secure candidates that may not be actively in the job market. This year alone, the firm has recruited and placed more than 200 real estate professionals. The $315,000 is a capped cost and enables us to hire four qualified real estate professionals in a timely fashion. In addition, the firm has agreed to let us fill any other vacancies that might occur within the next 18-month period at no additional cost by drawing from the pool of candidates identified by this firm. Yes, the fee is large, but the return from real estate investments is far greater. Hiring lesser-qualified staff or delaying the hiring process has even greater potential costs to the fund.

During its August meeting, the board also discussed reimbursements of legal expenses specific to individual board and staff members. Because the discussion occurred during an executive session, it would be inappropriate for me to discuss the details. At the same time, I also believe I have an obligation to address some misperceptions that have been brought to my attention. The Retirement Board has not, nor does it plan on, reimbursing any board or staff member for legal fees they might incur for their own personal defense of any of their own actions that are deemed to be potential ethics violations. Reimbursement has been made to two associates for the legal expenses they incurred in assisting the Ohio Ethics Commission and the Columbus City Attorney's office in the prosecution of a former board member. The assistance they provided was in the context of their professional duties at STRS Ohio. The total amount reimbursed to date is $1,400. The board has also indicated that legal fees totaling $6,000 from another associate can be paid if the request is made.

I apologize for the length of this message. However, I feel it is important for me to address members' questions in a timely manner, which our Web site and e-mail news service allows us to do. Thank you for your continued interest in your pension system.

Damon F. Asbury
Executive Director