Mark Meuser's position on vendor contracts; responses from Dennis and Molly

From Dennis Leone, October 23, 2006

Subject: Meuser Response

You are correct Molly (regarding the Board majority's desire simply to review proposed vendor contracts over $100,000 prior to approval), and I certainly do not agree with Mark Meuser's belief #3 below, which is that any Board involvement in approving vendor contract would "impair the staff's ability to negotiate" said contracts. I don't agree with that at all.

Dennis Leone

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Molly Janczyk to Mark Meuser, October 23, 2006

Mark, While I have no doubt that what you say is contained in books, we are dealing with the very real attempts to slip things through unnoticed as evidenced by past and perhaps some current board members. I believe it was simply asked for the board to be able to SEE the contracts, not to try to negotiate them. In this way, any attempts to slip through lodging as occured in the past or other items will be in full view.

I do not expect you or Dennis or board member to negotiate contracts. I do expect you to SEE them before voting and for large expenditures. We are dealing with a system that has to REGAIN our trust and has not done so yet with newly learned of credit cards and indifference to small expenditures out of line with ORC:3307.15 as well as indifference to having documents before voting on them. This has FINALLY be approved. I believe that seeing documents for large expenditures is all that was asked to ensure our belief that they are not containing items they should not or items being included without our awaremess.

Please consider this for future votes.

Thank you,

Molly J.

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Mark Meuser to Molly Janczyk, October 23, 2006

Subject: RE: Your vote on the Vendor Contract issue

Molly,

I just sent this to Kathie. It outlines my position on the vendor contract vote. Had I read your e-mail a little earlier, I would have included you in the Cc list.

Mark

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From Mark Meuser, October 23, 2006

Dear Kathie,

Thank you for your e-mail. I received a number of e-mails regarding this issue. In the interest of sending everyone a speedy answer, I have sent them each a Cc. I hope that will suffice.

The issue of vendor contracts is one which I spent a great deal of time researching. In addition to the normal required reading for this meeting, I am currently studying two books on pension trustees, one of which includes an on-line course, which I hope to complete next month.

Based partly on those texts, I outlined my position on vendor contracts at Friday's board meeting. I had four basic points, which I will attempt to summarize.

1. Both texts advise fiduciaries to learn to delegate when appropriate. Let me quote form the Handbook on Asset/Liability Management by John Ilkiw. "In the mistaken belief that they are lessening their exposure to liability for breach of duty, many governing fiduciaries retain decisions that are best delegated to managing and operating fiduciaries. In most cases, liability exposure is actually increased because they don't have the time, knowledge, or the skills required to make timely and sufficiently informed decisions. Governing fiduciaries are more likely to satisfy their duties if they learn to delegate."

After speaking with STRS legal council, I learned that it is a governing fiduciary's duty to approve vendor contracts only if that fiduciary has the required expertise. Otherwise, it is the fiduciary's duty to delegate that approval to those who do have the expertise. This is a principle recognized all across the country, not just in Ohio. In fact, much of the language in the Ohio Revised Code (including 3307.15) is taken from federal regulations. These regulations urging delegation of certain responsibilities are there to protect the system, not to "let board members off the fiduciary hook." The fact that STRS legal counsel has advised against contract approval by the board also weighed heavily on my mind.

2. Having made reference to ORC 3307.15, I should point out that that provision requires board members to act in ways which are consistent with other trustees in like positions. It is important to note, therefore, that no other public retirement board in Ohio approves contracts. Additionally, in an informal on-line survey conducted by our legal counsel at my request , 43 out of 46 retirement systems surveyed across the country indicated that their boards do not approve contracts. Typically, the boards approve budgets, and the contracts then must fall within those budgetary guidelines. It does not seem prudent to me for the board to embark down a path which most retirement systems avoid.

3. Requiring board approval of vendor contracts could actually impair the staff's ability to negotiate the best possible deal for the system. The give and take necessary to negotiate complex contracts would be compromised if the staff did not have the authority to say yea or nay. The long-term result could be less advantageous contracts for the system.

4. Finally, if contracts fall within a previously approved budget, I do not see the need to basically approve the same budget again. I do feel it is important for the board to be familiar with the contracts. That is part of our fiduciary duty. A proposed summary sheet outlining the major points of the contract should prove to be very helpful.

These were the four points that I made at Friday's meeting.

It was suggested by one e-mail that my "no" vote was an indication that I have chosen to ignore the abuses of the past. I would respectfully disagree. I think I have a pretty good overview of what went on then. I further believe that current board member Dennis Leone did a great service to the organization in bringing to light practices that were not in the best interest of the system, and in some cases illegal (as evidenced by recent court decisions). However, I do not believe that assuming duties which are not fiduciarily prudent for the system as a whole is the best way to guard against abuses by the board.

I am also very sympathetic to the plight of retirees regarding health care. I myself have been eligible to retire for four years but have not done so, in part, because of the high health care premium costs for my wife and daughter. The increased cost of health care premiums is not attributable, however, to the aforementioned abuses. It is a national problem, about which board members receive articles weekly. The the board hopes to address health care in Ohio by creating a dedicated stream of revenue. This must be accomplished with the help of the legislature.

I hope that this explains my position. Though not everyone will agree with it, I can assure you that it was not a position at which I arrived lightly or without a great deal of care and study.

Sincerely,

Mark

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Kathie Bracy to Mark Meuser, October 22, 2006

Subject: Your vote on the Vendor Contract issue

Dear Mark,

I was really surprised and disappointed to learn that you had voted against the Vendor Contract issue on Friday, I'm really curious to know your thinking on that, as I'm sure you must have had your reasons for voting as you did.

Thanks --

Kathie Bracy