Mary Ellen Angeletti's report on the two day STRS Board Retreat: Day One

From Mary Ellen Angeletti, February 1, 2007

Wednesday, January 31, 2007

The Retreat began at 9 a.m. with opening comments by the Chair, Conni Ramser, and the Vice Chair, Jeff Chapman, who then introduced the Retreat Facilitator, Craig Rider, who was also the Facilitator for last year's STRS Retreat. Mr. Rider led the Board members through the results of the STRS Board's self-evaluation.

Of the eight Board members, one member did not return a self-evaluation so the results were based on evaluations returned by seven of the members. Four areas were covered in the evaluation: guiding principles, governing style, delegation to the Executive Director, and Board job description. The average of responses to all four areas was -.3 lower than last year's evaluation. Last year's average was 3.6, and this year's average was 3.3. This indicates a split between members who regard goals as being met and members who regard goals as NOT being met.

Some interesting comments which occurred as the self-evaluation results were discussed were: In a discussion of the importance of being proactive, Dr. Leone expressed that he desires to bring up issues to discuss with the Bd. members, and he has been denied opportunities in the past. He has been told that to question contracts, etc. is a waste of time, and he has been told to shut up. Proactive means to prepare for growth and change which is what Dr. Leone has attempted to do. He reminded the Facilitator that when he suggested scrutinizing vendor contracts, the Bd. members voted it down 8 to 2. The Bd. eventually corrected this mistake.

Dr. Leone was asked how the Bd. might encourage better discussion. Conni Ramser said she feels that advance notice of issues to be discussed would help so that she could prepare for discussion. The Facilitator reminded the Bd. members that they must respect each other. Someone said that the Board is undermined if one Board member speaks out against another. Dennis said, "But what do we do when the Board is wrong on issues? An Executive Director and seven Board members have been convicted in the past. For example, the Board majority wanted to go to Broadway shows. Their behavior was wrong."

Ms. Ramser said that issues need to be clear. She said, "We need to ask ourselves what are the pros for making decisions and what are the cons." Facilitator said, "We should focus on the matter and issue at hand." Mark Meuser felt that voices need not be raised to share opinions. He reminded the Bd. that lawmakers are watching the STRS Bd. He said that tempers should not be raised. Dr. Leone said, "The legislature would frown more on stupid decisions made by the STRS Board members than they would if voices are raised."

Then Dr. Leone reminded Ms. Ramser she had pledged to show respect and work together. Dr. Leone then referred to Ms. Ramser's remarks to the Canton Repository last July in which she was quoted as saying that Dr. Leone was the cause of Judith Fisher's departure from the Bd., that Dr. Leone needed parenting, and that she would have suspended him from her school class. Ms. Ramser refuted the newspaper statement explaining that when she talked to Paul Kostyu, she thought that Ms. Fisher had already named Dr. Leone as the reason for her departure. She said that the other remarks were taken out of context during the phone conversation.

Dr. Leone asked why she had not requested a correction or retraction from the Canton Repository newspaper. Dr. Leone said that he was affected more than any other Board member as he represents the retired teachers who are hurting because of the cost of health care premiums & the increase in Medicare premiums. Dr. Leone said, "We serve membership and must listen to them." He said he hears from membership more than the other members.

Conni Ramser reminded them that the most recent member survey indicated that membership was pleased. Mark Meuser agreed that pleasure was highest for retirees but said that fewer were pleased with spending and how STRS handles their money. Dr. Leone said that the survey reflects satisfaction with member services at STRS. . . not actions of the STRS Board members.

Someone stated that the survey indicated that "recipients have forgiven the system of past transgressions." Someone said that this was wrong. . .that it was the opinion of the person who conducted the survey, Mr. Saperstein. Laura Ecklar said that "based on the survey results, recipients have forgiven but not forgotten past transgressions."

The goals of the survey of the STRS Board were identified as health care and the solvency of the pension fund. Jeff Chapman said, "We (the Bd.) are accountable. We have fiduciary responsibilities." He asked, "How effective is the STRS performance?"

A discusssion of the broad authority of the Executive Director over the Board followed. Tom Johnson said, "Oversight of the Executive Director and his staff are a big part of the STRS Bd. member's responsibility." Dr. Leone then said, "It is not a good idea then for the Executive Director to allow a Board member to have a fax machine at a Bd. member's house." Mary Ann Cervantes then said, "Is there a designated person at STRS who is responsible?" Dr. Asbury said that ultimately he is responsible. He said Bd. members can ask the STRS attorney and ask the staff.

Dr. Leone then asked, "What about the Board policy that permits things like $60.00 dinners. This is not wise. What about a policy which permits Bd. members to charge long distance phone calls to STRS? This is not wise." Dr. Leone then said that he had a motion to present that says that the pension system does not pay for Bd.entertainment. The facilitator said that Dr. Leone must sell this idea to the Bd. members.

A review of the IFS Fiduciary Performance Audit recommendations followed presented by Dr. Asbury and members of the STRS staff. The audit was explained as evaluating management issues by identifying strengths and weaknesses and recommending enhancements. Steve Mitchell, the Chief Financial Officer for STRS Investments, discussed the investment related recommendations of the audit. Of the 45 investment recommendations in the IFS Audit, STRS investment staff disagrees with only seven:

1. The audit recommended that STRS delineate roles in their investment policy statement even though they are in the Fund Governance statement. STRS maintains that the investment policy statement & the fund governance statement are used in tandem

2. The audit recommended that STRS consider a different international benchmark. STRS feels that IFS misunderstood country weights in the benchmarks & the recommendation would significantly underweight emerging markets in the proposed benchmark versus STRS Ohio's policy target.

3. The audit recommended that STRS consider a different alternative benchmark. The Board's consultant thoroughly analyzed this issue several years ago & embraced STRS Ohio's three-pronged approach.

4. The audit recommended that STRS examine transaction costs (trading costs) of external managers. STRS did this several years ago; no problems; cost to do again is $35,000 - $40,000.

5. The audit recommended that in searches for external managers that STRS delete policy requirement that at least one Ohio firm is in the group of finalists. STRS is attempting to fulfill the requirement of SB 133 & overall legislative intent.

6. The audit recommended that STRS should monitor lobbyist requirement and should review registrant filings. STRS already requires that all respondents are familiar with the registration requirement. All 5 funds decided that monitoring is not the systems' responsibility. (Bd. member, Tom Johnson, suggested having lobbyists sign off on the required monitoring.)

7. The audit recommended that STRS should consider rebalancing target weights of stocks. STRS felt that this would not be wise.

The IFS audit indicated to the ORSC that only five of the 45 investment recommendations are KEY. STRS staff agrees on all five KEY investment recommendations:

1. An asset allocation study every three years.

2. External consultants must disclose business relationships.

3. Include additional risk statistics in the next asset allocation study.

4. Articulate criteria in broker evaluation for selecting women/minority/Ohio brokers.

5. Expand manager selection policy & include it in the investment policy statement.

Mr. Osborn, of the Russell Company, was in attendance and shared his response to the audit as "a positive report containing some fine tuning suggestions." Board member, Craig Brooks, suggested that more investment education should be an ongoing policy for Board members. Mr. Mitchell added that the Russell Company would be conducting some educational components in the near future but Mr. Brooks said that "It must be ongoing."

Following the lunch break, Board and staff members were asked to share their impressions on their attendance at the Ohio Forum on Retirement which apparently occurred on Monday and Tuesday of this week in Columbus at the Hilton Inn at Easton. This event received very favorable comments from all of the attendees.

Bd. member, Craig Brooks mentioned the responsibilities of the Bd. members as trustees. He said that some good advice which came out of the Forum was that "If you question something, you probably should not do it." He said the Forum reminded Bd. members to challenge management and to review outside money managers as well as insist on board member education.

Bd. member, Jeff Chapman said the Forum reminded him that Bd. members are responsible for investments and monitoring those investments, that Bd. members must be sure that there is a process in place to handle losses of investments (due diligence).

Bd. member, Mary Ann Cervantes especially appreciated the presentation by David Freel of the Ohio Ethics Commission who reminded Bd. members to look at who is trying to influence whom. She said that the STRS legal team must be on top of policing to avoid past repetitions of fraud.

Mr. Mitchell felt that new investment strategies (such as hedge funds, gold) were well-explained BUT were not guaranteed risks. Bob Slater, in charge of STRS accounting, felt that the Forum was very well put together.

Bd. member, Mark Meuser felt that the conference was outstanding, even though some of the info. was "over his head" but praised the emphasis on the fiduciary responsibility of Bd. members. He especially liked the emphasis of Bd. members' "undivided loyalty to their pension membership." At this point, Dr. Leone responded, "So that's what he said, huh? Hmmmm. . . That's what I have said for the past three years."

Sandy Knoesel, Member Benefits, shared that she learned new things from other Executive Directors who attended and also appreciated Representative Wachtmann's explanation of the ORSC oversight.

Executive Director, Damon Asbury felt the Forum was well done and included a good blend of vendors, Board members, and Executive Directors. He especially liked the analysis of fiduciary responsibility (Fla. speaker) and the Kent State speaker who emphasized attention to payroll growth & economically challenged investments.

The STRS staff member who sat in for Terri Bierdeman (who did not attend due to the death of her father) appreciated Representative Wachtmann's underscoring the importance of the ORSC and said it was good for the vendors to hear this.

Laura Ecklar, director of STRS communication services, led Bd. members through a review and discussion of Board Policy changes which mainly had to do with Board member travel and expenses. She referred members to the comparison of reimbursements offered by other pension systems as well as state and federal agencies. The changes which were discussed today will be brought back to the Board at the February Bd. meeting for final approval. Highlights of the discussion today were:

1. A Board member who is a formally invited participant or designated speaker at an event sponsored by an organization with which the Retirement System is affiliated for the purpose of exchanging information pertaining specifically to the system shall be reimbursed for incurred expenses. Bd. members will only be reimbursed for expenses associated with such an event if documentation is provided by the organization inviting the Bd. member that stipulates the Bd. member was an invited participant or a designated speaker at said meeting. This documentation must be attached to the travel expense form. Reimbursement by third parties is restricted by Ohio law.

2. Board members are permitted to attend 3 out-of-state meetings (including all costs) per year as long as said meetings do not have a total cost to STRS in excess of $5,000. Expenses must be pre-approved by the Bd. at a Bd. meeting. Exceptions to this policy can be brought to the Bd. for consideration to allow.

3. Overnight lodging on the day after a conference ends will not be reimbursed, absent adverse weather-related conditions and/or cancellation of the Bd. member's airline flight.

4. Board members will not be reimbursed for overnight lodging in Cols. after Bd. meetings, absent adverse weather-related conditions and/or a mechanical breakdown of said member's motor vehicle. Bd. members will be reimbursed if they are conducting Bd. business or are a formally invited participant or speaker at a meeting the following day & the cost of the lodging does not exceed applicable mileage reimbursement.

5. Bd. members may be reimbursed for actual & reasonable meal expenses up to a maximum rate of $50.00 per day per person. Bd. members may be reimbursed for actual meal expenses as follows: not to exceed $10.00 for breakfast, $15.00 for lunch, and $25.00 for dinner.

6. Airfare will be purchased at least 30 days in advance & at the lowest price coach class available. Bd. members who choose not to secure airline reservations at least 30 days in advance will be required to pay the difference in cost between the two tickets.

7. STRS will not pay any additional fees charged by airline companies when ticket reservations are changed by Bd. members due to personal reasons -- before or after conferences.

8. Airfare for Bd. members to return for emergency Board meetings and/or extraordinary situations will be paid by STRS. 9. Reimbursement will not be made for personal purchases, alcoholic beverages, valet services (except use of valet parking when reasonable self-park facilities are not available), laundry & dry cleaning, personal grooming, entertainment, and long-distance telephone calls that are not connected to STRS business.

9. STRS funds will not be utilized to purchase credit cards for Bd. members & Bd. members will not be issued credit cards by STRS.

10. All eligible expenses exceeding $15.00 must be documented with an itemized receipt to be reimbursed.

11. Exceptions to the policy and limits herein established will require a majority vote of the Retirement Board present & voting.

In regards to policy changes which have to do with limitation of the Executive Director, Ms. Ecklar will rewrite section G. which addresses restrictions of administrative operating expenditures without a formal vote of the Bd. The Bd. members did okay the requirement that they be provided with a contract summary sheet if a potential agreement meets one of the following provisions:

1. The contract exceeds $100,000

2. The contract is for goods or services provided directly to the Board.

The last policy change discussed pertained to the position description of STRS Bd. members' compensation. It now includes "STRS will not pay for or provide computers, home Internet connections, home telephones, cell phones, or fax lines or fax machines for Board members. Bd. members will be permitted to check out STRS laptop computers immediately prior to the first day of business associated with a Bd. meeting or an approved conference. Said laptop computer is to be used only for STRS related business and not for personal use. IN SHORT, DR. LEONE, ALONG WITH SUPPORT FROM TOM JOHNSON, CRAIG BROOKS, AND TAI HAYDEN, WAS SUCCESSFUL IN GETTING MAJORITY BOARD SUPPORT FOR MOST OF THE PROPOSALS HE HAS PUSHED FOR MONTHS!!!!

Greg Taylor of the STRS IT Department reported on Board computing options but in the end, it was decided that there would be no cost savings by having the Board members switch from monthly paper binders to laptops.

Andy Marfurt, STRS Human Resources (I think) then led an explanation of the STRS request for a 3% salary structure. He presented supporting information and explained salary structure as a best practice tool used in compensation programs. It provides a hierarchy of positions from lowest to highest. He recommended that it be updated each year as it assists in recruiting top talent and also allows associates to excel in a position without hitting the top of the salary grade as quickly. He said that it was a myth that updating the salary structure results in pay increases. Updating is not a COLA or step increase. He recommended that it be effective Jan. 1, 2007. Jeff Chapman moved, seconded by Craig Brooks to approve the annual adjustment of the STRS Ohio salary structure reflecting a 3% increase over the previous salary structure with an effective date of Jan. 1, 2007. It passed unanimously.

Retreat Facilitator, Craig Rider, then summarized the day's discussions. The Retreat adjourned to Executive Session at 4:45 p.m.