Mary Ellen Angeletti: Report on Day 2 of STRS Board retreat

STRS Retreat, Day 2, Jan. 31, 2008

I was unable to attend the first day of the STRS Retreat due to the fact that my husband and I were captives in our home for 18 hours without electricity due to the wild winds the night of Jan. 29th. Several trees were blown down across state route 315 making the route impassable and knocking down the electric lines supplying 300 homes where we live. Now if we only had had the strength to manually pull open the overhead garage door, we might have been able to attend and enjoy the warmth of the STRS building! The first day agenda dealt mainly with Board governance, responsibility, governance structure & roles, competencies & personal attributes, and delegation. Any member may contact STRS to request that the CD recordings of Day 1 and Day 2 of the Retreat be sent to them. These audio CDs give complete coverage of the Retreat.

The second day began with a review of the first day's discussions presented by Ed Gaydos, a retiree from Limited Brands and Anheuser-Busch who has developed non-profit board training curriculum for executives.

Next came Gary Hudepohl and Debbie Roche, members of the Executive Director search firm of Hudepohl and Associates, who reported on their progress to date. They discussed the common themes of their interviews with the individual STRS Board members. They told why potential executive directors would want the job at the helm of STRS Ohio:

1. It is one of the three top jobs in the country.
2. The size of STRS Oh. is a big plus.
3. STRS Oh. has an experienced leadership team and a CIO who is achieving good returns.
4. STRS Oh. is experiencing good relations with the Ohio legislature.
5. Central Ohio is a desirable location.

Why would potential executive directors NOT want the job: The Board's governance issues. It is united in its mission BUT there are minuses:

1. Execution is a problem
2. Strategy, how to define oversight
3. Policies inhibit
4. Need more flexibility
5. Must find a way to be respectful of other's opinions
6. Must have a public face that supports the system

Mr. Hudepohl suggested that the Board members are really not far apart in their thinking, that they differ on opinions of oversight. He said that they need to find agreement on oversight, to agree that the Bd. wants an Exec. Director to lead the Bd., and then come together in an unanimous selection of the next Executive Director. They need to embrace the new leader and give him the authority to run the system. The Bd. needs to implement appropriate governance.

The next Executive Director must be well credentialed and run a large complex organization with experience in public pensions and with working with educators. He must lead the Bd. through decisions and be an advocate for defined benefit plans. He must know how to leverage STRS "size" to influence outcomes. He must be a visionary who can chart the course for the system, can ask the "tough" questions, and has the energy to lead change. He must be respectful of people and inspire & motivate people to perform at high levels. He must be strong, experienced, and confident and able to say "NO". Mr. Hudepohl said that the main quality is one who can bring the Bd. members together for the best interests of the members despite personal differences, always focusing on principle.

So far, the search firm:

1. Has drafted a position profile (which will be reviewed by the Board)
2. Has targeted whom send applications to
3. Has prepared a posting advertising the position: Postings to be placed in the Columbus Dispatch on February 17-18
4. Has actively recruited, starting phone calls on 1/14 and will continue until approximately 2/22 to 2/29. Mr. Hudepohl has talked to the top five prospects; he will hold phone interviews with them, followed by personal interviews. The STRS Bd. will be the ultimate authority on who is hired.
5. Has evaluated applicants through interviews
6. Will recommend candidates between 3/28 & 3/31
7. Will arrange for interviews with key people at STRS Ohio
8. Has targeted late March or early April for hiring of the new Executive Director

Craig Brooks offered, "We have good people, we trust management, we just need some tweaking."

Dennis Leone said, "A 10 to 0 vote would be great! Any Executive Director candidate will know the history of STRS and will know that if the Board is struggling with governance issues, it is because credibility has been "improved" but not "restored".

Mark Meuser added that 90% of the STRS member surveys indicate that STRS has improved so the past is the past and has been put behind us."

Someone said, "If the right leader is hired, he will know STRS past history and lead the Board."

Mr. Hudepohl added that an independent third party would talk to people NOT listed as references by the applicants including staff, board members, etc. He also mentioned that training would be provided for the new Executive Director. He expects there to be three to six candidates for the job. It was suggested that the search team have the candidates bring in examples of how they have handled governance issues with other boards.

After a break, Janet Cranna and Marco Ruffini of Buck Consultants presented the four year experience review of the actuarial assumptions of the system. Actuarial assumptions are used to project member benefits (projected service & salary), when & why members terminate employment (retirement, disability, death, termination before retirement), and when benefits begin and end (retirement, disability, death after retirement). Interesting highlights of the ensuing technical discussion was that our population of teachers has gone down, there has been loss of payroll growth & experience, there have been fewer retirements than expected, delayed retirements are good for the system, people are living longer, and fewer people are dying than was expected. Buck suggested some assumption changes effective July 1, 2008 for pension valuation and Jan. 1, 2009 for health care valuation. These assumption changes have to do with lowering rates used regarding mortality, modifying the rates of vested termination, lowering the rates of non-vested termination, adopting an updated mortality table for service retirements, adopting an updated mortality table for service retirements for males, modifying the female rates for mortality experience for disability retirements, and since mortality is expected to improve 1% to 2% of rates each year in the future, updating the retiree mortality table projected to 2010 by setting back (adjusting the fit) 3 years for males and 2 years for females. They also recommend setting back female disability mortality rates by five years. Assumptions of investment returns remained appropriate as did economic assumption components. The overwhelming factor to changing the ratios is that people are living longer. . this factor has the most impact.

{The question I had after this discussion is the lack of consideration regarding the impact on the system of members living longer in retirement who had the highest benefit (35 years = 88%). I do not see how this factor cannot hurt the pension system. I do not understand why Buck did not consider this data and run it out to see the effect it would have.}

Next on the agenda was discussion of STRS Ohio associate severance policy. Following lengthy discussion, the Board voted for the details in Option 1 in which they (the Board) approved the current severance policy. The Executive Director is then authorized to offer severance, pursuant to the policy, for future reductions-in-force without requiring additional Board approval. The vote was 6 for the motion and 3 against.

The payment of STRS associate legal fees was next discussed, and it was voted unanimously that if a STRS Ohio associate requested legal representation for matters arising due to his or her employment by STRS Ohio, the associate shall first request assistance from the General Counsel. In the event the STRS Ohio Legal Department would not provide representation, the associate shall seek representation from the Ohio Attorney General pursuant to Ohio Revised Code Section 109.361. Unless otherwise required by law, in no event will STRS Ohio pay fees for attorneys retained outside this process without the Retirement Board approval.

The next issue considered was an authorization resolution for administrative officers in all matters related to personnel and current expenses. The Board voted to accept the original resolution and eliminated the changes contained in the substitute motion.

The last issue considered was a motion to approve the annual adjustment of the STRS Ohio Salary Structure reflecting a 2.9% increase over the previous salary structure, with an effective date of Jan. 1, 2008. There was discussion regarding whether the 2.9% increase was in line with the other pension systems. When it was determined that it was, the motion then passed unanimously .

Respectfully submitted,

Mary E. Angeletti, CORE