Mr. Lambert...a comment from Dr. Leone re: your recent blog posting

From John Curry, November 6, 2008

Mr. Lambert....I call to your attention to your recent posting of an entry into your blog which is posted below and a comment re. your posting from STRS Ohio Board member, Dennis Leone.

John Curry
A Concerned Ohio Retired Educators member (CORE)
An STRS benefits recipient

From Dennis Leone, November 5, 2008

Who wrote this? It is not accurate. STRS investment staffers WERE paid handsome bonuses for positive stock market returns in 2004, 2005, 2006, and 2007…….when STRS made money. We are talking about years when STRS LOSES money. We lost big bucks in fiscal year 2008 and we are currently losing even more in the first 4 months of fiscal year 2009. It is an insult to the STRS membership when 87 people are given bonus checks averaging $65,000 (on top of $100,000 - $200,000 base salaries) when we lost money. We are not talking about the past. We are talking about the future. STRS assets have dropped $25 billion in the past 12 months, which is 31.25% of everything STRS has. Bonus checks shouldn’t even be in the picture right now.

Please share with Hilliard. I voted NO on the bonus compensation due to the information summarized above.

Dennis Leone
STRS Retiree Board Member

http://savethehilliardschools.blogspot.com/2008/10/it-goes-both-ways.html

Friday, October 24, 2008

It Goes Both Ways

In her blog, retired Ohio teacher Kathy Bracy has published a string of posts in which she and others are outraged that the State Teacher's Retirement Fund has lost a pile of money in the stock market and other investments of late. In their latest blog, they're crying for the suspension of bonus payments to STRS executives "during this time of economic upheaval."

First of all, one would presume that the bonus packages paid to these managers would be based on how they performed over some period of time, meaning you wouldn't pay them any bonus unless the investment portfolio had grown in value by the target amount. So my first assumption is that these bonuses are set to be paid because the STRS portfolio generated very good returns their last fiscal year. Presumably the STRS members have been happy to pay bonuses to these folks in the past, and would have been happy to pay out these bonuses as well had the stock market not tanked.

So now the STRS members want to reach back a year and take money away from managers they hired to generate those results. The justification is that this year is going to suck, and a lot of money has been lost, so therefore the managers should sacrifice bonuses they have already earned…

… in order to pay to the retired teachers benefits they feel they have already earned. Seems duplicitous doesn't it?

Americans have been feeling pretty cocky about their stock market skills. After all, they've seen their portfolios climb steadily over the past 30 years since the development of the 401(k), albeit with a couple of bumps along the way. Little did they understand that they weren't riding the investment market to higher levels of value, they were just driving the prices up by chasing investments with all that 401(k) money. The saying goes: "All boats rise with the tide."

Retirement fund managers were caught in a trap. Even if they were smart enough to know a dangerous bubble was developing, they had to go along for the ride because their members expected to share in the extraordinary opportunity, even if they didn't understand why it was happening.

Now the bubble has burst, they've taken a huge paper loss, and they want to hold someone accountable. The first victims in their crosshairs are their own fund managers, the same ones who apparently made them so much money in the past that the STRS members granted them these lucrative bonus programs.

The STRS members face a serious situation: a big loss in the value of their portfolio jeopardizes the ability to fund the pension benefits of both the current retirees and those who have yet to retire. But they have an interesting backstop – state law. Section 3307.28 of the Ohio Revised Code gives STRS the power to increase the contribution required by the employers (ie the School Board) as necessary (up to 14%) to prevent funding shortfalls. So when the STRS portfolio takes a hit, the burden can be transferred back to the taxpayers to make up the difference.

What happens if the hit is really large, as is happening now? We can be pretty sure that the teachers' union – spearheaded by the Ohio Education Association – would lobby our legislators aggressively to get this 14% limit raised. They have a strong voice, as OEA is a large contributor to the campaigns of state politicians.

Where is a school district supposed to come up with this additional money? That's easy: ORC 3307.30 says we have to raise our taxes with another levy. What if the levy doesn't pass? Got that covered too – ORC 3307.31 says the State will just withhold it from their normal state funding payments to the district.

I wish my 401(k) had that kind of backing. How about you?