Saturday, December 06, 2008

Michael Nehf: The numbers are coming

Mike Nehf to John Bos, December 5, 2008
Subject: RE: Monthly Balance of Investments

Dear John,

I can have this information prepared for you. I’ll be in contact.

Mike Nehf

John Bos: Request for investment numbers

From John Bos, December 5, 2008
Subject: Monthly Balance of Investments

Good Morning Mr. Nehf,

I have been reviewing the monthly news of STRS and have not been able to find appropriate data to assist me in a stastical project.

I would request the value of the STRS investments by month for the past 24 months. (composite number) This information is NOT included in the monthly report that is distributed via the internet. I have not been able to secure this information via normal methods. This information should be available to every member (active and retired).

Please have the appropriate personnel send this information to me at their earliest convenience.

I appreciate your efforts to solve multiple problems in a DIFFICULT environment. I truly understand that you are caught in the middle of multiple pressures and ideas. If the market does not correct soon, there will be no winners.


John Bos

Thursday, December 04, 2008

Rich DeColibus to STRS Board: Alligators and PBIs

From Rich DeColibus, December 4, 2008
Subject: Alligators in the Sewers

"The one and only goal of STRS's investment department is preservation of capital. Nothing which interferes with this tenet should be allowed to impact STRS operations. "Preservation of capital" isn't a trite phrase, it's the only rationale for the existence of STRS."

"Having lost $30 billion over the last year essentially means we have lost asset value at the rate of $951 per second for a year...not a good thing." [That's $57,060 per minute or $3,423,600 per hour or $82,166,400 per DAY, folks!]

Dear Board Members,

Every once in a while you hear the news story about a huge alligator found in some city's sewers (usually NYC). The presumption is someone bought a cute little alligator, but then it grew. It wasn't cute anymore, and it became dangerous. After all, to an alligator, the hand that feeds it is just as yummy as the food it holds.
It is time to reflect on your PBI program, and maybe send it to keep the alligators company. It may have started well, but it has become counterproductive. You are always free to dispute my logic, but I do ask you to step back and look at the overall picture. Of course, human nature wants to hang onto anything one has already spent a good deal of time and energy defending, and it will be an emotional challenge to reverse course. However, even Superbowl championship football teams have to punt once in a while. A punt is not an admission of defeat, it is a recognition of reality and a determination to do better next time.
I will give my brother the credit for the overriding principle that energized me to write this. As in the Hippocratic Oath, the words "First, do no harm" come to mind. The principle is this: The one and only goal of STRS's investment department is preservation of capital. Nothing which interferes with this tenet should be allowed to impact STRS operations. "Preservation of capital" isn't a trite phrase, it's the only rationale for the existence of STRS.
I have met many teachers in my life, as have most of you. I have yet to meet one who went into the profession to get rich. Teachers go into teaching because they love children or are fascinated by some field of human endeavor, and they want the rest of the world to enjoy it as much as they do. The satisfaction involved in being successful is considered sufficient gratification, and no amount of monetary compensation will make a teacher happy if he cannot see students progress.
What has this got to do with the PBI program? If you look a bit deeper, what I am trying to ask is simply this: what motivates individuals? Certainly money does, but money isn't the sole reason why human beings do what they do. Money is a perfectly legitimate incentive, but -- and this is the relevant point -- it must be structured in such a way that the behavior it motivates parallels the primary goal of STRS: preservation of capital. Therein lies the problem.
The PBI program is technically adequate. It is based on the principle money is a powerful motivator, which it is. It is not, however, the only motivator, nor, I submit, the most effective motivator. The most effective motivator is a feeling of accomplishment and satisfaction of a job well done, as well as recognition by others that you have exhibited superior performance. This is not feel-good, touchy-feely stuff; this is the grist of what it is to be human.
Allow me to demonstrate how the PBI program works against preservation of capital. I do not claim this is accurate in detail, but it is accurate in general application. We shall create four categories of investment: low-risk bonds, and similar investment vehicles, paying 3% a year, market index investments which return 5% a year, risky investments which return 7% in good years, and high-risk investments which return 9% in good years. The PBI is based on beating the market index so there are no bonuses for the first two categories. Let's see what happens to $100 (or a $100 million) over six years, using the historical standard of five good years to one bad year, and an average yearly bonus of $70,000 as per the most recent PBI payments.
[Click image to enlarge.]








As an investment associate, what would you do? Does the thought of preserving capital or the thought of a $70,000 check in your hand drive your decisions? Now, let's come to year six, when things are not so good.
[Click to enlarge.]



Take a look at the beginning $100 and the year six values. Investment associates are neither evil nor malicious, but your PBI program practically demands they invest not for the preservation of capital, but for that $70,000 check. Who can blame them? Y'all approved this PBI. You approved it because you were told it was a good program, a solid common business practice. This kind of Wall Street thinking was the same as the kind of thinking that insisted subprime mortgages were swell investments because, as we all know, the price of homes will always go up.
The question marks for the bonuses in year six are there because, if our particular investments lose money at a slower rate than the STRS composite market index, the investment associates will still get the same basic bonus as in the good years. Indeed, if the rate of loss is significantly less bad than the rate at which the market tanks, they can get a better bonus than in the good years, which is exactly what happened this year. This, pardon the colloquialism, is nuts. Take another look at some other STRS statistics:
[Click to enlarge.]

No amount of rationalization can justify this. I am not advocating any specific investment strategy, nor any specific PBI adjustment. Personally, I prefer sending it to where the overgrown alligators go. In any case, I am suggesting the current PBI program works directly against STRS's primary obligation: preservation of capital. It encourages investment associates to prefer relatively high yield, high risk investments because it maximizes their bonuses, and there's no down side for them if their individual and collective investment strategy fails, as it spectacularly did this past year.
This is a diagnosis of the disease; the cure is up to you. Having lost $30 billion over the last year essentially means we have lost asset value at the rate of $951 per second [or $57,060 per minute, $3,423,600 per hour or $82,166,400 per DAY] for a year...not a good thing.
Rich DeColibus
[STRS retiree, former president of the Cleveland Teachers Union]

Wednesday, December 03, 2008

Henry County RTA president to STRS Board: Change your bonus policy

From Bonnie Eddy, 12/2/08
December 2, 2008
Executive Director Michael Nehf:
Craig Brooks:

Mary Ann Cervantes:
Jeff Chapman:
Taiyia Hayden:
Denis Leone:
Mark Meuser:
Tim Myers:
Steve Puckett:
Conni Ramser:
Dear Executive Director and STRS Board,
I am writing on behalf of the Henry County Retired Teachers Association who strongly opposes the present STRS bonus system.
In your November Board News, you reported that the Retirement Board reviewed our returns and also is beginning an Asset Allocation Study. You further reported that the board is continuing an in-depth review of the Performance-Based Incentive (PBI) Program.
A message that Executive Director Nehf sent to the STRS members stated that "the events taking place in Washington and on Wall Street are unprecedented." May we suggest that giving bonuses to eligible investment associates, when as of 11-19-08 the STRS market value assets dropped $30 billion, is also unprecedented. We understand the method of paying bonuses when gains are made, but fail to understand why any bonuses are paid when losses occur.
According to The Columbus Dispatch, the total base salaries for the top ten of the STRS employees who earned $200,000 or more in bonuses in 2008 totaled $2,305,000 and bonuses paid totaled $2,222,740. In addition, the 'hidden cost paid to OPERS totaled $311,183. That's a total of $4,838,923 for only ten people. And two of them made over a half-million. STRS paid nearly $6 million in bonuses to 89 investment officers this year, most of whom have base salaries of $100,000 or more.
Most retired teachers, including us, can't even identify with these figures. Giving these kinds of "bonuses" when many people are experiencing difficult times because of the state of the economy is a "slap in the face" to the members of our retirement system who are struggling to make ends meet.
We strongly urge you to change your policy of paying bonuses in the present manner. Your decision is a poor one and needs to be rescinded. The policy should include bonuses based on performance. When there is a loss, no bonus. The policy should NOT include if the pension officer's assets lose less value than average for a comparable portfolio, they still qualify for a bonus.
We will continue to follow your actions regarding our concerns.
Bonnie Eddy,

Tuesday, December 02, 2008

December CORE meeting changed to Friday, Dec. 12

From CORE, December 2, 2008
CORE (Concerned Ohio Retired Educators) will hold its December meeting on Friday, the 12th, at the STRS Building at 275 East Broad Street in Columbus. Parking is free in the STRS parking garage behind the building. CORE usually meets on Thursday but the December meeting will be held on Friday this month due to the fact that STRS is planning to hold a special Health Care meeting on Friday, the 12th, from 9:00 a.m. to 3:00 p.m. on the 5th floor. The usual STRS meeting (which includes a report from the Investment Department and other STRS business) which usually begins around 9:00 a.m. on Thursday in the meeting room on the 6th floor is also being held this month but the beginning time this month will be 10:00.
Map/directions to STRS, 275 E. Broad St. Columbus, OH 43215
Due to the fact that this special Health Care meeting is described as a "planning meeting to develop a strategy for Health Care for STRS members for the next five years", CORE feels that it is vital for members to attend this meeting on Friday. The room in which this meeting will be held on the 5th floor is the room which some compare to the United Nations meeting room. It cannot be missed as it is circular and has microphones for each participant. If you do have trouble finding the room, just ask a staff member to guide you. (Get off the elevator and make a couple left turns.)
If there is a lunch break at this meeting, then CORE members will meet as usual in the small room off of the cafeteria on the second floor to get lunch and discuss the meeting requested by the STRS Executive Director, Mike Nehf, with the CORE Board of Trustees and CORE officers which occurred on Thursday, December 4th. If no formal lunch break occurs, then CORE will meet briefly at 3:00 at the conclusion of the Health Care meeting.
To join CORE or to renew your annual membership please send your contribution ($10.00 suggested) to: CORE, P.O. Box 167, Wilmington, OH 45177, along with your name, address (including county), telephone number and e-mail address. Please indicate if you are a new member, and if you would like to receive CORE e-mail alerts (sent occasionally).

STRS December, 2008 Board meeting schedule

From STRS, December 2, 2008
The State Teachers Retirement Board and Committee meetings currently scheduled at the STRS Ohio offices, 275 East Broad Street, Columbus, Ohio 43215, are as follows:
Monday, December 8, 2008
...11 a.m. Staff Benefits Committee
Wednesday, December 10, 2008
...11 a.m. Final Average Salary Committee (Executive Session)
.....1 p.m. Ad Hoc Committee for Retreat Review
Thursday, December 11, 2008
.....9 a.m. Audit Committee Meeting
...10 a.m. Retirement Board Meeting
Friday, December 12, 2008
.....9 a.m. Special Meeting - Health Care Educational Session
The Retirement Board meeting will come to order at 10 a.m. on Thurs., Dec. 11, and begin with a report from Clifton Gunderson (external auditor), followed by a report from the Investment Department. The Executive Director's Report is scheduled to begin at approximately 1 p.m., followed by public participation, a report from the Staff Benefits Committee, routine matters, old business, new business and any other issues that require the Board's attention.

STRS .... the worst move and the best move according to MFFAIS

From John Curry, December 2, 2008
MFFAIS - Mutual Fund Facts About Individual Stocks
Strs Ohio
Page Created: 2008-12-02 09:01:00-08
Report Date: 2008-11-03
Current Value: $17,073,783,822
Total Performance: -8.06 %

Strs Ohio Highlights
Worst Move: Strs Ohio potentially lost $-19,635,500 on changes made with Google Inc (GOOG) buying shares when price went down.
Best Move: Strs Ohio potentially made $2,205,000 on changes made with Newmont Mining Corp (NEM) buying shares when price went up.
Good Save: Strs Ohio potentially saved $4,430,800 on changes made with Potash Corp Of Saskatchewan (POT) selling shares when price went down.
Missed Move: Strs Ohio potentially missed $-2,028,146 on changes made with Allegheny Energy Inc(AYE) selling shares when price went up.
Strs Ohio Contact Information
275 East Broad Street, Columbus Oh 43215-3771, Phone: 6142272848, Fax: , Website: Strs Ohio Symbols Strs Ohio Recent Source SEC Filings
For the entire list click on: to see all losses and gains.

Monday, December 01, 2008

Tom Curtis and Steve Buser re: PBIs, Board policy, etc.

From Tom Curtis, December 1, 2008
Subject: 120108 Curtis, Re Rich DeColibus to STRS Board....Your job is to monitor and regulate!
Stephen Buser, a recent former board member, kindly responded to my email passing along Rich DeColibus' comments, along with some of my own.
Steve is a retired OSU professor in the College of Business and a STRS stakeholder.
Tom Curtis
From Steve Buser, December 1, 2008
Subject: RE: 120108 Curtis, Re Rich DeColibus to STRS Board....Your job is to monitor and regulate!
Dear Thomas and other fellow retired teachers,
As I said at the recent Board meeting, and at the risk of incurring the wrath of many, I continue to support the PBI program on the grounds that I firmly believe it is in the best interest of us as retirees.
It is the Board, not the staff, that sets the asset allocation policy of STRS. The economy then decides if the Board policy generally will do well or poorly in the following year. It is the job of the investment staff to add value as best they can to whatever conditions they are given by the Board policy and the economy. The STRS PBI system pays out money if, and only if, staff does well in its specific assignment. For example, if the STRS return is strong in a given year because the Board puts STRS in stocks and all stocks do well, there are not necessarily any bonuses. To earn bonuses, staff would have to add value beyond the policy return, and that relative contribution is measured by an external advisor to the Board.
As is correctly noted by Rich DeColibus below [here], for the year ending June 2008 the return for the Board policy was negative. Yet staff managed to add back over $200 million to the pot. That is $200 million that would not be available for retirement or health care if staff had not done, not just a good job, but an exceptional job. Moreover, while it might not seem like it is that hard to add back a handful of basis points above whatever percentage the Board policy return nets, it truly is very hard, especially in a down market. Many pension plans and other institutional investors around the country would be envious of the STRS record and would be eager to hire away our talent.
But please do not think I am taking up the cause for staff. When I first joined the Board and saw how much STRS was spending on our investment staff, I was the Board member who asked our advisor, Russell, if we could save money by eliminating all staff and simply outsourcing the work. That is where we came up with the figures noted below that show STRS actually manages to save a lot of money by using its own staff. So the way I look at, the PBI program may have cost us $6 million, but it generated over $200 million on top of the money STRS saved by using its own staff. I just wish STRS staff had managed to add back even more value, which would have resulted in even bigger bonuses.
I can appreciate how frustrating it is to see big bonuses being paid on salaries that are already huge in relation to teacher salaries. And in a year when returns in general are negative it is even more frustrating. Nevertheless, in my opinion the worst message the Board could send to staff is that because last year the market was down, and because the market since June 2008 has been even worse, we do not care if staff manages to earn back some of the money beyond what the market provides over the rest of the year. On the contrary, I hope that the STRS staff can add back even more money than it did last year. My fear is that they will not be able to do so, in which case there will not be any PBI money paid out.
I think of the PBI system as a kin to a commission. If they don't earn it for us, we don't pay it to them. Another analogy that is appropriate, in my opinion, is recognizing the contribution of a teacher who is assigned a class of students that are two years behind grade level at the beginning of the year. If the class closes the gap and is only one year behind grade at the end of the school year, did the teacher do well or poorly? Some might argue that no teacher ever deserves recognition if his or her class ends up behind grade level. But doesn't a teacher that helps close a significant gap really have an exceptional year just the same?
Here's hoping STRS staff can help us close the gap this year. Then, and only then, will STRS staff earn bonuses this year, or any year, under the PBI program.
Steve Buser

From Tom Curtis, December 1, 2008
Subject: 120108 Curtis, Re Rich DeColibus to STRS Board....Your job is to monitor and regulate!
Hello Educators,
What Rich DeColibus states [here] more then exemplifies my continued statement that besides Dr. Dennis Leone, who objected to the PBI payments, our elected board members have absolutely no business governing what policy takes place at the STRS.
Because not one of them has any education or background in the business and financial world. Who else on earth would allow these same people to manage billions of dollars? This is truly unbelievable to me!
Until educators (OEA/OFT sheep) wise up about who they are electing to make their pension decisions, expect the underperformance we have witnessed by those people many times over the past two decades and the billions of dollars lost because of such.
The undereducated board members we have experienced for nearly 2 decades, with few exceptions, have been given to us by the OEA/OFT. However, they seem to think they are doing a good job. HOGWASH! Please read [here].
Tom Curtis

Rich DeColibus to STRS Board: Your job is to monitor and regulate -- and rein in the excesses

From Rich DeColibus, December 1, 2008
Subject: PBI
Dear Board Members,
When your committee meets to discuss the PBI program, I would request you consider a few issues (see attachment [Comments by Richard DeColibus, below]). It is an error to use Wall Street standards to determine whether the PBI program is effective, or even if we should have an investment department at all. The current economic crisis is specifically and directly the result of unregulated Wall Street greed. To give one example, Thomas L. Friedman, of the New York Times, reports a Mexican strawberry picker making $14,000 a year in California, and who spoke no English, was granted a mortgage to buy a $720,000 house. The subprime mortgage culture of unrestrained greed for profits, and disregard for any kind of intelligent decision-making, is not the culture we wish to emulate. Your job is to regulate.
What has infected STRS is internal empire building. The investment department has become an entity unto itself, one manifestation of which is the expectation of huge bonuses regardless of external events. The fiduciary responsibility of each and every STRS Board member is to monitor and, when necessary, rein in those excesses. Who among you is willing to stand before a group of teachers (whom you have the responsibility to represent) and justify $70,000 bonuses to individuals whose sole responsibility is wise investment of STRS assets in light of the fact we have now lost $30 billion?
Rich DeColibus
[Rich DeColibus is an STRS retiree and former president (16 years) of the Cleveland Teachers Union.]

Comments by Richard DeColibus
STRS Ohio Performance-Based Incentive (PBI) Program
Major Points

• The $6 million paid to 87 Investment associates in September 2008 was for the period from
July 1, 2007–June 30, 2008 (also known as fiscal year 2008). During this period, active management by these associates and external managers beat the benchmark return by +.35%, resulting in an additional $215 million for the pension fund than if assets were passively indexed.
All true. Now step back and look at it again. Beating the benchmark return by about one-third of one percent is not exactly a masterful performance. It produces a large “savings” of $215 million but fails to recognize we have lost more than a hundred times as much ($25 Billion). The $215 million “saved” looks large but isn’t compared to the total being worked with (it is less than 1% of what we lost). Put another way, if we had lost $10, our “savings” on a proportional basis would have been 9¢.
Another problem is the benchmark. It is so complicated to calculate, unless you have extensive background in banking and investment, it is impossible to verify that the benchmark itself, which is the key to all calculations with respect to the PBI program, is valid or appropriate. My sense is the benchmark is accurate and legitimate, but that is a statement of faith, not knowledge.
Finally, look at the last five words in the paragraph. The presumption is there are only two choices: have an investment department or have your assets passively indexed. There are dozens of other options, none of which are considered.
• STRS Ohio Investment associates internally manage about 80% of STRS Ohio’s investment assets; third-party studies have shown that internal management is extremely cost-effective for STRS Ohio, saving $100 million in external fees in calendar year 2007 alone.
This would depend entirely on what investment vehicle is chosen to be compared. No doubt, STRS could choose a high-fee arrangement and incur this kind of cost. It could also choose much lower-fee vehicles. The claimed $100 million it “saved” is a result of deliberately picking the most costly and undesirable options available.
• The PBI Program for fiscal year 2008 was approved by the State Teachers Retirement Board more than 1½ years ago, in April 2007. Applicable PBI payments were discussed at the August 2008 board meeting, approved by the Retirement Board at its September 2008 meeting, and paid later that month. Given the extraordinary market downturn since then, the Retirement Board has accelerated its annual review of the PBI Program usually conducted in March, and has been conducting discussions this fall.
It is well to note it is stated very clearly in the PBI policy that the STRS Board has the right to modify or eliminate the program at any time for any reason.
• The PBI Program is very transparent to both STRS Ohio members and the Legislature.
— Permitted by state statute; (It is, in other words, not illegal).
— Reviewed by the Ohio Retirement Study Council (ORSC) and the Joint Committee on Agency Rule Review (JCARR); (This is good, no problem here).
— Included as a separate line item in the budget presentation made annually to the ORSC prior to adoption by the Retirement Board; (This is also good, very good in fact)
— Communicated to the membership through newsletters, postings on the STRS Ohio Web site, messages sent to subscribers to STRS Ohio’s e-mail news service, and handouts at speaking engagements; and (whoa…sure the facts are communicated, but are also so spun as to be very misleading. See paragraph 1.)
— Included in the monthly posting of the STRS Ohio budget on the STRS Ohio Web site (both budgeted amount and actual expenditure). (This is OK).
• Including a PBI as part of an overall compensation program for Investment associates is an appropriate and commonly accepted practice in both the public and private sectors. As noted in a study of STRS Ohio’s program conducted by Aon/McLagan in March 2005, “STRS’ incentive plan for Investment Associates can be considered ‘mainstream’ relative to competitive practice.”
I dispute this. Name me another public sector agency that routinely awards its workers an average bonus of $70,000 each when said agency is in the midst of a horrible financial disaster. Wall Street, it is true, operates on the presumption everyone should get a bonus every year no matter what. We not Wall Street, nor is this PBI type of program “commonly accepted” in the public sector.
• The PBI Program is only available to eligible Investment associates; no other STRS Ohio staff members participate.
• References to a $25 billion loss reflect the period from mid-October 2007 through mid-October 2008, which covers portions of two fiscal years. Losses recorded in fiscal year 2008 are reflected in the September 2008 payments; investment results for fiscal year 2009 will be reflected in any applicable September 2009 payments.
This is true, but it is also irrelevant. In fact, STRS has seen a constant slide downward in asset value, and it continues to this day. Quibbling about in which fiscal year money was lost is of interest only to auditors and bookkeepers; it does not lessen the loss, nor excuse those who are responsible for managing our assets. How much did we lose on Enron? Was anyone ever held accountable? How much did we lose because of computer trading? How much did we lose buying Fannie Mae? At what point in time will we be back to $80 Billion in assets?
Investment Department Staffing and Compensation
80% of STRS Ohio’s investments are handled in-house by associates in the Investment Department. Currently, there are 115 associates in the department, of which 87 received PBI Program payments for fiscal year 2008.
Why didn’t the other 28 (115-87) associates get bonuses? Was it because of performance, or was it because they haven’t been employed long enough to be eligible for the bonus program? Let me ask the same question another way: Did anyone who was eligible for a bonus not get one because of poor performance?
Third-party studies have shown that internal management is extremely cost-effective for STRS Ohio, as shown in the chart below:
Savings Due to Lower Cost of Internal Management Compared to External Management Fees
Calendar Year 2007 $100 million
Calendar Year 2006 $88.4 million
Calendar Year 2005 $90 million
Calendar Year 2004 $74 million
The magnitude of these numbers depends entirely upon what assumptions are made, as noted before.
The Performance-Based Incentive (PBI) Program enables eligible Investment associates to receive an additional percentage of their base salary through a PBI payment, depending on both total investment fund performance and their individual goals over the previous fiscal year. STRS Ohio has had some form of PBI Program for Investment associates since the mid-1980s. Under the current program, total compensation for STRS Ohio Investment associates (base salary plus maximum PBI) places them in the bottom quartile (25%) of total compensation levels in the private market (i.e., 75% of private sector investment professionals can earn more). Maximum PBI payments can only be paid when positive absolute returns are achieved and the total fund return exceeds the benchmark return by 40 basis points.
Fact one: The average salary of STRS Investment associates is $150,210 and the highest is more than double that. They are not underpaid.
Fact two: Add to that a bonus of $70,000 each, and the average Investment associate is making $220,000 a year. Who else in the public sector makes that kind of money? Even superintendents don’t make that kind of money. The governor doesn’t make that kind of money. No one who ever paid into STRS ever made that kind of money.
Fact three: Since the Investment associates are in PERS, and not STRS, for retirement purposes, every penny of their bonus will count toward their Final Average Salary (FAS) and their retirement.
Fact four: Look at the last sentence in this paragraph. This is classic spin and misdirection. The important word is the first one: “Maximum”. Most of the bonuses were at the 60-98% level, and that’s what produced the $70,000 average bonus. The top ten bonus recipients all got bonuses between 93% and 98%. Sure, they didn’t get the maximum, but they did rather nicely, considering we lost $25 billion. We did not have “positive absolute returns”, nor did the “total fund return exceed the benchmark by 40 basis points” So, they didn’t get the maximum (100%) allowed, they got about 60-98% when we were losing $25 Billion. A basis point, by the way, is one-hundredth of one percent.
PBI Payments Reward Outperformance
When markets decline, the value of STRS Ohio investment assets decline. Conversely, when markets go up, the value of investment assets goes up. STRS Ohio’s goal throughout is to minimize losses and maximize returns beyond the markets’ performance. For example, in fiscal year 2008, STRS Ohio’s total fund return of –5.44% beat, or outperformed, the composite benchmark return of –5.79 by +.35%. The net value added after deducting all direct investment costs (including PBI payments) was 24 basis points or about $215 million for the year. In other words, active management by STRS Ohio Investment associates and external managers resulted in the total fund return loss being less than it would have been if the assets were passively indexed — and the pension plan benefited.
This is true if, and only if, your only alternative is a passively indexed fund. There are dozens of other ways to invest assets, a fact conveniently ignored. The validity of this paragraph depends entirely upon the assumption there are no other options available, and that is patently untrue. For example, if we had seen the coming market slide and moved into bonds, even T-notes would have been a smarter investment and we would not have lost $25 Billion. In fact, we would have made money. But, we failed to anticipate it, a $25 Billion error.
Here is a five-year history of “net value added” to the pension fund, as well as PBIs paid:
[Click image to enlarge]

The validity of these “savings” is addressed previously. The figures are presented as facts, while the reality is STRS is starting with a preconceived point of view and then adjusting the numbers to retroactively make the data fit its contention that we should have an investment department. Simply change the starting assumptions and you can move the decimal point of these “savings” anyway you wish.
PBI Process for Fiscal Year 2008
March 2007 — Retirement Board adopted the PBI Program for fiscal year 2008 (July 1, 2007–June 30, 2008).
August 2008 — The Retirement Board discussed the payment of $6 million to 87 Investment associates based on a total fund return of –5.44% that beat, or outperformed, the composite benchmark return of –5.79% by +.35%.
September 2008 — The Retirement Board approved a motion to pay this amount and payments were made to eligible Investment associates later in the month.
All true, which is exactly the problem.
Under the PBI Program criteria, no Investment associate earned a maximum payment for fiscal year 2008 performance. In addition, all PBI payments earned were reduced by 20% as the total fund had a negative absolute return. As a result, the payment of $6 million was $3.4 million less than the budgeted amount of $9.4 million and $2.2 million less than the amount paid for fiscal year 2007 performance.
Note the word “maximum” again. Let me rephrase this paragraph: “Even though we lost $25 Billion, we still paid out 64% of the budgeted bonus amount for good investment performance by our associates.” In my opinion, beating the market index (however they figure that number) by one-third of one percent is not a bragging point, and certainly does not justify a $70,000 bonus.
Point of clarification: The investment returns after June 30, 2008, are NOT factored into the fiscal year 2008 payment of $6 million, but will be used in calculating any applicable payments for fiscal year 2009 performance. While STRS Ohio’s total investment assets have dropped by $25 billion from mid-October 2007 to mid-October 2008, this period crosses over two fiscal years. There was a $6.5 billion reduction in the value of total assets from
July 1, 2007–June 30, 2008. Since July 1, 2008, through mid-October 2008, there has been an additional reduction of $18.5 billion.
I fail to see why the $25 Billion loss (now $30 Billion and climbing) spanning more than one fiscal year means anything except we lost $30 Billion.
Oversight of the STRS management is the responsibility of the STRS Board. It goes without saying this should include a healthy dose of skepticism and a willingness to intelligently question big buck decisions. Whether we need an investment department or not is one question. Whether this PBI policy needs revisiting is, in my mind, beyond question.
In a basemente deepe and darke alonge Broadstreete….
[With apologies to the late William Shakespeare]

Firste Witch
Rounde aboutte the Cauldronne goe;
Wherein the poison'd Entrails throwe.
Enronne shares into the vatte
Fannie Mae follows thatte
Tongue of Sir Dennis Leonne, may it rotte
Boil thou firste i' the charmèd potte.
Double, double toyle and trouble;
Fire burne and Cauldronne bubble.
Seconde Witch
Eye of Newte, and Toe of Frogge,
Wool of Batte, and Tongue of Dogge,
Composite Markette Indexe doth winne oure vote
We laughe at fooles who believe suche joke
Adder's Forke, and Bloated Paye
Our praises sunge by the feye
While we are only fewe in numbere
We lose billiones while you slumbere
For a Bonus of powerfulle trouble
Like a Hell-brothe, boille and bubble.
Double, double toyle and trouble;
Fire burne and Cauldronne bubble.
Thirde Witch
Scale of Dragonne, Toothe of Wolfe,
Witches' Mummy, Maw and Gulfe
We hunte oure Bonus like a Sharke,
A billione loste a mere Larke
Roote of Hemlock, yes we knowe
For the fewe that oppose us we growe
Silver'd in the Moon's Eclipse,
What care we of Markette dippes,
Make the Gruele thicke and slabbe:
Though be oure investmentes drabbe
Nay, it worries us notte at alle
We have the Boarde within oure thralle.
Double, double toyle and trouble;
Fire burne and Cauldronne bubble.

[Speciale thankes to Richard DeColibus]

Click here to view original version.

The famous Dancing Elves return!
Click HERE to see this year's rendition by your FAVORITE GUYS! (Turn up your speakers)
Sit back and let it happen. Then click on "Try Another Dance" over on the left. The elves have three more dances for you. All of this is free and available till Jan. 15.
Try this link if the one above doesn't work:
You might have to download the newest version of Adobe Flash Player to see it. It's free:
If you are using Firefox and cannot open the Dancing Elves link (and get a message to download Adobe Flash Player), try this link for help: Following their instructions to uninstall the older version of Flash Player on my computer, then installing 9.0 worked for me and took only seconds to accomplish. KBB

Sunday, November 30, 2008

Gee, performance bonuses that even Dr. Gee would love to see! OSU's bonuses can "occasionally hit 50 percent," but...STRS's top 10 all hit 93% or better!

From John Curry, November 30, 2008

Hmm...let's see what percent of the base salary STRS paid to their top 10 investors in bonuses and compare it with the "occasional" 50 percent bonus paid by OSU!

Click image to enlarge.

1. Mary Grant 96% bonus
2. Elizabeth Lynch 93% bonus
3. Matt Vulanich 98% bonus
4. John Morrow 96% bonus
5. Stephen Huber 96% bonus
6. Wm Shurman 98% bonus
7. Kevin Stahlman 98% bonus
8. James Meeth 96% bonus
9. Robert Sharpe 96% bonus
10.Alan Muench 98% bonus

Business First of Columbus - by Carrie Ghose

Ohio State University President Gordon Gee cemented his spot as the highest-paid president of a U.S. public university on Friday when trustees approved a bonus structure that bumped him past a million dollars for his first year in office.

Trustees Chairman Gilbert Cloyd was quick to point out that the school compares itself to the top private as well as public institutions.

Trustees approved boosting Gee’s base pay by 3.5 percent to $802,125 from $775,000. He’s also receiving a 40 percent, or $310,000, performance bonus for his first full year and will be eligible for bonuses of up to 40 percent in future years.

His total compensation since being hired in October 2007, including deferred pay and retirement benefits, comes to $1.4 million, and could approach $2 million this year if he earns his full bonus, Cloyd said.

“The bonus is not an entitlement,” Cloyd said. “In future years, if the performance is not meeting goals, it could be less or none.”

The bonus program can occasionally hit 50 percent for extraordinary performance or when Gee meets long-term goals.

Gee had been working under an employment agreement since last October that included the $775,000 in base pay along with $225,000 in deferred compensation that he can collect upon completing five years of service.

Private pay

The new package also includes a board-approved supplemental plan to Gee’s retirement package, funded through an Academic Excellence Fund. It would be a first for a state university to allow private contributions to go toward an official’s compensation. The fund, with a $300 million fundraising goal, is modeled after an endowed professorship and would enable Gee to get a year’s sabbatical at full pay if he stays for 10 years. It also would meet the gap from any state pension program to bring his retirement pay after that to 70 percent of his base pay upon retirement.

If Gee stays the full 10 years, the sabbatical and retirement pay from private donors would equal about one-third of his cumulative compensation, Cloyd said.

State ethics law prohibits public servants from receiving pay for official duties from anyone other than their employer. However, an endowment controlled by trustees creates a barrier between the donors and the president, Cloyd said. He would not specify if the school will seek a formal opinion from the Ohio Ethics Commission, which ruled in a similar case this year that athletics boosters could not directly pay public school coaches, but could donate to a fund controlled by the school board.

After meeting with the commission and the Ohio attorney general’s office, Cloyd said, “We’re very confident what we’re doing now will meet the letter of the law.”

Keeping up with the times

In approving the package, trustees said that the nation’s economic crisis only increases Ohio State’s need to keep a president they believe can help it keep growing in tough times.

Trustee Algenon Marbley, a federal judge, said he’d made another important vote on on Election Day on Tuesday and “I have an opportunity to vote for yet another transformative figure.”

Student trustee Jason Marion, a nonvoting member, said he came to support the package after some soul-searching in light of classmates struggling to pay tuition and his concern over inflated pay for CEOs nationwide.

“To attract the top talent ... unfortunately we have to pay the price,” he said. “I understand the league we play in.”

Cloyd said Gee had exceeded the goals he and the board set when he arrived last year, including hiring leaders for OSU Medical Center and several key areas such as investments and information technology and making progress in streamlining bureaucracy.

Gee called himself humbled and honored.

“It puts a tremendous amount of expectation on me to perform, and I accept that,” he said. “I believe very strongly in what we’re doing at this university. I believe very strongly in the progress we’re making.”

He said he still gets frequent calls from headhunters, but added after leaving Ohio State and returning once – he also was president from 1991-97 – he has no intention of leaving again.

An oldie but goodie (1998)

Top OEA staff pay outpaces teachers' 9-to-1
Posted October 1, 1998
Compensation for top Ohio Education Association (OEA) union leaders grew more than 9 times faster than the average Ohio teacher's pay between 1996 and 1997, according to the most recent data available from the U.S. Department of Labor.
With 117,423 members, [1] the OEA is Ohio's largest public employee labor union, representing teachers, librarians, bus drivers, custodians, secretaries, and food service workers. The OEA had 240 full-time employees in 1997. [2]
Staff compensation grows
While the average teacher's salary and benefits grew 2.6 percent to $49,354, [3] the top 25 OEA staff members [4] increased their cash compensation and benefits by 23.5 percent to $131,822. The average OEA staff member's cash compensation and benefits grew 7.8 percent to $91,670 in the same period. [5,6]
Additionally, the number of OEA staff members receiving over $100,000 in cash compensation and benefits grew from 9 to 28 between 1996 and 1997. [7]
Salaries of OEA professional staff (which excludes support staff, such as secretaries) grew 6.1 percent per year on average from 1993 through 1995, from $66,046 to $74,403. [8]

More union dues go to staff
While Ohio teachers and other members of the OEA paid $27,416,231 in union dues in 1997, the percentage going toward cash compensation and benefits for OEA staff grew from 76.5 percent in 1996 to 81.5 percent in 1997. In 1997, $22,330,760 went to OEA staff salaries, expenses, and benefits, up 9.9 percent from the previous year. [9]
[1] Education Intelligence Agency, Piles of Wealth: Teacher Union Staff Compensation (Carmichael, California, June 1998), p. 17, citing Report Form LM-2, "Labor Organization Annual Report," U.S. Department of Labor, Office of Labor Management Standards (Washington, D.C.: U.S. Government Printing Office, 1997).
[2] Ibid, and Education Intelligence Agency, Teacher Union Staff Compensation (Carmichael, California, June 1997), p. 17, citing Report Form LM-2, "Labor Organization Annual Report," U.S. Department of Labor, Office of Labor Management Standards (Washington, D.C.: U.S. Government Printing Office, 1996).
[3] Based on salaries reported by the National Education Association, 1997 (
[4] Education Intelligence Agency (June 1998), p. 17. During 1997, the highest paid (in gross salaries and expenses) OEA staff members, lobbyists, and labor negotiators/political organizers ("UniServ consultants") were:
1. Michael Billirakis president $166,733
2. William P. Sundermeyer executive director $164,347
3. William Dorsey secretary-treasurer $148,208
4. Gary Allen vice president $145,988
5. Benjamin Gerber UniServ consultant $145,112
6. Edward Spiezio UniServ consultant $144,309
7. Dennis Coughlan UniServ consultant $140,990
8. William Canacci UniServ consultant $140,537
9. James Romick UniServ consultant $140,241
10. Alan Adair, Jr. UniServ consultant $137,906
11. Dorothy Fay UniServ consultant $137,590
12. Thomas Scarpelli UniServ consultant $137,256
13. Charles Williams UniServ consultant $134,095
14. Mary Jo Shannon Slick UniServ consultant $132,971
15. Michael Shanesy UniServ consultant $131,912
16. Donald Looker UniServ consultant $125,058
17. Richard Bourgault executive director $120,608
18. Barry Bartelt computer services consultant $119,907
19. Richard Baker magazine editor $119,082
20. Jerome T. Rampelt director $116,272
21. Christopher Turner director $115,647
22. Daniel Burke computer services consultant $113,305
23. Jane Currey UniServ consultant $107,973
24. Dennis M. Reardon executive manager $104,786
25. Ellen Currie director $104,705
[5] Ibid.
[6] Cash compensation includes salary and expenses and excludes benefits. Staff benefits include group health and life insurance, a pension, postretirement health care, and other unspecified benefits.
[7] Ibid. The increase in employees earning more than $100,000 is due to a significant increase in salaries for UniServ consultants from 1996 to 1997. The OEA?s UniServ consultants, who have their own collective bargaining agreement with the OEA, went on strike against the union, charging unfair labor practices. The settlement of the strike resulted in higher UniServ salaries and benefits.
[8] Ibid.
[9] Ibid.

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Another oldie: OEA and 40 "take backs" -- from its own staff, no less!

From, December 14, 1998
The Buckeye Institute for Public Policy Solutions, an Ohio think tank featured prominently in NEA's conspiracy report, issued a study that revealed details of the compensation afforded to staffers of the Ohio Education Association. The Buckeye study prompted OEA President Mike Billirakis to send a letter to local affiliate presidents to help them "answer members' questions." After claiming the study was trying to "drive a wedge between members and staff," Billirakis wrote that members "have been willing to provide the compensation necessary to attract and retain highly-skilled, highly-specialized people."
Billirakis' defense of staff perks flies in the face of his views of just a year ago. In bitter negotiations with the OEA staff union, Billirakis reportedly presented a contract offer with 40 "take backs" then walked away from the table. Billirakis offered one-time bonuses (teachers' unions routinely reject one-time bonuses to force permanent increases in the salary structure). "It was the most amazing document I have ever read — considering it was a proposal by a union to its staff," said one Ohio staffer. Another staffer said, "Management's line has been that ‘it's taking back the association from staff.'" The staffers went on a month-long strike, picketing OEA headquarters the entire time and inspiring a series of embarrassing newspaper stories. Sounds like Billirakis is the wedge that's calling the kettle black.
Larry KehresMount Union Collge
Division III
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