Dennis Leone: Summary of February 19-20, 2009 STRS Board meeting

STRS Update
Board Meeting on February 19-20, 2009
By Dennis Leone
STRS Retiree Board Member

The truth is the truth. A number of important things occurred at the last board meeting. It was announced that total assets at STRS were $49.7 billion as January 30, 2009 (down $30.4 billion since 10-31-07), and our stock return for the first 7 months of fiscal year 2009 has been -27.7%. I should note that when our assets were calculated as $49.7 billion on January 30, 2009, the DOW closed at 8,0001. As of yesterday, February 24, 2009, the DOW stood at 7,114. I state this to illustrate that our total assets likely are now below $47 billion, which means that the total assets at STRS have dropped in excess of 40% in the past 16 months. This is far worse than what STRS experienced in 2000-2002.

What does this mean? Deputy Executive Director Bob Slater announced at the board meeting on 2-20-09 that while pensions of current retirees are secure for the immediate future, the pension obligations of future retirees may not be so secure in the distant future – if the stock market fails to improve. He said it was not possible to offer specific dates, just like it is not possible to predict if the stock market will improve. I will take this a step further, from my perspective: It should go without saying that if the stock market continues to drop significantly, I believe that pension checks of current retirees and future retirees are not secure. I realize that as recently as this past November, official STRS communications said that pensions of current and future retirees were secure. I said at that time that such communications were improper and unrealistic, and I feel that way even more so now – given Mr. Slater’s announcement. It was plainly wrong for STRS communications in the immediate past to portray an “all is fine” picture to the membership.

Mr. Slater’s announcement will result in the board developing contingency plans in the coming months to deal with our potential future financial realities. Contingency plan discussions occurred about 18 months ago, but stalled. Everything will be on the planning table to deal with this matter. It also was announced by the STRS staff that the Health Care Stabilization Fund (HCSF)will run out of gas in 9 years, if not sooner. (The future of this fund assumes an annual positive stock market return of between 5% and 8% for the fund to last another 9 years. I do not believe this will happen. To extend the life of the HCSF, the board will be meeting soon to consider how to cut $83 million in the STRS health insurance plan. A two-hour meeting was held on February 20 to begin discussions on cuts to be considered. As is the case with steps that will be taken to preserve future pensions, everything will be on the table as it pertains to changes that will have to occur to preserve the HCSF.

While the above news is not good, I am pleased to report on the following actions that occurred at the board meeting on February 20, 2009:

1. The board voted 9-0 to implement an immediate base compensation freeze of all STRS employees. I recommended such a freeze in November, but my motion died due to a lack of a second, then was referred to a sub-committee for study. This occurred in November after Executive Director Mike Nehf said he was opposed to STRS staff receiving a wage freeze. At the board meeting on February 20, 2009, however, Mr. Nehf recommended that the board approve the wage freeze, which we did.

2. The board voted 10-0 to institute “head count” freeze – meaning that STRS will not employ more than the current 605 employees, until further notice. This also was recommended by Executive Director Nehf. I would have preferred a staff cut, but there would not have been board support for such.

3. The board voted 7-3 to raise the work week for all STRS employees from 37 ½ hours per week to 40 hours per week, effective January 1, 2010. It deserves noting that Mr. Nehf recommended the change, but his recommendation included a July 1, 2010 start date. Teacher board members Tim Myers, Conni Ramser, Mark Meuser, and Mary Ann Cervantes advanced a substitute motion to delay the start date to July 1, 2010. This substitute motion was defeated 6-4. Voting no on the final motion to institute the change on January 1, 2010 (which was approved 7-3) were teacher board members Myers, Ramser, and Cervantes. Board member Tai Hayden and I would have preferred an even earlier state date for the change, but there would not have been support for it. The change to a 40-hour work week should have occurred years ago, in my opinion.

4. The board voted 9-1 to formalize language from last month to institute a suspension of bonus checks of investment staff on February 1, 2009, and restrict the eligibility of bonuses during future “down” years in the stock market. Teacher board member Mark Meuser – who will be board chair on September 1, 2009 – voted no on the clean-up language. More important, however, was the fact that a board consensus expressed support for the Salary/Benefits Committee to meet within the month to consider additional restrictions in the bonus plan for investment plan. I have said for months that there is a fundamental flaw in the STRS bonus plan for investment staff. Here is why: If we end the fiscal year, for example at $47 billion in assets, then we increase to, let’s say, $48 billion in fiscal year 2010, then the investment staff will receive gigantic bonuses because total assets increased. Never mind that we’d be nowhere close to where we were 6 months ago, or 12 months ago, or 18 months ago. Board member Craig Brooks, who represents the Speaker of the House and the President of the Senate on the board, presented preliminary suggestions that supported my position of investment staff NOT receiving full bonuses when such happens. This will be considered further soon. I appreciated the willingness of Mr. Brooks to step-up-to-the-plate on this matter. The concept was getting nowhere when I was suggesting it previously.

5. The board voted 9-1 to give STRS staff the day after Thanksgiving off in the future as another holiday. I voted no on this due to the fact that the staff received this day off with pay in November, which – in my opinion -- was in violation of page 53 of the Board Policy Manual (which says that no staff benefit improvements can occur with board approval). My fellow board members supported the change because former executive directors Damon Asbury and Herb Dyer also gave staff the day off as well. Their yes vote was continue with past practice. I would have supported the change had it been handled differently in 2008 and had the change been brought to the board for a vote in advance.

I also brought up at the meeting on February 20, 2009 that public statements by teacher board members Tim Myers and Mary Ann Cervantes in the Columbus Dispatch on 1-17-09 were incorrect. Both said in the newspaper article that when the board voted on 1-16-09 to suspend the bonus checks for investment staff (to be effective on 2-1-09), that the board was “breaking a promise.” I publicly read a letter that all investment staff received from the executive director before the fiscal year began (which all board members received a copy of previously) which said the board could modify or terminate the bonus plan in the future for any reason. In other words, the board did NOT break a promise to the staff, period.

The coming months will be challenging, for sure.

Dennis Leone
STRS Retiree Board Member
2/24/09