Mary Ellen Angeletti: STRS Board Retreat, Day 1

STRS Retirement Board Retreat
Day 1, Thursday, Jan. 29th, 2009
Location: STRS Bldg. 7th Floor

A.M. Session: Welcome and Opening Comments All Board members were in attendance except for Tai Hayden and Steve Puckett. Staff members who are in charge of departments were also in attendance as well as legal counsel and the Executive Director, Mike Nehf.

The Retreat Facilitator was Ed Gaydos (who had participated in this capacity for past STRS Retreats) who provided the agenda overview and explained the ground rules for the retreat.

The Retreat agenda began with Ed Gaydos leading a discussion of Board governance principles. This was a refresher overview of a Board member's job in light of governance structure and roles, of competencies and personal attributes, and of delegation of responsibilities. In other words, what is a Board member's job, what do Board members need to know, and how should Board members spend their time. The governance structure was explained as a pyramid with the Board at the top, the Executive Director in the middle, and the STRS staff at the base. At this point, Dr. Leone made the point that he felt the stakeholders (like stockholders) should be at the top of the pyramid, especially now when so many boards of trustees (Wall Street, other businesses) are experiencing fraud, greed, illegal use of funds, etc.

The roles of the Board were explained as having three parts:
...1. Long-term strategy involving a sustainable fiduciary plan with 1 to
...3 year objective, and which includes the welfare of ALL members.
...2. Executive director
...3. Oversight which includes policy and metrics (looking at the numbers).

The roles of the Executive Director were:
...1. Manages the operation
...2. Representative to the stakeholders
...3. Link between the Board and the staff

The roles of the STRS staff were explained as:
...1. Executes daily operations
...2. Monitors legislative, economic and professional issues
...3. Advises the Executive Director and the Board

It was pointed out that the STRS Board member's role receives the greatest impact of decisions made. The staff 's role provides technical expertise, knowledge of the operation, and time in operation. The Executive Director's role encompasses all of these efforts.

Competencies and personal attributes were described as what Board members need to know (the "what" and "how" of competent work conducted in a culture which provides results). What do Board members need to know and how to conduct themselves. The "what" was described as having a basic understanding of:
...1. modern portfolio theory (asset allocation)
...2. diversification principles
...3. basic financial analysis
...4. fundamental accounting principles
...5. basic features of STRS Ohio benefit programs Board members were reminded that they cannot delegate basic competencies since they come with the job. They are the job.

The "how" was described as a positive work culture which is created when trustees are . . .
...1. loyal to members as a whole
...2. inquisitive
...3. willing to devote time and attention
...4. civil and constructive in debate
...5. cooperative in solving problems

Delegation of responsibilities was described as:
...1. putting work where it can be done most efficiently and effectively
...2. ensuring that the Board can focus on its primary role

Gaydos emphasized that Board time priorities are driven by its two major obligations:

...1. welfare of members as a whole
...2. fiduciary soundness of assets He concluded with the reminder that governance means:
......a. know the job
......b. do the job
......c. play nice

Next on the agenda was Board governance training led by Ian Lanoff of the Groom Law Group which represents public employee pension and welfare benefit plans to corporations, institutions, labor unions, etc. He is fiduciary counsel to several giant public employee pension funds.

He explained that the basic fiduciary rules found in the STRS legislation is derived from the federal Employee Retirement Income Security Act of 1974 known as ERISA. He reviewed the wording of 3307.15 explaining that "prudence" means "common sense". There is a "Prudent Expert Rule" that says that when making investment decisions for multi-billion dollar funds, a fiduciary is held to the standards of a prudent individual with experience managing assets of the same magnitude. To carry out his/her duties prudently, a fiduciary "has a duty to seek independent advice where he/she lacks the requisite skill and experience".

Lanoff added that under the law, a Board member must be able to defend himself/herself for his/her votes. The Board member is liable. He added that if a Board member votes "no" on an investment vote, and the majority of the Board votes "for" it and there are problems as a result of the vote, ALL Board members are liable. While a fiduciary may rely on advice of independent experts, he or she may not blindly do so as the fiduciary is not relieved of the obligation to exercise his/her own judgment in making a decision.

For Board members to gain more knowledge, Lanoff suggested obtaining training and complimented OSU resources. He reminded Board members about the stringent laws of accepting gifts from vendors and suggested Board members have STRS pay for expenses. He emphasized that Board members cannot delegate authority to the STRS staff, to consultants, or to investment managers/advisors. Board members must understand decisions.

Mr. Lanoff reminded Board members that the U.S Supreme Court concluded that while performing trust business, they may wear only one hat - as trustee - and may not at the same time wear a second hat as a representative of the union or employer who appointed them. Examples were:
...1. No fiduciary duty is owed to a group of union members or constituents.
...2. No fiduciary duty is owed to participating employers
...3. No fiduciary duty is owed to the Legislature
...4. No fiduciary duty is owed to the Governor
...5. No fiduciary duty is owed to the taxpayers

This governance training session concluded with a discussion of current problems affecting public funds such as divestiture, overseas investments, alternative investments, changing investment approaches, new ways to look at risk, etc. Also discussed was what costs have been found to be unreasonable such as the bonuses for the investment staff. It was mentioned that the Board has not received much guidance on what is reasonable & unreasonable costs. Dr. Leone cited the example of eight STRS employees who were laid off last year and were given $8,000. each and free health care for these employees and their families. Bill Neville, STRS counsel, said that the $8,000. was a severance payment and that the 8 employees paid for their own health care. Dr. Leone said, No". It was also mentioned that these employees agreed not to sue STRS.

Lunch break followed. Dr. Puckett arrived for the afternoon session and Dr. Leone had to leave.

Following lunch, the agenda resumed with Terri Bierdeman (director of Governmental Relations for STRS) and Marla Bump (assistant director of Governmental Relations) providing an overview of current approaches to state and federal relationships, specific programs and their estimate of what is on the horizon. Their objectives were described as:
...1.Keeping the Ohio Revised Code 3307 and the Board administrative rules current
...2.Keeping the Retirement Board, Executive Director, and staff informed of political issues, trends, and legislation
...3. Advancing the Retirement Board's legislative policy initiatives
...4. Fighting policy & legislative initiatives harmful to STRS Ohio
...5. Maintaining positive relationships with legislators, policymakers, and coalition network
...6. Providing timely services to stakeholders
...7. Improving departmental efficiencies.

Terri and Marla emphasized particular challenges to these objectives:
...1. term limits of legislature & staff
...2. lack of positive issues (tight budgets)
...3. current crisis (state/federal budgets)

How to address these challenges:
...1. educating the many federal coalition associations
...2. orientation sessions by the 5 pensions funds for legislators explaining defined benefit, divestiture, etc.
...3. scheduling appointments for personal meetings with every legislator
...4. linking key relationships
...5. positive communications which emphasize that our defined benefit plan is a good one and we want to hang on to it . . . using our HCA (health care advocates) to help with this

...6. providing legislative updates to promote awareness to membership and to engage membership

...7. positive communications are MOST important

Next Aristotle Hutras, director of the Ohio Retirement Study Council, provided a legislative update. He emphasized that the present climate is tough and will become tougher. He warned that the threat to the defined benefit is the defined contribution. He explained that the defined contribution would solve a lot of the legislator's problems. He said ballot issues are also an ongoing threat. He also reminded us that the ORSC has always been concerned with the next GENERATION rather than the next ELECTION. New members of the ORSC are to be announced in a week. Regarding the pros and cons of re-introducing HB 315, he said:
...1. he thinks we should re-introduce it
...2. the 14% which the school boards pay could be reduced substantially by substituting the defined benefit plan with the defined contribution plan. . . this is a real threat
...3. retirees must be patient and allow the STRS pension fund to return to higher levels or increase the years of smoothing

Following a break, Mike Nehf, Executive Director, explained a model for fiduciary and financial contingency planning for the Board's consideration. This model was the result of review of minutes from previous Board and staff discussions. These discussions were categorized around 3 main areas: Assets, Liabilities, and Operational Factors. It was also noted that at the 2007 Retreat, contingency planning was an agenda topic and during that discussion, it was noted that a catastrophic event cannot be timed. Once such an event happens, a large and immediate market reaction takes place rendering any investment contingency plan moot. Implementing a conservative investment asset allocation in anticipation of a catastrophic event would be very costly for STRS because of the opportunity cost of being "out of the market". It was again reiterated that a diversified portfolio provides the best long-term contingency plan for short-term market fluctuations.

The proposed contingency planning process model would work as follows:
...1. An incident/trend is identified to the Board which is then discussed in an open forum.
...2. The Board determines if action or additional discussion is required.
...3. At the direction of the Board, a Review Team (or committee) is assembled to study the incident's/trend's impacts.
...4. A report is developed & presented to the Board as a whole at a formal meeting.
...5. The Board accepts or rejects the report & communicates a decision. This proposed contingency planning model was positively received by the Board members.

The session ended around 4:30.