Active teacher to Laura Ecklar: I see a lot of spin and very little common sense

Now this response makes "sense to me." Thanks [~~~] for clarifying things for Ms. Ecklar.

Jim Stoll

From [Active teacher, name withheld], April 16, 2009
Subject: Re: Response to E-Mail

Ms Ecklar,

Thank you for your response. From my vantage point I see a lot of spin and very little common sense. Freezing salaries through 2010 is not overly impressive. Most of us in the real world have experienced wage freezes from a number of years already. Comparing compensation practices of public vs professionals is at the center of my anger in that this culture of rewarding without producing results is what has gotten our entire country into the mess it is in.

What I know is the STRS has lost a tremendous amount of money through the investments that they have made. I could care less if that loss is more or less than the average - it is still a loss and that will directly impact on my retirement. You can spin it all you want, but when your job performance results in significant losses you don't deserve double digit raises and any type of bonus. What happened in 2004 or how the investment set up at STRS saves money is irrelevant. The bottom line is we didn't do very well with our investments in the past year..

This concept simply parallels the AIG fiasco. How in the world can AIG take billions of tax payer money to stay afloat and then turn around a reward executives with bonuses? When will common sense ever enter the picture in the investment world??

It really should be a very simple concept - if you perform well you get rewarded and when you don't perform well you don't get rewarded.

Rewarding ANYONE at a time when retirement benefits are at risk is inexcusable. Please make sure Mr. Nehf knows how I feel.

[~~~]

From Laura Ecklar, April 16, 2009

Dear [~~~],

Our executive director, Michael Nehf, has asked that I respond to your recent e-mail regarding eliminating bonuses for our Investment Department staff. As you will read below, based on recent actions by the Retirement Board, base salaries for all STRS Ohio associates have been frozen through June 30, 2010, and Performance-Based Incentives or PBIs have been reduced. Please know that we recognize that there is a significant difference between compensation practices and levels for most public educators versus investment professionals. Further, we know that it can be difficult to understand how investment staff could be rewarded for their work when the overall value of investments has declined. So, if I may, I would like to share some additional information with you about our PBI Program for eligible Investment Department associates and other staff compensation. As you read through this, I hope you will see why we have a PBI Program, as well as get a sense of the changes our Retirement Board has recently made in compensation, not just for investment staff, but for all STRS Ohio staff, in recognition of the current economic times.

In managing our billions of dollars in investments, STRS Ohio has three basic choices. We can hire outside investment managers, we can do much of the investing "in-house," or we can purchase only passive investments, which require minimal staff. Though we use all three methods for portions of our investments, associates in the Investment Department handle about 80% of STRS Ohio's investments in-house.

STRS Ohio's members have been well served by the system's dedication to managing a large percentage of the system's assets internally and actively. STRS Ohio benefits from significant cost savings each year due to the lower cost of internal management by STRS Ohio associates compared to paying fees to external money managers. The savings from internal management totaled $100 million in calendar year 2007 alone. Additionally, for the time period of July 1, 2004, through Jan. 31, 2009, the net value added from active management after deducting all direct investment costs, including earned PBI payments during that period, was .65% or about $1.8 billion. This represents the additional value brought to STRS Ohio through active management by STRS Ohio associates and external managers, above and beyond passively indexing system assets.

To compensate these Investment associates, the Retirement Board uses a combination of a base salary and variable pay (pay that is "at risk"). Eligible Investment Department associates can receive an additional percentage of their base salary through a PBI payment, based on total investment fund performance and their individual goals over one- and five-year periods compared to the respective benchmark.

The Retirement Board's goal is to maintain total compensation for eligible Investment Department associates (base salary plus maximum PBI) at the bottom quartile (25%) of total compensation levels in the private market (i.e., 75% of private sector investment professionals can earn more).

The PBI payments made in September 2008 included our last fiscal year, which ran from July 1, 2007, through June 30, 2008. During that time period, the total investment fund return was a negative 5.44%. However, the benchmark return was a negative 5.79%. When markets decline, the value of our investment assets decline. Conversely, when markets go up, the value of our investment assets goes up. Our goal throughout is to minimize losses and maximize returns beyond the markets' performance.

So, in the case of fiscal year 2008, our total fund return beat the composite benchmark return and the value of investment assets stood at $70.3 billion. Active management by our STRS Ohio Investment Department associates and external managers resulted in an additional $215 million beyond benchmark returns for the investment fund, and your pension plan benefited. That is why PBIs were awarded.

If you still have your October 2008 STRS Ohio newsletter, you will see an article and accompanying chart that shows the performance of each asset class against its benchmark, resulting in the net value added that I refer to above. (The October newsletter can also be accessed via the STRS Ohio Web site at www.strsoh.org.)

As you know, the global markets have experienced a rapid and significant downturn since last summer. For STRS Ohio, this has meant a drop in the value of our investment assets by more than $22 billion since July 1, 2008. As of March 31, 2009, the estimated market value of investment assets is $47.8 billion. And, it has resulted in the Retirement Board examining whether current compensation levels for Investment associates should be maintained during this period of significant loss in asset value. During the last several months, the board has made changes to the PBI Program that include:

* Suspending the current PBI Program for 2009 as of Feb. 1, 2009. With this suspension, calculations for any earned PBIs for this fiscal year will generally be based upon the performance results for the first seven months of the year, and the longer five-year period (the board will not be voting on these PBIs until September 2009); and
* Reducing any earned PBIs for the 2010 PBI Program by up to 60% if the total STRS Ohio investment fund has a negative absolute return.

Several weeks ago, the board approved a further change to the 2010 PBI Program that states if STRS Ohio's total investment fund earns a positive absolute return, but the total market value of investment assets is less than $65 billion at June 30, 2010, then each PBI payment will be reduced by three percentage points for every $1 billion (and fraction thereof) of the shortfall from $65 billion. At its April 2009 meeting, the board will be presented with the final fiscal year 2010 PBI Program document for approval.

The board also implemented a salary freeze for all associates in February that extends through June 30, 2010, as well as an associate head count freeze. This will reduce expenditures in the coming fiscal year by about $2 million.

The March STRS Ohio newsletter includes a lengthy article about the impact of the global market downturn on STRS Ohio and its impact on our long-term pension fund liabilities and our health care program. As a result, the Retirement Board has begun a long-term contingency planning process to address these issues.

It is absolutely imperative that STRS Ohio watches every dollar that it spends, whether markets are up or down. However, just reducing operating expenditures cannot solve the long-term issues we face in funding pensions for future generations of teachers and a viable health care program. We are in the midst of challenging economic times. We will continue to do our best to help members understand where their dollars are being spent - and why.

We hope, in turn, that you will continue to read our newsletters, visit our Web site and register for our e-mail news service to keep abreast of your board's discussions and decisions.

I apologize for this lengthy response, but your comments are important to us and I wanted to make sure you had complete information. Again, thank you for writing and sharing your viewpoint with us.

Laura Ecklar

Director, Communication Services