Dennis Leone: Answers for Linda Meinelt and a closer look at the bonuses

From: Dennis Leone, April 4, 2009
Subject: RE: Questions for you

Yes, it actually happened, somewhat, at the last board meeting, on Friday, March 20. Here is how it played out: Even though I originally pushed for the bonus suspension vote in January – which also includes a provision restricting bonus potential in future “down” years – I told the board I felt the adopted plan was flawed because it did not contain a minimum threshold that our assets needed to return to BEFORE bonuses could be awarded in the future. In other words, as approved in January, if we end the current fiscal year with $50 billion in assets, the STRS investment staff would qualify for huge bonuses in fiscal year 2010 if our assets climbed back to just $51 billion. (Never mind that we would be nowhere close to the $70 billion in assets that we had at the beginning of the current fiscal year). I was alone in this thinking for several months.

Then Craig Brooks stepped up with a motion at the 3-20-09 board meeting, which I seconded, that would require our assets to return to at least $65 billion for staff to qualify for their full bonuses. The motion stated further that for every $1 billion in assets we have under the $65 billion threshold, staff members will receive a 3% cut in their potential bonuses. This means that if our assets stay at $50 billion in FY 2010, staff would receive a 45% cut in their bonuses. While this plan is not exactly what I had in mind, it is much better nonetheless. Voting yes for the motion were Brooks, Leone, Burch, Hayden and Puckett. Voting no were Ramser, Meuser, Myers, Cervantes and Chapman. It failed 5-5. I left the meeting at that point in disgust. Mike Nehf, before the 5-5 vote, told the board that the staff could live with the plan, and urged approval. The board said no with its 5-5 vote. A break was called and I left for the parking lot. During the break, private conversations apparently occurred between Mike Nehf and certain board members which resulted in the no voters having a change of heart. I received two cell phone calls as I was getting in my car, urging me to return for a “reconsideration” vote. I returned. The new vote was 9-0-1, with Ramser abstaining. (Ramser’s abstention, in my opinion, is chicken-hearted – as it was when she abstained on the original bonus suspension vote in January.) Those who changed their no vote to yes on 3-20-09 said that while they still basically opposed the motion, they would approve it because Mike Nehf said he could live with it. A final vote on this matter will occur at the next board meeting.

The change described above is as far as this board will go, in my opinion. A stronger plan, which I still believe is needed, would require legislative approval. The board majority accepts the “value added” notion that our investment staff members deserve bonus checks even if their accounts lose money – as long they beat the so-called Wall Street “market.” STRS investment chief Steve Mitchell illustrated this point of view this last month when he said the board should be pleased that while our returns for fiscal year 2009 are -32.2%, the average market returns are -32.3%. In other words, since we are “beating the market,” they deserve bonus checks. It is plainly ridiculous and out-of-touch with reality. I argue that bonuses should not occur unless the absolute return increases at STRS. If staff members individually beat the market (while we lose money overall), then they are earning their wonderful base salary of over $150,000 and their spectacular benefits. They just should not be getting a huge bonus on top of that. No one is suggesting, heaven forbid, that the $150,000 average base salaries of investment staff members be reduced. They get that no matter how poorly they do. This argument surrounds the question of BONUS checks on top of their base salaries.

Regarding the latest on our stock market returns, here is what I have been told: As of March 31, our total assets stood at $47.8 billion, which is a 3.6% increase over last month. For the first 9 months of the current fiscal year, our returns are -29.7%. Our assets stood at $70.1 billion at the beginning of the current fiscal year. We peaked at $80.1 billion on October 31, 2007 – which is 17 months ago. Mike Nehf and Steve Mitchell have said they believe our assets will be back up to $50 billion by June 30.

Dennis Leone

From Linda Meinelt, April 3, 2009
Subject: Questions for you

Dennis,

Do you intend to introduce any type of further adjustments to the bonus program, considering what is happening in other states?

Also, have you received the latest investment balance for the end of March? I wrote Steve and asked him for it; however, he said that he did not feel he should reveal the figure to me until the Bd. members knew it. He said I should email him again midweek. Figured if you knew, it would save him getting another email from me.

Thanks,

Linda Meinelt