Ralph Graham to Mark Meuser: Now they have negative results and shouldn't be rewarded

From Jim Stoll, April 26, 2009

Mr. Mitchell, Mr. Nehf, and STRS Board,

Here is an email received today that again sums up the feelings of teachers Statewide and members who pay into the system. After my email to you on Friday, just wanted to pass along an example of the HUNDREDS of emails which I, like you, have received. Mike, have you shared the bonus emails with Mr. Mitchell and his staff??

Continued defense of this plan by Mr. Myers, Mr. Meuser, Ms. Ecklar, Mr. Nehf and others at STRS is alienating and really upsetting your OWN constituency from Superintendents on down. You are losing credibility every time a response like this goes out. If Board members are going to respond themselves they should at the VERY LEAST say that they are responding "FOR THEMSELVES AND NOT SPEAKING FOR THE BOARD AS A WHOLE."

Regardless, I hope you will move quickly to "ELIMINATE" any bonuses for this year. It isn't going away and is becoming a complete mess for the leadership at STRS.

Jim Stoll

ps. I've never met, nor spoken with Mr. Graham in my life, but certainly look forward to it someday.

Ralph Graham to Mark Meuser, April 26, 2009
Subject: Re: [QUAR] RE: Bonuses

Mark, I'm glad you took the time to respond to my concerns. I would like to address some of the points you have raised and I have done so (IN CAPITAL LETTERS) next to your remarks.

From Mark Meuser, April 24, 2009
[Capital letters: response from Ralph Graham]

Dear Mr. Graham,

Thank you for your recent e-mail. I have received a number of e-mails expressing concern over STRS investment bonuses, and I want to take this opportunity to clarify a few points for those who took the time to write.

I am a math teacher with 37 years experience in the classroom. Like you, I have never received a bonus nor do I make the kind of regular salary that many of our investors do. Even so, I have been a proponent of Performance-Based Incentives. This program has, over the years, been instrumental in adding value to the system. I THINK WE ARE IN AGREEMENT ON PERFORMANCE BASED INCENTIVES. INVESTMENT PROFESSIONALS THAT PERFORM WELL SHOULD BE REWARDED.

I would like to comment on some common misunderstandings that I have seen expressed in e-mails.

Misunderstanding # 1: The STRS staff lost our members billions of dollars.

The investment staff cannot realistically affect the performance of the fund by any more than about one half of one percent of our assets. Though this is a tiny fraction of the assets, it can amount to tens of millions of dollars. Active trading by our investors did not cause the system to lose the billions that it did. Those losses were the result of the extreme bear market and the subsequent economic downturn, which affected all segments of the economy. That downturn was not controlled by any investor. WITHOUT ASSIGNING BLAME - LET'S JUST AGREE THAT STRS INVESTMENTS HAVE LOST A CONSIDERABLE AMOUNT OF MONEY INTHE LAST YEAR AND A HALF.

Misunderstanding # 2: STRS Investors are being rewarded for poor performance.

In fiscal 2008, our investors beat the total fund benchmark (the performance of an index fund) by $215 million. What this means is that if we had put our money in an index fund instead having our own employees invest it, we would have been $215 million poorer. In pursuit of that $215 million, we paid about $6 million in incentives. The whole concept of incentives is a no-lose deal for the board. If our investors beat the benchmark by a predetermined amount, they earn an incentive. If they don’t beat the benchmark, they don’t get the incentive. Thus, the excess earnings above benchmark pay for the incentives. THIS IS WHERE WE HAVE A BIG DISAGREEMENT. TOTAL FUND BENCHMARK IS A RIDICULOUS CONCEPT. THE FUND LOST MONEY. INVESTMENT PROFESSIONALS SHOULD NOT EXPECT, NOR SHOULD THEY BE GIVEN BONUSES WHEN THE FUND LOSES MONEY. THE FACT THAT IT WASN'T AS BAD AS IT COULD HAVE BEEN IS AN ASININE CONCEPT FOR BONUS PAY. THAT WOULD BE LIKE SAYING - ONLY 25% OF THE STUDENTS IN YOUR DISTRICT PASS THE OGT, BUT OTHER DISTRICTS ONLY PASSED 20% SO WE ARE GOING TO REWARD YOU EVEN THOUGH 75% OF THE STUDENTS FAILED.

Misunderstanding # 3: The retirement board has recently increased the investors’ salaries.

This is not true. It is true that one year ago the board voted to bring total investment salaries (base salaries plus maximum potential incentive) up to the bottom 25th percentile of private investment firms. That was an effort to make investment salaries more competitive and was part of the overall operating budget for fiscal year 2009.

In the wake of the economic downturn, however, the board did a number of things. It suspended investor incentive payments from January through June of 2009, and it put restrictions on future incentives. It also froze salaries for all STRS employees for the remainder of this fiscal year and for fiscal 2010. These measures are more than any other Ohio retirement system has done thus far. If we reduce our investors’ total salaries (including incentives) by too much, we run the long-term risk of losing the best talent (botprospective) to systems or brokerage firms that have not instituted such cuts. THE LAST SENTENCE IS A MENTALITY THAT NEEDS TO BE CHANGED. IF WE DON'T CONTINUE TO PAY THEM THEN WE WILL LOSE THEIR TALENT. YOU STATED EARLIER THAT: "The investment staff cannot realistically affect the performance of the fund by any more than about one half of one percent of our assets." SO WHY SHOULD WE CARE IF WE LOSE THEM?

We have three choices in managing our assets. We can manage them internally, which is what we do now for 80% of our assets. We could put the majority of our assets into index funds, or we could hire external managers. For the last six years, our investors have substantially outperformed index funds, and external managers would charge much more for their services than what we pay our own investors with no guarantee of any better performance. THIS ISN'T ABOUT THE PAST 6 YEARS. I'M SURE THEY WERE REWARDED DURING THAT TIME FRAME. NO PROBLEM - THEY PRODUCED POSITIVE RESULTS AND THEY WERE COMPENSATED. NOW THEY HAVE NEGATIVE RESULTS AND THEY SHOULDN'T BE REWARDED. Consequently, I believe that we should continue to invest using our own staff. This will remain a viable option, though, only if our staff continues to outperform the benchmark. ENOUGH OF THE "BENCHMARK".

My view is that the real bottom line is not how much money we spend on incentives. The real bottom line is the monetary value that our investors add to the system. No one relishes paying high salaries, but outperforming the benchmark by directly investing in the stock market requires specialized expertise. That expertise can be expensive.

The market will eventually recover. When it does, and even in these difficult times before that happens, I do not want to trust our assets to below-average investors. How many of us would go to a hospital for an operation and insist on using the cheapest, least experienced doctor? I realize that my views may not be popular with some STRS members. However, it is my fiduciary duty to the system and its members to act and vote in such a way as to most positively impact the system’s assets. That is why I am not in favor of further cuts to the salaries or incentives of the STRS investment staff. WE DISAGREE HERE!

Thank you again for your e-mail. I appreciate your input. I want to assure you that I am acutely aware of the economic crisis and of the board’s responsibility to do what is in the best interests of all of our members.

Sincerely,
Mark H. Meuser
STRS Board Member