Dennis Leone's "Second Paper," August 8, 2003: Restoring Faith, Trust, and Confidence in STRS

Dennis Leone's "Second Paper," August 8, 2003

MEMO TO: All STRS Board Members, All Ohio Retirement Study Council Members
FROM: Dennis Leone, Superintendent, Chillicothe City Schools
SUBJECT: Restoring Faith, Trust, and Confidence in STRS [State Teachers Retirement System]
[Date: August 8, 2003]

I would appreciate it if you would read this document carefully. On May 16, 2003, I presented a 13-page position paper to the STRS Board entitled "STRS Organizational Matters and Spending Practices." Much has been discussed over the past 3 months about STRS and its operations. It is my hope that the 417,000 individual members of STRS, as well as the 944 employer members, are better represented in the future by their pension system. It also is my hope that all interested parties become committed to the absolute awareness that much needs to change at STRS, and that the changes must occur immediately.

It will serve no purpose for the STRS Board and its executive director to send out the kind of letter that went out to individual members and employers respectively on June 20 and June 27. Clearly, the membership is not interested in being told that things really are okay or that consultants have justified past spending practices. When times are difficult financially for members and employers, that type of rhetoric is counter-productive and rather insulting to people who have made education their life-long work.

What must occur now is for the STRS Board to take the necessary steps to restore faith, trust, and confidence in STRS. If the proper steps are taken, and a meaningful change in spending practices occurs, the overall reputation of STRS can be restored. If the STRS Board members believe anything, they must believe this: While many (including myself) were rather naïve in the past about what really was happening inside STRS, the membership will not be fooled again regarding the implications of future Board actions and the end result of changes that are implemented in the immediate future.

The membership needs to see and feel that the changes are real. With this spirit in mind, it is recommended that the STRS Board adopt the following steps now to restore faith, trust, and confidence in STRS:

1. Make Meaningful and Deep Cuts in Personnel and Expenditures: Take the necessary steps to reduce the STRS staff by 20% (which constitutes 140 positions). It simply is not enough to tell the member-ship that you have a hiring freeze in effect and that the STRS budget for administrative expenses will be decreased by 3% in fiscal year 2004. This doesn't fly when STRS documents show that administrative expenses increased 17.4% per year for 6 years between 1996 and 2002, and when other STRS documents show that 311 new employees were added in the same time period (constituting a 75.1% increase in staff).

In the business of school boards and college boards, after we make real cuts in non-personnel areas, we then reduce staff through a Reduction in Force (RIF) action. We set a target for a desired dollar amount to be achieved, and then enough employees are reduced through a RIF action to meet the target. Real cost-cutting measures need to be implemented by the STRS Board. Staff reductions through attrition will not suffice.

The cash savings achieved through a RIF action need to be distributed to retirees in the form of a partial restoration of the 13th check, in an effort to help them reduce their increased health insurance costs. This allocation must occur.

2. No More Bonus Checks or Cash Awards for Non-Investment Personnel and Restructure Bonuses and Cash Awards for Investment Staff: Things got out of hand at STRS beginning in 1998. This was the year that bonuses and cash awards increased nearly three-fold from the year before, and according to STRS data, total amounts went out as follows:

This means clearly that in the past 5 ½ years, the STRS Board permitted Mr. Dyer to award $24.4 million in bonus checks and cash awards, making it necessary to send another $3.2 million to PERS to satisfy that pension system's retirement contribution requirement (since STRS employers belong to PERS).

The Board needs to return to the days prior to 1998, when no bonuses were given to non-investment personnel, except to a select small number. Bonuses given to investment personnel in the future should only occur if the accounts managed by said personnel produce substantial dollars for STRS.

It is not good enough to conclude that investment staff members deserve a bonus because the accounts they manage have declined less than the national average. If their accounts don't produce money for STRS, bonuses simply should not even be considered. Also, the STRS executive director should never decide unilaterally who gets bonuses. This policy must change!

Even in the best of times, the STRS Board can never, never allow a reoccurrence of what happened in 2002, when 395 staff members were awarded bonus checks, when 34 different STRS employees received total bonus checks in excess of $40,000, and when 33 staff members received higher annual salaries than the Governor and the Chief Justice of the State Supreme Court.

The pool of dollars set aside from prior interest earnings (which was to be used for bonus checks in the future) needs to be transferred into the health stabilization fund (if permitted by IRS) or distributed to retirees in the form of a partial restoration of the 13th check, in an effort to help them reduce their increased health insurance costs. This must happen.

3. Sell or Auction The Artwork, and Stop the Deception Regarding the 1% Statutory Guideline. While the STRS Board may not be able to recoup the entire $869,235 that was spent on sculptures, polished stones, and artwork, it would be received well by the membership if the Board could recoup at least half of that amount and use the cash to revitalize the 13th check for retirees in order to help them with their increased insurance costs.

STRS Board members are kidding themselves if they think their 417,000 individual members and 944 employers believe the artwork is necessary to run a pension fund. The money never should have been spent in the first place.

It also is time to stop deceiving the public and the membership about the decision that was behind the purchase of the artwork. STRS Director of Member Services Gary Russell ($102,860 base salary in 2003, complimented by a $20,572 bonus in 2002) wrote to retiree Cindy Justice on July 10, 2003, and said the following: "Expenditure guidelines (for the artwork) were drawn from Section 3379.10 of the Ohio Revised Code, which stipulates that 1% of state money appropriated for the construction of public buildings be spent on the acquisition of works of art."

Even the casual reader would conclude that this statement implies the STRS Board had to spend the money it did on artwork. This statement also has been repeated by STRS Board members and other STRS staff members. It is a terrible deception.

Section 3379.10 of the Ohio Revised Code does not apply to STRS, the State Inspector General determined in 1996 that STRS is not a state agency, and no state money was used to construct the building. Instead of implying that the artwork was a necessary expenditure, it is time to admit the truth, which is that the STRS Board voluntarily chose to spend membership money to buy the artwork by using a statutory guideline that doesn't apply to STRS.

The Board needs to show good faith to the membership (including Mrs. Justice) by not only acknowledging that the purchase of the artwork was inappropriate, and that the constant reference to the 1% guideline is wrong, but that sincere efforts will be made to dispose of the artwork so the Board can help send cash to retirees in an effort to help them with their increased health insurance costs. The Board might be surprised over how positive the response would be from the membership regarding this recommendation.

4. No More Widespread Annual Cash Reimbursements for Unused Vacation Time and Unused Sick Leave -- Current practice and policy must be changed immediately. While it is perhaps common for a select few staff members to have perks that others don't have, current STRS Board policy makes this benefit available to all full-time employees, every year. For the highest paid STRS employees, it represents another annual bonus check of between $10,000 and $20,000. It also represents an unnecessary annual expenditure of membership money that exceeds $1 million per year.

Simply put, the membership and Ohio taxpayers are not sending dollars to STRS for these kinds of employee perks. If the STRS Board continues to provide these perks to all full-time employees, a matching dollar amount should be set aside, then distributed to retirees in the form of a partial restoration of the 13th check, in an effort to help them reduce their increased health insurance costs.

If it is important enough for the Board to provide this special financial benefit to STRS staff members, then it is important enough for the Board to provide special financial help to retirees. The Board needs to show good faith to the membership by immediately adopting a policy to address this issue.

5. No More Parties and Gala Events Costing the STRS Membership Thousands of Dollars -- On June 19, 2003, which was the day before the STRS Board instructed Executive Director Herb Dyer to show more respect to the membership, to tow the line financially, and to be more cost efficient, Board members themselves participated in the spending of $4,100 of membership money during a private retirement party at the STRS headquarters for fellow board member Hazel Sidaway.

Other activities have produced even worse examples of spending membership money. On August 27, 2000, a special dedication ceremony was held for the "Discovery Park" outside the STRS headquarters. STRS forked up $18,810 for the event, paying for food, stage and chair rental, disposable instamatic cameras (what?) lapel pins, and knit shirts.

Then, three months later on November 16, 2000, the STRS membership paid $15,899 for the dedication ceremonies of the new STRS $94.2 million building. What was included in this total cost? Dinner, wine, gift boxes, aluminum commemorative plates for attendees, plus air fare and lodging for former Board members and former staff. How did this possibly happen?

How, when a Cleveland Plain Dealer article in 1995 revealed that member-ship money was used for beach bar bills in Florida, is it possible that five years later thousands of dollars of membership money was used for wine, gifts, disposable instamatic cameras, PLUS travel and lodging for visitors? It all has to stop and it must stop now. These types of expenditures represent a betrayal to the individual members, the 944 employers, and to the taxpayer.

I wonder what the State Auditor would say to a school district that was spending money in this manner? The Board needs to show good faith to the membership by immediately adopting a new policy that forbids use of STRS dollars for parties and gala events.

6. Stop the $1,000 Dinners For Board Members and Staff Members. At least twice in the past three years, Board members and staff members have gone out to dinner following committee meetings or other miscellaneous STRS work, and, instead of grabbing something to eat at Wendy's or Pizza Hut, they have gone to outrageously expensive restaurants and spent over $1,000 of membership money (averaging about $70.00 per person). The membership also paid for alcohol at these gatherings.

How was this ever allowed to happen? It can never happen again. In fact, Board members and staff members who participated in the unnecessary $1,037 dinner at Lindey's Restaurant in Columbus on March 13, 2002 (following a committee meeting), should re-pay STRS for this dinner.

Without a doubt, the State Auditor should cause this re-payment to occur. The Board needs to show good faith to the membership by immediately adopting a policy that forbids this type of expenditure and strictly forbids the purchase of alcohol with STRS money at any time.

7. Eliminate the Membership Funding of Child Care Services and Food Service Operations for STRS Staff Members -- The taxpayers of Ohio and the individual members of STRS are not sending in $1.2 billion and $827 million respectively to subsidize child care services and food service operations for STRS employees. It was bad enough that the child care center cost $818,000 to construct, but never again can the membership pay $487,560 per year to operate the center.

Further, while it is nice to have a full-service cafeteria inside the STRS headquarters, the salaries, bonuses, cash awards, fringe benefits, supplies and materials associated with running it exceed the income received from meals purchased. All of this means that the membership $88,397 in 2002 to provide cafeteria services for STRS employees.

The options appear to be simple: Charge STRS staff members enough to fully pay for the two operations, or shut them down. If the decision is made for STRS to get out of the child care business, the Board could rent out the space and gradually recoup the $818,000 that was spent of membership money to construct the facility.

It is proposed further that if the Board is able to rent out the facility, revenue received should be distributed to retirees as a partial restoration of the 13th check, in an effort to help them reduce their increased health insurance costs.

8. Close the STRS Fitness Center, Sell the Equipment, or Rent it Out. This facility cost $426,000 to construct. The Board needs to sell or auction the equipment, or rent it out, to recoup, over time, the construction cost.

The dollars received from a sale or rent need to be distributed to retirees as partial restoration of the 13th check, in an effort to help them with increased health insurance costs. As in the case of the child care center, the Board and the STRS Administration should be committed to looking for creative ways to generate income and help the retiree financially.

9. Sell Half of STRS-Owned Cars and Abolish Existing Policy that Permits the Personal Use of STRS-Owned Cars, STRS owns 16 vehicles -- 10 vans, 2 Durangos, 2 sedans, 1 truck and 1 station-wagon -- that have a combined value of $428,056. And of course, each car has an STRS-purchased insurance policy.

Eight (8) of the vehicles are assigned full-time to the executive director, his 4 deputies, and 3 directors. Board policy permits these 8 individuals to use the cars assigned to them for personal use like vacations, fishing trips, shopping, etc.

Were the make and model of cars selected on the basis of what would serve STRS the best, or were they (like the vans and the Durangos) selected because they were preferred by the employee for his/her personal use? The policy also permits the family members of said employees to drive the vehicles, as long as the family member also is picking up or dropping off the STRS employee at any location.

With the exception of the executive director, the STRS Board should not be providing cars to staff members. The employees need to turn in mileage reimbursement requests, which 99% of school district employees in this country are required to do.

Half of the cars should be sold immediately. The others, except for the one assigned to the executive director, should be parked at the STRS garage, where they need to stay unless needed for STRS business.

10. Request the Ohio Retirement Study Council to Appoint an Individual to Examine All Credit Card Receipts, Gas Card Receipts, and Travel Expenditures For Board Members and Staff -- If a school district has 50 employees and board members with American Express credit cards, as well as 13 employees with BP gas cards, the State Auditor would tell the school district that such a practice invites abuse.

Why are there so many people who have credit cards at STRS? Why do any Board members have them? There needs to be an independent reviewer assigned to examine all credit card receipts and travel expenditures of Board members and staff members.

This independent person would be in a position to determine if purchases were excessive or improper. This is necessary due to the $170,000 of membership money that is spent per year for travel-related expenses.

Why is there an unnamed employee inside STRS who keeps writing me to say that the "skeleton in the closet" at STRS is cost for staff travel, staff expenditures at meetings, and staff credit card receipts? Why does this person keep urging me to look into this?

11. Reduce and Consolidate Board Member Trips by At Least Two-Thirds -- In 2002, seven Board members (Chapman, Scott, Billirakis, Sidaway, Gaylord, Endry, Marshall) went to the same meeting in Boston and spent a total of $8,002.05.

The year before, seven Board members (Chapman, Scott, Billirakis, Sidaway, Gaylord, Shreve, Moore) went to the same conference in Boston and spent $9,627.54. This is completely unnecessary. In a period of economic decline when the individual and employer members of STRS are cutting back in order to survive, the Board should be sending to these meetings only one or two Board members, who can return and share their findings with the rest.

When Board members Scott, Norris, and Sidaway went to Honolulu in 2000, the three of them spent a total of $5,285.91 for hotel accommodations alone.

When Board member Jack Chapman traveled to Kiawah Island in 2001, and then returned in 2002, he spent a total of $2,284.70 for hotel accommodations alone. With 39 trips taken between 2000 and 2002, Chapman took more trips than any other Board member from Ohio's five pension systems.

And of the $530,284 that STRS Board members spent between 2000 and 2002 on trips, $218,500 was for out-of-state travel. This craziness must stop. In the immediate future, Board members must:

(A) Turn in their STRS credit cards;

(B) Reduce their air fare by two-thirds:

(C) Consolidate their trips;

(D) Limit the number of Board members attending the same meeting; and

(E) Focus on attending meetings in Ohio. The Canton Repository was correct when the editors wrote: "Stop the STRS Culture of Entitlement."

12. Stop The Shameful Practice of Deliberately and Consciously Paying More Than Necessary For Air Fare. This, all by itself, represents grounds for some Board members to step down.

The Ohio Administrative Code forbids the purchase of first class plane tickets by STRS Board members. What this writer has learned with the help of a retired teacher who now works for a travel agency, is an absolute, undeniable fact that while first class tickets have not been purchased, "upgraded" coach tickets, costing four or five times more than the coach tickets that the rest of the world buys - have been frequently purchased.

This allows Board members to bump up into first class seats if first class tickets have not been purchased (and, at the same time, skirt around the "no first class" regulation of the Ohio Administrative Code).

Here's an example that has been repeated many times: One Board member purchased a plane ticket in 2000 that cost $1,007.00 to fly to a meeting in New York. The ticket was booked in the "Y" class from Delta Airlines, which is the more expensive upgraded coach class. A much less expensive coach class ticket for this same flight -- if purchased at least 30 days in advance -- costs only $258.50.

There are other problems. Sometimes, tickets automatically have cost STRS in excess of $1,000.00 -- instead of approximately $250.00 -- simply because they are purchased a few days before departure. There also are frequent examples of flights being "re-booked," requiring STRS to pay for a second, higher priced ticket on top of a "re-booking" fee.

At a bare minimum, the Board needs to show good faith to the membership by immediately adopting a policy requiring the lesser expensive coach ticket to be purchased at least 30 days in advance.

The policy needs to state further that the Board member will have to pay the difference if a upgraded coach ticket is purchased, if the ticket is purchased less than 30 days in advance, if there additional fees for "re-booking," or if there is are additional costs for purchasing a new, second ticket.

How could Board members have a clear conscience on this issue? It is outrageous that these higher priced tickets have been deliberately purchased with membership money.

13. Eliminate Special Bonus Contract Provisions For the Executive Director and the Deputy Executive Director of Investments; Redefine Their Job Descriptions and Personal Contracts -- The personal contracts for these two individuals have provisions that give them a bonus based on a weighted average of the bonuses that are awarded to the people that report to them. In other words, the more bonuses they approve, the more they receive personally. This contract provision must go.

Also, the Deputy Executive Director of Investments has a contract clause stipulating that if he is fired due to malfeasance, he will receive a year's salary at that time. This must go as well. These two contract provisions are not in the best interest of the STRS membership.

The Board also needs to show good faith to the membership by announcing that a nine-member committee comprised of the following people will examine the job descriptions and employment contracts of the executive director and the deputy executive director of investments, and make recommendations to the Board: Three retirees selected by ORTA, two active teachers selected by OEA, one active teacher selected by OFT, one active school administrator selected by BASA, one college president selected by the Inter-University Council, and one school board member representative selected by OSBA.

It would be understood that all active members serving on this committee would need to have at least 25 years of service.

14. Offer the Same Health Insurance Plan to STRS Employees That the STRS Board is Forcing on Retirees -- The STRS Board is providing its own 707 employees a health insurance plan that is less costly than the plan retirees are now forced to accept.

The STRS employees have health insurance that requires a monthly single plan payment of only $47.66, and a monthly family plan payment of only $121.33.

By comparison, the plan forced on retirees (with 30 years of service) costs $135.00 monthly for single coverage, $447.00 monthly for the retiree's spouse, plus another $131.00 per month for any dependent children.

Why is the Board treating STRS employees any differently than retirees? (In fact, it wasn't until 2002 that STRS staff members had to contribute anything toward their health insurance.)

The Board members need to show that they understand they are running a pension system for the retiree, and require employees to be on essentially the same plan.

Retirees even need to be given the opportunity to pick insurance provisions that are superior to what the STRS employees receive.

Projected savings achieved through this change should go to a partial restoration of the 13th check, in an effort to help retirees with their increased insurance costs.

15. Immediately Investigate the Forced Nature of the New LifeMasters Disease Management Program -- How could it be that retirees are being signed up, against their will, for a program they knew nothing about previously. STRS has entered into a contract with LifeMasters (total STRS cost not known), which we're told is supposed to save STRS money in the long run.

Mr. Dyer sent letters to retirees saying that the program is voluntary, but the letter fails to say that STRS already has signed up retirees without their consent. Retirees have received personal, intrusive phone calls from nurses representing LifeMasters that have been offensive to them.

Mr. Dyer's letter to the retirees says that they "can expect to receive a telephone call" from a LifeMasters representative, and if the retiree does not wish to participate, THEY (the retirees) are expected to call LifeMasters and indicate they do not wish to be part of the program. Something is wrong with this picture.

16. Publicly Support in Good Faith the Following Legislative Initiatives:

(A) House Bill 227 to increase the number of retirees on the STRS Board;

(B) Senate Bill 104 to give the State Inspector General the independent power to investigate all STRS operations;

(C) Senate Bill 105 to require a financial disclosure statement of all STRS employees, including investment staff;

(D) The desire of the Ohio Retirement Study Council and the State Auditor to have an independent audit of STRS;

(E) The desire of State Attorney General Jim Petro to remove the State Attorney General and the State Auditor from the STRS Board and replace them with two retirees.

17. Take the Lead in Supporting, in Good Faith, the Following Initiatives Before They Are Submitted as Proposed Bills:

(A) Redefining the definition of an "active teacher" member of the Board to prevent what happened this year from happening in the future when Board member Michael Billirakis advertised himself in STRS publications as a "social studies teacher for the past two years at Perry High School in Lake County," when in fact he has never taught there;

(B) Creating a minimum number of days that an "active teacher" member of the Board works in the home district, thereby eliminating the notion that he/she has become a full-time, traveling STRS Board member and preventing what Board member Jack Chapman has done for at least 10 years, missing about 75 school days per year; and

(C) Establishing new procedures for removing current members of the Board for misconduct, violations of policies, improper expenditures, etc. Since all of these initiatives are currently being considered by lawmakers, Board members need to be part of the solution instead of part of the continued problem and support such constructive change. Doing so would go a long way toward helping restore faith, trust, and confidence in STRS.

18. Drop the Current Practice of Sending STRS Staff Members To Districts Throughout the State to Conduct "Personal Finance" Workshops For Active Members -- While this may seem like a nice thing, it also represents an unnecessary cost to the membership.

The workshops are far different from the counseling sessions that are needed and effective. These workshops cover things like IRA's, stocks, and personal investments, etc. There are many for-profit and not-for-profit agencies that can provide such counseling, as many feel the STRS costs associated with staffing, cars, and transportation for the workshops need to be eliminated.

The dollars saved through dropping this practice need to be distributed to retirees in the form of a partial restoration of the 13th check, in an effort to help them with their additional insurance costs.

19. Consider an Educator as the New Executive Director. It would be in the Board's best interest for an educator with sensitivity to retirees to be seriously considered for the position. An external nine-member committee as described in #13 in this memo needs to be used in the screening process.

An educator as the executive director also would help Board members better understand that thousands of retirees are able to perform the work functions of positions at STRS, and able to show more sensitivity to retirees in the process.

The Board needs to show good faith to the membership by immediately adopting a resolution in support of utilizing a committee like the one described in #13 above in the process for selecting a new executive director.

20. Miscellaneous Recommendations Which Will Help Restore Faith, Trust and Confidence in STRS: "

• Utilize a nine-member committee as described in #13 above to secure an appraiser to properly determine the value of the STRS headquarters. This committee should be charged with coming up with a recommendation pertaining to whether there are advantages to selling the building, and whether, by selling the building, this could generate dollars to be used as a partial restoration of the 13th check to help retirees with their increased insurance costs. "

• Utilize a nine-member committee as described in #13 above to make recommendations to the Board pertaining to changes that occurred in 1989 and 1999 to raise the "index" for yet-to-be retirees at a higher rate than what retirees received. Both groups were treated equally prior to 1989. This discrepancy needs to be investigated by such a committee. "

• Discontinue publicizing that STRS has consultant reports recommending that all personnel receive bonus checks. This is a distortion of the real truth. The consultant firm that Board President Debra Scott referred to at the July 9 Ohio Retirement Study Council meeting, the Russell Investment Group, only has recommended bonuses for investment personnel, not the non-investment staff. State Representative John Boccieri twice asked Mrs. Scott during the July 9 Study Council meeting if the firm she was referring to had recommended bonuses for non-investment personnel, and twice she improperly said the Russell firm had. "

• Utilize the nine-member committee as described in #13 above to assess whether there needs to be greater use of "stop loss" orders to trigger an investment pull-out at a certain point after a stock has declined (to protect prior gains and/or minimize continued losses). This committee also can have the function of assessing the ratio of external managers versus internal managers of stocks. "

• Since there is teacher member and retiree member representation on the STRS Board, Board members need to develop a new, formal mechanism for seeking input and involvement of other member groups in the decision-making process at STRS. These include citizens, school administrators, OSBA, and college presidents. While it is understood that these groups cannot vote, they certainly could have a formal linkage to STRS. "

• The Board members need formal inservice training, at an Ohio location, that is designed to help them better relate to the financial realities facing retirees and the 944 employers. "

• The Board needs to formally acknowledge to the membership that poor judgment and terrible mistakes as described herein have been made. Such an acknowledgement also needs to firmly state how the Board members will correct the mistakes to help retirees in the immediate future and how they will better represent their entire membership in order to restore faith, trust, and confidence in STRS.