Kathie Bracy's Blog

THE STRS BONUS ISSUE

From Mario Iacone, May 16, 2009

So much is heard these days about STRS bonuses. Many say they are not deserved. Some say they are because benchmarks were met. I researched the issue with a fair and open mind. The following is what I discovered and concluded.

FACT ONE: Bonuses were paid for PAPER GAINS that were not sustained. Not only were the gains not sustained, but all of the gains and more were lost. Even worse, the losses are such that teachers and retirees are facing substantial cuts.

FACT TWO: The STRS Bonus Structure provides reward for gains in the investment value of the fund. It even provides reward when losses are suffered, but STRS established benchmarks are met. However, The STRS Bonus Structure does not provide penalty for losses in the investment value of the fund. If one gains, they receive a bonus. If one loses, they receive a pay cut. A pay cut is not unreasonable nor would it cause undue financial hardship for salaries of $200,000 or better.

What a Sweetheart Deal, you never lose. Pension Fund Gains, get Bonus. Pension Fund Loses, get Bonus. Although the latter will be changed in the future thanks to Dennis Leone, it’s still a great deal, Pension Fund Loses, no Bonus, just great salary.

FACT THREE: The more I researched this issue, the more I read about BENCHMARKS. I will admit that I truly do not understand benchmarks that well. This much I do know, benchmarks are used to grant the bonuses.

Then I found a simple benchmark that was not met by STRS investment managers. The rate of return on no effort, no risk Treasury Bonds.

Examine the ORSC Performance Review Chart below. It will indicate a ten year 3.30% return on STRS investments.

Then, examine the Treasury Bond Rate Chart also shown below and notice that it would have been a “no brainer” to achieve at least a 5% return over that same ten year period.

OPINION ONE: I believe I can anticipate one response to my comments. That’s not how things are done in the FINANCIAL WORLD. Before that comment is made please consider that STRS is not a Wall Street Investment Firm. STRS is a Pension Fund for Teachers. The members are not trying to get rich but just have a decent income for their old age.

OPINION TWO: Furthermore, I believe I can anticipate a second response to my comments. If STRS would not invest as it does and use things like Treasury Bonds, STRS would not make enough to meet its obligations. Well, STRS has not made enough. But, STRS has lost enough that major changes in the pension plan for both teachers and retirees are being considered. Changes that appear to be more substantial than would have been necessary not making enough with steady, conservative, low risk investments.

IMPORTANT FACT/ESTIMATE: The following chart shows at least what 2009 STRS assets would be if the 1998 asset value would have been invested in low and no risk investments averaging Five Percent.

No doubt, it will be pointed out that stock market investments will do much better and probably average 10% over the long term, and that is probably accurate, although such is not true for the period of 1998 to 2009 and might turn out to be true for the period of 1998 to 2025.

However, there is a serious flaw in such Long Term projections. Large Short Term losses cause serious financial hardship for both the active and retired members of STRS.

Click images to enlarge.