Rich DeColibus to STRS Board: STRS would be far better off eliminating the PBI program, not just tinkering with it

From Rich DeColibus, May 16, 2009
Subject: PBIs

".....being in the middle of the lemming pack is not much of an excuse for going off the cliff"

".....had STRS invested in 5% return T-bills for the last eight years, it would have been far better off today, by tens of billions of dollars"

".....any suggestion to permanently eliminate the COLA lessens everyone's buying value year after year after year, virtually guaranteeing an impoverished living standard as time goes on"

"Professionals are supposed to do their best for their client. Without bonuses as incentives. That is the definition of a professional. My presumption is our investment counselors will act professionally, and if they do not, that is why we have a management. Frankly, again, if the whole department would have been dismissed eight years ago, we'd be tens of billions of dollars richer."

Gentle(wo)men:

I believe the argument over whether PBIs should be extended when STRS loses total assets is like being unable to see the lake because of glare off the water. The fundamental question is whether there should be PBIs AT ALL, not just when our total asset value is down. My conclusion is STRS would be far better off, in every way that is important, by scrapping the whole program, not just tinkering with it. Bear with my logic.

The Board in the past was sold PBIs as a standard way of doing this kind of business, a replication of Wall Street employment practices, and a practice without which STRS would be left without competent investment counselors. My understanding is virtually no one currently on the Board was actually there when this practice started; most of you simply inherited it. Various experts have either validated the practice or judged it excessive and unwarranted (you can, in short, get any opinion you want if you shop around for it). More to the point, what may have been true in the past is no longer true. There has been a sea-change in accepted thinking about what constitutes appropriate compensation; granted many on Wall Street are doing their best to "Bring back the good old days," but there is now a tidal wave of anger and condemnation against huge salaries and grotesque bonuses as rewards for, at best, mediocre performance. Think of the AIG bonuses, if you need a solid example.

The number one responsibility of the STRS Board is preservation of capital. It is NOT a given percent of return (like an average of 8% per year). If you inspect the record, it is crystal clear all those years of wonderful returns were completely washed away by one catastrophic year (the most recent one). Not only is there no guarantee this will not happen again, in the mostly free market of America, it's virtually a certainty this will happen again. It is not a good thing for the situation to have deteriorated to such a degree that the Ohio General Assembly is now interested.

Your responsibility was to avoid this catastrophic loss, not maintain 8% returns year-after-year only to see it all lost by a failure to anticipate a bad year. Yes, few others were clever enough to see what was coming, but being in the middle of the lemming pack is not much of an excuse for going off the cliff. The fact of the matter is brutally obvious: had STRS invested in 5% return T-bills for the last eight years, it would have been far better off today, by tens of billions of dollars. Your current PBI program simply encourages investment counselors to invest in riskier vehicles than are appropriate, because the rewards for them personally are great (the bonuses) and the risks are all taken by us who have a vested interest in STRS (which is none of the investment counselors).

Professionals are supposed to do their best for their client. Without bonuses as incentives. That is the definition of a professional. My presumption is our investment counselors will act professionally, and if they do not, that is why we have a management. Frankly, again, if the whole department would have been dismissed eight years ago, we'd be tens of billions of dollars richer. That is a fact. If you insist on hanging on to the department, then at least expect them to be professionals, just like the teachers and administrators who put a lifetime of their savings into the pot. That does not seem like such an unreasonable request.

The suggestion to eliminate the COLA is a horrible one. It penalizes every individual who has already retired, and the younger they are, the more it penalizes them. In years where the cost of living is stagnant (such as this year), not a problem, but any suggestion to permanently eliminate the COLA lessens everyone's buying value year after year after year, virtually guaranteeing an impoverished living standard as time goes on. This is not what STRS is supposed to stand for. Please discard this really bad idea forever. Losing the 13th check is one thing, but a COLA is absolutely essential to maintaining a normal but modest life style into the retirement years, especially as unreimbursed health care costs mount, which they tend to do as the years go by. The federal government's COLA calculation doesn't even include the price of gasoline or food, two of the most volatile price indexes in existence. Does anyone think, running up a trillion and a half dollars of federal government debt, isn't going to skyrocket the inflation rate in the near future?

We need to look to the future, not rest on the outdated and clearly failed business practices of the past.

Rich DeColibus

[Rich is a retired teacher and former president of the Cleveland Teachers Union.]