Approved minutes from the June 30, 2011 meeting of the Ohio Retirement Study Council.

VOTING MEMBERS

Scott Oelslager

Charleta B. Tavares

Dan Ramos

Kirk Schuring

Lynn Wachtmann

Lora Miller

Seth Morgan

NON-VOTING MEMBERS

Karen Carraher

William Estabrook

Lisa Morris

Mike Nehf

Dan Weiss

Janyce Katz

ABSENT

Keith Faber

Doug Gillum

STAFF

Aristotle Hutras

Anne Erkman

Glenn Kacic

There being a quorum present, Rep. Wachtmann asked the Council to review the minutes from the previous Council meeting. The minutes were approved as submitted, without objection.

Rep. Wachtmann called Laurel Nicholson and Steve Voss of Hewitt Ennisknupp to review the fiduciary audit of HPRS. Ms. Nicholson and Mr. Voss reviewed the audit. They concluded that HPRS has many good practices in place, but improvement is possible; addressing the recommendations made within their report will take time and dedicated resources; some recommended changes may be able to be implemented quickly, with little money, while others will take many months and sizable expenditures to complete. They encouraged HPRS to address the recommendations made in the report and either formally accept, modify, or reject them based on what is in the best interest of the members of the system and then report back to the ORSC on their progress within a reasonable amount of time.

(Rep. Ramos entered the meeting.)

(Sen. Oelslager entered the meeting.)

Sen. Tavares asked if the percentage of HPRS’ assets invested in real estate is the norm in the industry. Mr. Voss said 5-10% is the common allocation.

Sen. Tavares asked what percentage does HPRS hold. Mr. Voss said HPRS has 5% of its assets in real estate; it is more common for larger funds to have more exposure to real estate.

Rep. Wachtmann asked if it was a reasonable risk for two buildings to make up almost 25% of their real estate portfolio. Ms. Nicholson said HPRS’ two buildings make up 22% of their real estate portfolio, which is relatively high, but the remainder of their real estate holdings is within diversified funds. Mr. Voss said they look for diversification. Having two buildings as direct holdings is not unheard of, but it is not best practices. However, it is not a problem overall.

Rep. Tavares asked what the two properties are. Ms. Nicholson said one is the HPRS operational site and the other is a nearby building.

Rep. Tavares asked if it is unusual for a system to own its operational building. Ms. Nicholson said it is not unusual.

Rep. Wachtmann asked if HPRS takes up the entire building. Mr. Weiss said no, HPRS uses approximately 5,000 square feet of the 60,000 square foot building; the remainder of the building is rented by tenants.

Rep. Wachtmann said he would like to know the rental income history for the past two years.

Rep. Wachtmann asked if the number of recommendations is comparable to the recommendations they have made for other systems they have audited. Ms. Nicholson said it is not uncommon to have 75-100 recommendations. She said the division between high, medium, and low is typical to other projects they have completed.

Ms. Miller asked if the HPRS board has had an opportunity to fully review the recommendations. Mr. Weiss said the board has reviewed a draft report and has begun work on implementing a number of the recommendations. He said the board has already completed work on 6 of the 15 high recommendations.

Ms. Miller asked if the board rejected any of the high priority recommendations. Mr. Weiss said no, they believed they were excellent recommendations.

Rep. Wachtmann asked for further questions; there were none.

Rep. Wachtmann called on Paul Morgan of Evaluation Associates to review the investment performance of the five systems for the period ending 12/31/10. Mr. Morgan reviewed his report.

(Sen. Oelslager left the meeting.)

(Sen. Oelslager returned to the meeting.)

Rep. Wachtmann said, regarding Mr. Paul Morgan’s recommendation that the systems engage in dialogue regarding investments, that he assumed senior staff of the systems talk to one another. Mr. Estabrook said they do.

Mr. Seth Morgan said that SERS’ 25% allocation to alternative investments strikes him as a large number. Mr. Paul Morgan said he thinks it is a great idea and endowment funds have been doing it for a long time. He said it is another source of risk and statistics have shown that good private equity managers can provide significant excess returns.

Mr. Seth Morgan said it appears that investing in hedge funds is a new policy for SERS; he asked Mr. Paul Morgan to comment. Mr. Paul Morgan said investing in hedge funds can be done immediately or on a longer term, depending on prudence. Ms. Morris said SERS has invested slowly over the past three years.

Mr. Seth Morgan said that except for hedge funds and private equity, the report looks at gross of fee returns. He asked if they could see the net of fee returns. Mr. Paul Morgan said gross of fee is the typical industry pattern when comparing public funds so they can keep it on an apples-to-apples basis. He said net of fees is doable and a good idea. Mr. Seth Morgan said net of fees is reality.

Rep. Wachtmann asked if Mr. Paul Morgan was concerned that the systems’ 10-year rates of returns were substantially lower than the assumptions the systems were using. Mr. Morgan said that number is subject to end point sensitivity. For example, he said 2001 and 2002 were bad years that were followed by five good years and next year they would lop off 2001 so the numbers would increase. He said there is more than meets the eye when looking at the assumed rate of return. He said the assumed rate of return uses actuarial standard practice number 27, which suggests that the future is uncertain and actuaries must use their best estimate that encompasses a range, not a specific number. He said they look at the expected return of the portfolio, standard deviation, and the measurement period. Mr. Paul Morgan added that 8% is a bit high, but reasonable.

Mr. Nehf said that STRS’ 20-year rate of return is 8.2%; their 25-year rate of return is 8.8%; and their 30-year rate of return is 9.5%. He said the longer period tells the whole story.

Rep. Wachtmann asked if there is any measurement that actuaries use to reflect the uneasiness of future markets. Mr. Paul Morgan said no.

Mr. Paul Morgan informed the Council that Mercer bought Evaluation Associates and sold its public fund clients to Callan. He said that because Callan advises STRS they cannot advise the ORSC. He said Tim Price of Milliman will take over as lead consultant for the investment performance review until the Council decides what it wants to do.

Rep. Wachtmann thanked Mr. Morgan and told him he appreciated his professionalism and his work.

Rep. Wachtmann called on Tim Price of Milliman to introduce himself. Mr. Price told the Council he worked in the San Francisco office, which was established in 1984 and that Milliman would like to retain the Council as a client. He proposed assigning the contract to Milliman and keeping everything else the same.

(Mr. Morgan left the meeting.)

Rep. Wachtmann recommended that the Council consider reviewing whether it should retain Milliman or issue an RFP for a new investment consultant.

Rep. Wachtmann called on Rep. Schuring to report on the Subcommittee’s work on the RFP for an actuary and policy advisor. Rep. Schuring moved, seconded by Sen. Oelslager, to approve the RFP reported by the Subcommittee with the amended language to include a scoring method in the RFP, as suggested by staff and the Attorney General’s representative.

Rep. Wachtmann asked for comments.

(Mr. Morgan returned to the meeting.)

Mr. Nehf said STRS welcomes oversight and transparency with a proper scope and reasonable costs. He said the boards as fiduciaries developed reasonable plans in 2009 to sustain the systems into the future and would prefer the next step to be for the General Assembly to enact those plans into law and study future changes. He requested the Council look at the scope and anticipated cost of the review and asked for the inclusion of a pre-bid conference where bidders could ask questions.

Sen. Tavares asked why a pre-bid conference is better than having individuals ask questions and providing those answers to all known potential bidders. Mr. Nehf said it provides bidders an opportunity to ask questions and find out the Council’s expectations before they put their bids together. For example, he said bidders might ask if the Council is expecting them to actually recalculate the actuarial valuations or just review the work of the systems’ actuaries.

Rep. Tavares said she has participated in pre-bid conferences and has found they are a better way to ensure bidders have a good understanding of the scope and are responding to the same scope.

Rep. Wachtmann asked Ms. Katz her legal opinion regarding a pre-bid conference. Ms. Katz recommended that language stipulating there would be a pre-bid conference should be included in the RFP.

Rep. Wachtmann asked the Council to be at ease while language was drafted to be included in the RFP.

Rep. Wachtmann called the Council to order.

Sen. Tavares moved to amend the RFP, seconded by Rep. Ramos.

Rep. Wachtmann asked Ms. Erkman to read the language to be included. Ms. Erkman said the following language would be inserted after the first sentence of section 1.2: “A mandatory pre-bid conference will be held between July 11 and August 11, 2011.”

Rep. Schuring said he supported the language.

Mr. Morgan asked what the significance is of July 11, 2011 as the issue date. Rep. Schuring said the Council is placing an ad in the July 11, 2011 issue of Pensions and Investments so the issue date corresponds to the publication date.

A roll call vote on Sen. Tavares’ motion to approve the amendment to include a pre-bid conference was taken. The motion passed 7-0.

YES:

Sen. Oelslager

Sen. Tavares

Rep. Ramos

Rep. Schuring

Rep. Wachtmann

Ms. Miller

Mr. Morgan

A roll call vote on Rep. Schuring's motion to approve the RFP as amended was taken. The motion passed 7-0.

YES:

Sen. Oelslager

Sen. Tavares

Rep. Ramos

Rep. Schuring

Rep. Wachtmann

Ms. Miller

Mr. Morgan

Rep. Wachtmann said he found some of Mr. Nehf’s comments ridiculous. He said he was speaking for himself and the Speaker of the House when he said they are intent on keeping the defined benefit plans in place. He said they want to keep the systems financially strong and feel strongly that they make sure they have the best chance for keeping health care available to Ohio’s public retirees.

Rep. Wachtmann asked for further questions; there were none.

There being no further business to come before the ORSC, the meeting was adjourned at approximately 10:30 a.m.