Report on September 2011 STRS Board Meeting

From STRS, September 16, 2011
September Board News

Pension Legislation Remains on Hold; Six Firms Respond to RFP

Six potential vendors have submitted proposals in response to the Request for Proposals (RFP) from the Ohio Retirement Study Council (ORSC). The six firms that submitted proposals are: Deloitte, The Segal Company, Bolton Partners Inc., Hay Group, Milliman, and Pension Trustee Advisors. The ORSC has not met since the proposals were submitted. Senator Keith Faber (R-Celina), chair of the ORSC, reiterated at the August meeting his intention to conduct regional hearings on the five pension system boards' pension reform proposals; however, no announcement regarding the hearings has been made. STRS Ohio will share information concerning these meetings as soon as it becomes available.

Retirement Board Updated on Asset-Liability Study

Callan Associates, the Retirement Board's investment consultant, is conducting an asset-liability study for the pension fund that is expected to conclude in December. Pension funds use asset-liability studies to establish investment policy by evaluating various criteria including pension plan design (benefit structure), actuarial data, and investment risk and return objectives.

During the September board meeting, Callan Associates' staff discussed asset allocation with the board, calling it a long-term strategic process that is the primary determinant of investment return and asset volatility. The board's consultant will create a series of asset mix alternatives with different levels of risk/reward for consideration. This "modeling" will include the June 30, 2011, valuation results. The study will also evaluate the impact of different interest rate and economic scenarios on STRS Ohio's liabilities.

The presentation also noted that the appropriate asset allocation policy should satisfy two basic criteria:

• The asset mix will be efficient — generating the maximum level of expected return for a given level of risk; and

• The asset mix will reflect the appropriate level of risk for STRS Ohio.

Investment Cost Effectiveness Analysis Shows $94 Million Saved Through Internal Management

A CEM Benchmarking report, "Investment Cost Effectiveness Analysis" was shared with the board at the September meeting. The analysis compares cost and return performance to a custom peer group of pension systems. One of the more significant findings is that STRS Ohio saved $94 million in 2010 by managing about 80% of its total assets with in-house staff. The analysis compared those internal management costs to the median management costs that the peer group pays for external management. The report also noted that STRS Ohio's five-year total return of 4.4% was ahead of its policy return of 4.2%. The five-year value added figure of 0.2% was above the peer median.

Retirements Approved

The Retirement Board approved 1,517 active members and 151 inactive members for service retirement benefits.

Other STRS Ohio News

Finance Staff Educates Employers About GASB Exposure Draft
As noted in last month's Executive Director's Report, the Governmental Accounting Standards Board (GASB) has recently issued two exposure drafts about pension accounting and financial reporting that would make fundamental changes to standards for state and local governments, including public school districts, colleges and universities. The proposed change is most likely to directly impact STRS Ohio reporting employers, because employers participating in a cost-sharing, multiple employer pension plan (like STRS Ohio) are required to report a net pension liability in their financial statements for a proportionate share of the plan's entire unfunded liability. Finance staff sent a bulletin to employers to make them aware of the exposure drafts and how these rules, if they become standards, will impact them. The bulletin also gave employers information about how to submit written comments to GASB.

Benefit Counselors Are on the Road Again
Benefits counselors took to the road for fall field counseling the week of Aug. 15. The fall season includes 26 locations around the state. Scheduling for the available appointments began in July with nearly 1,300 members scheduling appointments at one of the first 11 locations. Internet scheduling is still popular, with half of the appointments being scheduled through the STRS Ohio Web site. Counselors will be available to meet with more than 4,600 members at the various locations around the state during the next three months. This is a 30% increase in capacity compared to fall 2010.

Express Scripts Inc. and Medco Health Solutions Sign Definitive Merger Agreement
Express Scripts Inc. (ESI) and Medco Health Solutions Inc. announced recently that they entered into a definitive merger agreement. The transaction is targeted to close in the first half of 2012. However, monopolistic concerns and scrutiny as to whether regulatory review will approve the merger have been raised.

Under the terms of the definitive merger agreement, ESI management is sustained and becomes the executive driving force. STRS Ohio, as a client of ESI, expects little if any adverse impact to enrollees. Looking ahead, ESI should have opportunity to leverage additional dispensing facilities, augment clinical pharmacy services and potentially enhance volume discount negotiations.

Rich DeColibus on SB 5 and teachers unions

From Rich DeColibus, September 13, 2011

SB 5 is a pretty appalling attempt of Ohio Republicans to eliminate unions because unions seldom endorse Republicans (who usually wallow happily in management rights). This law has nothing to do with good government, finances or intelligent public policy, and everything to do with "How can we make our reelections easier?" But, it goes beyond the pale, attempting not to defeat opponents one disagrees with, but, rather, attempting to destroy public unions outright.

I was president of a teacher's union in Ohio [Cleveland Teachers Union] and the facts are no teacher in Ohio is forced to belong to any teacher union, although they do have to pay a fee for the services the union must, by law, render them. Does anyone believe teacher unions wouldn't love to have the right to pick and choose who is in their bargaining unit (a different population from union membership)? We don't have that right, nor should we; the way it is now is the fairest. The individuals who don't want to pay "fair share" fees (and these are fees for service, not dues) are simply trying to ride the bus without paying the fare.

Furthermore, any teacher who thinks s/he can bargain better individually with a Board of Education than being represented by a union is a total fool. Negotiations are about power, and single individuals have zero when matched up with a Board of Education. Why do you think unions developed in the first place?

STRS Ohio Sets the Record Straight on Buckeye Institute Report

From STRS, Sept. 12, 2011

https://www.strsoh.org/HTML%20News%20E-mails/News/09.12.11.html

Earlier this month, the Buckeye Institute issued a misleading report entitled, "Taxpayers on the Hook: Taxpayer Contribution Rates for Ohio Government Pensions Outpace National Averages." The report claims STRS Ohio's 14% employer contribution rate is the ninth highest rate out of 34 states with similar teacher retirement programs. STRS Ohio employers do not contribute to Social Security by state law, making the STRS Ohio pension the only source of retirement income for Ohio's educators. In reality, STRS Ohio's employer contribution rate is below the national average when you factor in the Social Security contribution rate of 6.2% that 22 of those states make on behalf of their public educators. The report only listed the amount those states contribute to the state retirement system and failed to include the additional amount that is contributed to the Social Security program.

A more fair and accurate comparison would have noted that when the Social Security contribution is factored in, STRS Ohio's 14% employer contribution rate ranks 20th out of the 34 states in the report. Among the 12 states that do not participate in Social Security, STRS Ohio's rate ranks right in the middle:
(Click image to enlarge.)

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Of the remaining 22 states that contribute to both a public retirement system and Social Security on behalf of their public educators, 18 of those states contribute more than 14% in combined state retirement contributions and Social Security contributions.

The Buckeye Institute report suggests that 401(k)-style retirement plans are a better alternative for Ohio's public employees, but study after study shows that individuals enrolled in these plans are ill-prepared for retirement, as untrained, individual investors earn a significantly lower return than the professional money managers at public pension funds like STRS Ohio. It's clear that defined benefit plans offer a greater retirement benefit at a lower cost.

These continued and unwarranted attacks on Ohio's public pension funds and their defined benefit plans are sure to continue until the Ohio Legislature takes action on pension reform proposals that are currently on hold. Defined benefit pensions give members a retirement they can count on and stoke — rather than drain — Ohio's struggling economy. STRS Ohio paid more than $5.5 billion in benefits during fiscal year 2010, with much of that money staying right here in Ohio, being spent on goods and services throughout the state — and that's something all Ohioans should be thankful for.

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Education in the U.S. -- the way it REALLY is

From John Curry, September 12, 2011

American Schools in Crisis
Saturday Evening Post, August 16, 2011
By Diane Ravitch

If you read the news magazines or watch TV, you might get the impression that American education is deep in a crisis of historic proportions. The media tell you that other nations have higher test scores than ours and that they are shooting past us in the race for global competitiveness. The pundits say it’s because our public schools are overrun with incompetent, lazy teachers who can’t be fired and have a soft job for life.

Don’t believe it. It’s not true.

View entire article here: http://www.saturdayeveningpost.com/2011/08/16/archives/post-perspective/american-schools-crisis.html

STRS stakeholders...we got pumped and then we got dumped!

From John Curry, September 9, 2011

Mazzuto convinced institutional investors, including the State Teachers Retirement System of Ohio and the Methodist Church, to buy millions of illegally-issued shares of Industrial Enterprises stock. Defense lawyers for Margulies referred to Mazzuto as "one of the grand scamsters of our generation."

The Manhattan district attorney's office said Margulies did the legal work to paper over the stock scam, while John Mazzuto, who preceded Margulies as Industrial Enterprises' chief executive, was the public face of the company.

http://www.cleveland.com/business/index.ssf/2011/09/pepper_pike_lawyers_sentenced.html

Pepper Pike lawyer sentenced to 7-21 years in prison in stock scam

(Click image to enlarge)
September 9, 2011
By Alison Grant, The Plain Dealer

Cleveland-area attorney James Margulies was sentenced to seven to 21 years in prison today for his role in a $110 million pump-and-dump stock fraud.

Margulies, 47, was also ordered to pay $7 million in restitution --- the amount that prosecutors said he profited in the scheme.

Prosecutors said Margulies and other conspirators artificially inflated the price of shares in Industrial Enterprises of America, which owns a company north of Pittsburgh that makes antifreeze and other car chemicals; lured in investors; then dumped their shares, leaving innocent investors holding the bag.

Margulies made a statement before the sentencing in which he said he had never heard the term "pump-and-dump" before getting entangled in Industrial Enterprises. He said he was untrained to recognize the scam perpetrated by others.

Prosecutors said the conspiracy allowed Margulies to live a high-rolling life -- paying for a $500,000 vacation club membership, a $350,000 diamond ring for his wife and the balance remaining on the mortgage for his French country manor in Pepper Pike, now listed for sale at $1.5 million.

Margulies was convicted of securities fraud, grand larceny and other crimes in July. He had served as finance chief, legal counsel, and for about a year, chief executive of Industrial Enterprises while working in a small law firm he opened on Chagrin Blvd. after several years at Jones Day's Cleveland office.

The Manhattan district attorney's office said Margulies did the legal work to paper over the stock scam, while John Mazzuto, who preceded Margulies as Industrial Enterprises' chief executive, was the public face of the company.

Mazzuto convinced institutional investors, including the State Teachers Retirement System of Ohio and the Methodist Church, to buy millions of illegally-issued shares of Industrial Enterprises stock. Defense lawyers for Margulies referred to Mazzuto as "one of the grand scamsters of our generation."

Judge Gregory Carro told Margulies today, "He was the architect, but you were the engineer."

Shares in Industrial Enterprises peaked at $8.50 in May 2006 before crashing in 2007 as the scheme came to light, wiping out $20 million in investor holdings. It trades today for less than 5 cents a share.

Mazzuto, 62, spent seven months in jail, unable to afford bail, before agreeing to testify against Margulies.

Mazzuto said during the trial that he is an alcoholic who often drank himself "senseless." He was arrested for drunken-driving twice in Florida after striking the plea deal, so prosecutors are no longer bound to recommend a light sentence.

On the stand Mazzuto testified in detail about the fraud. It began when Mazzuto gained control of a private company, EMC Packaging Inc., which sold industrial gases. In 2004 he merged it with another company that traded publicly as a low-priced, speculative stock that had no operations and existed only on paper.

Prosecutors said a Cleveland real estate developer, Peter Vanucci, introduced Mazzuto and Margulies when Mazzuto was looking for a public shell corporation to drop on top of EMC Packaging.

Renamed Industrial Enterprises of America, the now-public company, headquartered in New York, began issuing a type of stock restricted for use as employee compensation. Instead, IEAM used associates and "front" companies to sell shares to unsuspecting investors.

Part of the scheme involved a stock promoter in Texas whose "programs" to boost the value of penny stocks drew upon a list of 1,000 to 2,000 people who would buy a corporation's stock to push up its value, in return for fees for engaging in the conspiracy.

The original indictment of Margulies and Mazzuto included 10 unnamed co-conspirators. Testimony suggested that a handful of them are businessmen from the eastern suburbs of Cleveland. Assistant District Attorney Garrett Lynch said today the investigation is continuing.