Monday, March 20, 2017

Dean Dennis’ speech to STRS Board February 16, 2017

Members of the Board, 

On February 16, I drove from Cincinnati to present before the Board. Having paid into the STRS Defined Benefit Plan for 35 years, I was quite upset over the mismanagement that caused the 1% deduction in the COLA for retirees who planned on the 3% promise. Worst was the COLA freeze teachers now retiring will have to endure, not to mention the entire revamping of the retirement schedule. It was my understanding that under the Defined Benefit Plan, STRS assumed all the risk. Changing the language to effect benefits after one retires I believe to be illegal. I'll share my wife also taught for 35 years. We were not expecting to lose half-a-million dollars in our retirement; especially after a combined 70 years of funding our pensions. The expectation under the Defined Benefit Plan, especially once retired, is that a benefit would stay the same, or increase, but would never be reduced (ORC 3307.67 states COLA's shall increase 3% annually). I believe past practice also establishes this. That said: 

On February 16, I presented before STRS. It is my very strong belief that over the years our Board's have allowed a smaller and more efficient investment staff to grow and become a bloated less efficient financial operation. We also are spending unnecessary monies on consultants as a result. From a person who understands investments, STRS has become upside down. Instead of managing the investment department, you now are reacting to their inefficiencies. They need to be reacting to your management. Due to their mismanagement, you are once again considering cutting member benefits. Don't over react too soon. You need to give the market time to recover. We set our goals for 30 years, why do we not trust the 30 year market cycles? 

Please listen; if you see a team that sets a benchmark goal that shoots for less than 8% annually, then you don't need that team. It shouldn't take a staff of 70 plus investment professions to find the symbols (VOO), (SPY), or (VFINX) and invest in the S&P 500 index. You are tolerating too many unnecessary investments using target assumptions that underachieve our benchmark needs. With 8% returns we can easily meet our funding goals. We should not be using the monies of our members to pay people to experiment by trying to beat the market indexes. It is very well documented that over 66% percent of money managers consistently under-perform the S&P 500 index. Employing over 70 people, paying them, and then giving them bonuses to under perform an index that has been around since 1926 is both irresponsible and reckless. I'll share again what I shared at the meeting (with3 minute time restraint). I'll state it in bold. 

There has never been a 30 year period in the long proven history of the S&P 500, where the S&P 500 index hasn't gained at least 8% annually. In fact, over 60% of the time it averages over 10%. There have been 60 such thirty year periods. This should be easy to understand.  In fact ask your investment advisers from Callan, like I did. I spoke with three individuals from Callan and they seemed to be in agreement with my premise. If you have any doubts please set a meeting, I'm happy to drive to Columbus again. To farther drive home my point, I can also show you that over the last 20 year period that the S&P Mid Cap index has nearly doubled the S&P 500. We should be doing better and spending less in doing so. 

So, the S&P 500 index should be your baseline annual investment benchmark utilizing an 8% return objective. If you feel compelled to consider other investments, then they should always be above this benchmark. Listening to our investment team get rewarded while the rest of us are getting punished should be a red flag. It wasn't lost on some of us that while the investment team was getting positively acknowledged during the presentation for exceeding the performance of some of their peers; we were aware that our investment staff's performance lagged the market by nearly 2%. Last year the S&P 500 returned 9.8%, why would we even consider moving our benchmark down from 7.75%? The only reason that makes sense is that the investment staff can't be trusted to keep up with the market indexes or invest in them. 

Lastly at this point the 30 year unfunded liability needs to be adjusted to 35 years. Unfortunately due to under performing investments future teachers will have to work 35 years to qualify for full retirement.  Having to entice future teachers into our system when they have to work for 35 years and then wait until the age of 60 to retire jeopardizes our retirement system even farther. However, there is hope if we don't react hastily and get back on track. I for one am willing to help. 

Please find attached the S&P 500 document referenced during my presentation. It breaks down annual investments in 5 year increments up to 25 years. 


Dean Dennis, 
Retired CFT Field Representative
Larry KehresMount Union Collge
Division III
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