Dan MacDonald reports on the March 2021 STRS Board meeting

From Dan MacDonald

March 25, 2021

The March STRS Board meeting was called to order at 9 a.m. on March 18, 2021. All Board members were present. After February’s minutes were approved, the Investment Department presented. Motions were made and passed on the amended Stock Proxy Voting Policy plus the Statement of Investment Objectives and Policy and Statement of Fund Governance. [The latter establishes the benchmarks for the entitlement of Performance Based Incentives.]

The general fund had a return of 1.77% for February. For FY21 the fund is up 17.99%, approximately $87.7 billion. Mr. Worley then mentioned a $524 million loss in Alternative Investments with efforts being made to recover some of this investment and pointed out that overall Alternative Investments have brought a 10% return over the last 5 years. Board member Wade Steen pointed out that a STRS statement that “Panda loss value” really was deeply troubling and the statement should have at least said “substantial loss.” Steen also asked about what can be done to prevent the loss of over a half billion dollars in the future with a staff response of diversification and “due diligence.” [This is important since I was told this “loss” does not appear on the CAFRs and Performance Based Incentives are to be paid. Transparency? Mr. Worley’s report on this loss took a little under a minute and a half. No Power Point slides. Mr. Steen’s pushing/questioning/statement took about 2 minutes. No other Board member had any comment on the loss. I submit that Worley reported this only because of a recent news article by John Damschroder. Google STRS Ohio and Panda.]

CEM, an outside consultant, then raved about STRS position amongst other pension plans and how active investment management is saving over $1 million per year compared to peers’ investment costs. [It would be interesting to know if CEM knew about Panda and the loss].

Callan, an outside consultant, presented on Capital Market Assumptions and expectations. Bleak. Initially the market looks good but long-term flat and down. GDP fell 4% last year and a predicted 6% gain for this year. GDP is a major factor in returns. Employment is large with 9.5 million jobs lost. The economy is not the stock market. [An STRS Board assumption is 7.45% return on investments; Callan is not predicting maintaining that Rate of Return. May’s Board meeting will have Cheiron, our outside actuarial auditor, who will probably indicate that 7.45% return is not realistic. If the ROR lowers, projections of income lowers which then pinches actives and retirees, the biggest way to lower cost.]

Executive Director Neville gave his report on 6 areas. The 2021-2022 Budget preparation is underway. [Stay tuned and do not miss April’s Board meeting]

After Executive Session/Lunch break, there was an elections update. April 1 ballots are mailed. Voting is by paper, phone, or online and closes May 3 at 4:30 p.m. Contributing Member Seat’s candidates: Carol Correthers, Benjamin Pfeifer, Matt Sheridan. Two Retiree Member Seats’ candidates: Rudy Fichtenbaum, Elizabeth Jones, Robert Stein, Rita Walters.

The Finance Department presented on the unfunded liability and its growth from 2000 until 2020. Annual benefits paid are approximately $7 billion. Contributions from employers and actives are approximately $3 billion, leaving a hole of 4 billion which investments attempts to fill. The assumption rate of return ranged from the current 7.45% to 8% while annualized return over 20 years was approximately 6%. The loss in 2009 of $17.4 billion was about the same magnitude as the sum of all the gain over the 20-year period, $17.8 billion. Other assumptions did not hold up either: tread water, retirements, mortality, and other. Total losses were more than $46 billion, even with $28.5 billion in benefit cuts offsetting about two-thirds of the losses, the remaining one-third was enough to increase the Unfunded Actuarial Accrued Liability from $4.5 billion in 2000 to $22.3 billion in 2020. [Bottom line, the Finance Department is making a plea to lower the fund’s rate of return. Remember the projected budget will be presented April and then Cheiron comes in May with their assumptions.

The Legal Department followed with the Groom Law Group from Washington, D.C., doing Fiduciary Training. Board members responsibilities were broken into Loyalty, Exclusive Benefits, Prudence, Communication and Diversification. Loyalty to the system and Prudence were highlighted. [I sent an email to both presenters asking if they were told anything about the loss of the Panda investment since both talked about perception and its impact; no reply from either presenter to date.]

The meeting ended with Routine Matters. No new/old business. April 14, 15, 16 are reserved for the next Board meeting. [The actual Board meeting should be April 15; you need to register at www.strsoh.org Registration usually opens the Friday before the meeting dates.]

[Comments: It is more than worrisome when it is Facebook that is the reporting source for STRS issues/concerns. Throughout my years of monitoring STRS, they present their good; they avoid bad unless it deals with the reduction of benefits for actives/retirees. The Panda International Investment is a huge case in point, going back to its bankruptcy filing in 2017. Perhaps STRS is still waiting on the restructuring of the company to come out of bankruptcy. Worley stated that over 85% of alternate investments have had positive returns. So what about that 14% plus that didn’t? Why should we not know? Who can discern because silence and one voice is the mantra of STRS. The very documents, standards, consultants, organizations touted and paid for by our moneys, all support STRS and make no mention of any problems - the CAFR, GASB, Cliffwater, Callan, the CFA Institute and ACA Compliance Group Performance Services. No wonder Board member Steen continues to ask “Who owns these numbers?” “Who is liable” for these numbers? Last month in Board Policy the Board’s lawyer stated the word “transparency” does not need to be added to a certain section of the policy document. In retrospect, maybe transparency should be added to every portion of the policy document and then enforced. Another issue, Steen asked about nepotism at STRS a couple of months ago. It has never come up in public again. STRS needs to share its dirty laundry with us, actives and retirees. No wonder many of us donated to the forensic audit. The quinquennial review is about to start, a five-year actuarial experience review. Others - 2002, 2007, 2012, 2017 – have led us to a $22.3 billion unfunded liability. I point this out as STRS also reports we are closing the gap in years to be fully funded. Of course, if we change the Rate of Return, the years will be extended. STRS works hard to make sure their staff, our staff, have it both ways. Who really pays for STRS mistakes? Actives and Retirees. Do not forget that April is the annual meeting for budget and an annual merit based raise recommendations by STRS management. Dan MacDonald, STRS Retiree, Executive Director, 279-R, NEO AFT Retirees]

From Facebook:

The message below came to me [Damschroder] late this afternoon [3/17/2021] after seeking response from STRS since 2/26/21. The Panda loss equals 2.5 years of COLA.
Mr. Damschroder,

STRS Ohio committed and invested $525 million with Panda Power Funds (Panda). The Panda investments were valued at $0 as of June 30, 2020. All of STRS Ohio’s investments have been properly valued and reported in our CAFRs. While the Panda investments lost value, it is worth noting that over 85% of STRS Ohio’s alternative investments have had positive returns. STRS Ohio’s alternative investment program, of which the Panda investments are a part, has been additive to our total fund returns over the 10-year period ending Dec. 31, 2020, with an annualized return of 11.03%.

Nick Treneff 

Communication Services Director 

-   -  -  -  -  -  -  -  -  -

STRS Ohio3/17/21 

John Curry, Facebook
Will tomorrow come to be known as "Panda Thursday" at the STRS building? Is STRS coming down with a bad case of lockjaw? Say, isn't this national Sunshine Week?

"You will probably also be unsurprised by the non-response from the State Teachers Retirement System (STRS) on my last column reporting more than $300 million in losses on their investment in a Texas-based merchant power generator, with a side of professional wrestling, called Panda Energy International. It is easier for STRS to ignore the Fremont News-Messenger than the Fremont native on their Board of Trustees. Wade Steen tells me he will be asking questions about the Panda investment loss at the STRS board meeting on Thursday. It will not make him popular with the cabal in Columbus, but he will be the teachers’ pet.

ADDENDUM- This loss has now been updated to 525 MILLION DOLLARS! 

Dan MacDonald Reflection [ Sorry to report that “Panda Thursday” really did not happen. No big deal from Treneff note and Worley’s report. I am sure STRS realizes that a half billion loss when our fund is $87.7 billion, is less than a percent. Only Board member Steen publicly addressed the loss. The whole problem was put to rest in less than 3 plus minutes.]