Dan MacDonald reports on the June 17, 2021 STRS Board meeting

ACTIVES' FUTURE PENSIONS DECREASE; STRS STAFF SALARIES INCREASE

From Dan MacDonald

June 19, 2021

[First a reminder, the Board meeting is recorded and available at www.strsoh.org the Wednesday after the meeting and is posted for about 3 weeks. I am wondering if the opening of the meeting will be available. You should hear Steen’s request to add to the agenda and the discussions under the Legal Department.]

The June STRS Board meeting began at 8:30 a.m. and ended at 4:25 p.m. The meeting began with minutes approved, Executive Director Neville then made “opening remarks,” a new wrinkle, which covered what was being addressed for the day. Board member Steen then tried to add the completed Siedle’s Forensic Audit to the day’s agenda. He reminded members of their fiduciary responsibilities to the members and not the staff/organization. Board members claim “not enough time,” “need to get thoughts together,” “pending litigation,” “not through it,” “128 pages and I’ve only had it 8 to10 days.” The motion was defeated 2 for, 6 against. [It should be noted that Dale Price was not in attendance for the morning part of the meeting].

The Investment Department then gave its report. The semi-annual Broker’s evaluation basically said everyone was doing fine. The FY22 Investment Plan was then reviewed area by area. The department is predicting a 6% growth, normal is usually 2-3 percent, nationally and globally. One of STRS analyst then presented an Economics Outlook for FY22, a 6.84 percent rate of return is expected, but the internal auditor said in reality it’s 6.04%, a ten-year average. Steen challenged both numbers and asked how we will earn over 7%. Basically, he was ignored. [It needs to be pointed out the ROR through May is at 27.01% (gross)] Presentations with expectations proceeded in Economics, Fixed Income, Domestic Equities, International Equities, Real Estate, Alternative Investments, and Risk Management. Outside consultant Callan then approved the plan. Steen then pushed Callan on expected ROR and what it should be as an outside consultant, not on staff. Callan deflected and said the Board needed to decide there willingness for risk. Outside Consultant Cliffwater supported Callan and the Investment Department Plan, praising the quality of staff and internal management. The Investment Plan was then moved for acceptance. Steen challenged the plan on the premise that it was not good enough to meet the needs; STRS needs a better return goal. Steen then asked for a walk through on the difference between 6.04% long-term and 6.85% short-term. Ultimately the Board voted to accept the plan as given with all yeses and one abstention, Steen. As to the current fund balance, May saw a +1.69% return. The preliminary FY21 return is estimated to be 27.01% gross. Total investment assets ended may at 93.3 billion, higher by 16.3 billion from FY20. June 30 ends FY21

Member Benefits then presented changes and premiums for the health care plans starting January 1, 2022. 88% of plan enrollees will have a premium decrease. 12% will have a premium increase – 11,500 in the Aetna/Medical Mutual Basic plans for non-Medicare enrollees and 2,500 individuals in the Medical Mutual Basic plan for Medicare enrollees. [Premiums can be found at STRSOH.org under About Us and then Retirement Board then recent Board materials]

Under the Executive Director’s Report, Neville reported nearly 3,000 service retirement applications; a FY22 payroll estimate of 4%, a slight increase over last year; two legislative bills allowing board members to attend meetings virtually which have removed the provision although both are in conference committees. Temporary virtual meetings are in effect to July 1, 2021. Other items were reported. Rhodes asked when staff would return to building - July managers and needed associates and then August associates. Steen asked about space utilization and options including selling the building. Neville promised a report in Spring, 2022.

After an Executive Session/Lunch break, the Board honored a 22-year retiring employee. The Finance Department then presented FY22 Budget for approval. Cheiron, an outside actuarial firm, first went over STRS’s assumed discount rate (DR) [similar but different to Rate of Return (ROR). Cheiron pointed out that STRS’s general fund has grown 5.9% over the last 20 years and our mature plan has a negative cash flow of 4 billion dollars per year. C+I=B+E Contributions plus Investment Returns = Benefits and Expenses. A long discussion ensued about the DR and its importance. An analogy was made to a faulty thermometer. If your temperature was measured at 99 degrees you might ignore getting help, but if the thermometer was faulty and your temperature was actually 104 degrees you are in trouble. So goes the DR. If the DR is set at the wrong amount, the general fund could be in trouble. Currently the rate is set at 7.45%, but the fund has averaged over 20 year a 5.9% growth. Throw in this year’s estimated return of 27.01% and one would think we are doing fabulous. Toss in “Inflation Protection” [a term just introduced at this meeting to address struggling retirees with inflation] and the DR becomes more important. [OK, Inflation Protection was mentioned but the concept has not at all been addressed or what it means or how it might exist. As a retiree, don’t sell out a COLA for a 13th check or some other cocky idea. A COLA lasts in your pension check, all others vamoose after issue.] Lots of participation in discussion – Steen, McFee, Rhodes, Walters, Price. Total silence by other Board members. A new DR was voted to 7%, a reduction from 7.45%, to be effective September 1, 2021. [This will cause actives who retire after September 1, 2021 to be jilted financially. Their pensions will be reduced a little when their moneys are annuitized. A little money over a long time becomes a lot of money]. The FY22 Budget was then voted and passed. STRS staff was again rewarded with merit-based pay increases. [Ying/Yang, right?]

The Legal Department then presented Board member Steen’s changes to the Board Policy Manual. These proposals were delayed from the November and February Board meetings. All 15 proposed changes were beaten down as “weaponizing word;” “can’t control legislation;” “need to be a fiduciary to all STRS & members;” “what are you implying;” “need flexibility don’t want to be specific;” “pushing power, too vague;” tying our hands;” “Do we follow Robert Rules of Order? – only as a guide, not required, Board needs flexibility;” “must speak with one voice;” “over reaching;” “against all changes;” “we have the ear of teachers;” “we were elected; appointees just know someone;” “Go back to school and get a teaching degree;” “tell me what you are really after;” “we reach out; we are workable;” “we are not a corporation, we are not CPA’s;” “getting in the weeds;” “too open;” “very broad;” “not our fight;” “mother in me, make a choice if you want to be elected;” “Chair’s prerogative to allow someone to speak over 3 minutes.” I know these are out of context, but the old guard was not about to allow any changes where all of STRS’s changes were accepted at the November meeting.

Routine Matters were routine with the exception of Vice Chair nomination for the Board. One person was nominated and then voted to the position, Carol Correthers, who was the incumbent recently elected into an active seat, term starting September 1, 2021.

Old/New Business: Board Member Steen was congratulated on becoming a grandfather on June 16th,

No meeting in July; next Board meeting August 19th.

STRS VERSION: STRS OHIO eUPDATE June 18, 2021

Board Names Chair, Vice Chair

During its June meeting, the State Teachers Retirement Board elected contributing teacher member Carol Correthers (Lorain City Schools, Lorain County) as its vice chair for the coming year. According to Board Policies, Robert A. McFee, who is currently serving as vice chair, automatically moves into the position of chair. McFee and Correthers will assume their new responsibilities on Sept. 1, 2021. Board members receive no compensation for serving on the board other than reimbursement for actual, necessary expenses.

Board Adopts Fiscal 2022 Investment Plan; Current Year Returns Exceed Expectations, Benchmarks

STRS Ohio Investment staff presented its fiscal 2022 Investment Plan to the Retirement Board. The plan describes staff investment strategy for each asset class in the system’s investment portfolio. The board’s external investment consultants, Callan LLC and Cliffwater LLC expressed their support for the plan. The board adopted the plan as presented. The fiscal 2022 Investment Plan projects returns for the upcoming year near STRS Ohio’s policy objective returns of 6.84%. Staff will evaluate the need to issue an addendum to the Investment Plan once market levels are set on June 30, 2021. STRS Ohio will post the fiscal 2022 Investment Plan on its website in early July.

Chief Investment Officer Matt Worley shared with the board that the total fund investment return for the current fiscal year that ends on June 30 is among the highest in recent history. Worley said the preliminary total fund return through May 31 was +27%. If that return holds through June 30, he said that would be the highest fiscal year return since 1983. Worley also noted this return exceeds the total fund benchmark return of approximately 25.8%.

Following this update, Retirement Board Chair Rita Walters asked staff to evaluate the possibility of providing some level of inflation protection for retirees since the cost-of-living adjustment is currently set at 0% to maintain the fiscal integrity of the pension fund. Staff will address this request and provide information to the board in the coming months.

Board Approves Health Care Premiums; Most Enrollees will Pay Less than Last Year

The Retirement Board approved health care premiums for the 2022 plan year that will result in a premium decrease for about 88% of enrollees.  A complete list of premiums is posted on the system’s website or may be requested by calling STRS Ohio’s Member Services Center toll-free at 888-227-7877.

Board Follows Recommendation of Actuarial Consultant, Adopts Lower Actuarial Investment Return Assumption for June 30, 2021, Valuation

The Retirement Board’s actuarial consultant, Cheiron, presented information at the May and June board meetings regarding the economic assumptions the retirement system uses to measure the financial and actuarial health of the pension fund. Cheiron stressed the importance of using realistic assumptions, noting that unrealistic assumptions provide a false reading of the plan’s health. Cheiron reminded the board that its investment consultant, Callan LLC, expects lower than normal investment returns over the next decade. Callan’s return expectation for all asset classes has declined in the past year. Callan estimates STRS Ohio’s portfolio return over the next 10 years will be 6.02%.

Cheiron recommended that the board set its discount rate at no higher than 7.0% for the upcoming June 30, 2021, valuation. The discount rate is used to determine the present value of benefits due to be paid to members of the retirement system in the future. STRS Ohio also uses the discount rate as the actuarial investment return assumption. The board voted to lower the actuarial investment return assumption to 7.0% from 7.45% and will continue to evaluate this rate during the upcoming five-year experience review. Cheiron shared that, like most mature plans, STRS Ohio has negative cash flow because the system pays out much more in benefits (about $7.4 billion per year) than it collects in contributions (about $3.4 billion per year). This makes the plan more reliant on investment returns and underscores the need for realistic assumptions.

Board Adopts Fiscal 2022 Operating Budget that Reflects Slight Increase from Current Year

The Retirement Board voted to adopt system budgets for fiscal year 2022 (July 1, 2021–June 30, 2022). The fiscal 2022 operating budget totals $106 million, an increase of 1.7% from the current year budget. The budget includes increases for the actuary and investment consultants to conduct the upcoming five-year experience review and asset-liability study and increases to expand cloud backup of data to enhance business continuity capabilities and to lower future costs in this area. The board also adopted a capital budget for fiscal year 2022 that totals $9.1 million, an increase of about $4 million over the current year budget. This includes information processing and computer software costs to replace the system’s 25-year-old investment accounting system. Fiscal 2022 State of Ohio expenses include an increase in Ohio Retirement Study Council expenses to cover the upcoming fiduciary and actuarial audits conducted under the oversight of the Council.

Retirements Approved

The Retirement Board approved 485 active members and 76 inactive members for service retirement benefits.

Other STRS Ohio News

Open Seat on Retirement Board

Earlier this month, Robert Stein resigned from his current seat on the State Teachers Retirement Board. In addition, he will be unable to assume the board seat to which he was reelected for the term beginning Sept. 1, 2021. Information regarding filling the vacancy will be shared at a later date.

Dan MacDonald is Executive Director of Local 279-R, NEO AFT Retirees