Dan MacDonald reports on the April 21, 2022 STRS Board meeting: the good, the bad and the ugly

STRS APRIL 21 BOARD MEETIING – BUDGET SCREAMS – ME, ME, ME

Robert Walters and I attended the STRS April 21 Board meeting. I hope you listened in; I hope you had on your “thinking caps.”  

After the usual opening of minute’s approval, the agenda was altered to add a presentation by Executive Director William Neville on “Indexing Comparison.” Neville praised the Investment Department for putting together a tremendous report. Neville produced charts that showed the in-house investment team beat the S&P 500 and Russell 3000 in Funded Ratio and Market Value from 1999 -2021. [This presentation was in response to two retirees who continually hammer the Board during Public Participation that DOW and/or the S&P 500 over the long term would place more money into the General Fund.]  Board members Rudy FIchtenbaum and Wade Steen requested the data used to produce the charts. 

The Investment Department reported March’s total fund returns at plus 1.04% and preliminary FY22 total fund return estimated at plus 4.13%, with investment assets ending March at approximately $95.6 billion, higher by $800 million since June 30, 2021. The department also adjusted interest rate ranges up because of the Fed’s inflation intervention; 10-year U.S. Treasury Note yields have increased. 

There was a review of the Statement of Investment Objectives and Policy and the Statement of Fund Governance. Most changes related directly to the Asset-Liability Study. Investment presented on Commission Comparison and explained why STRS costs are higher than OPERS – “different implementation styles.” Comparisons were also made to CalSTRS, Texas Teachers, and Virginia Retirement, all much cheaper, BUT [isn’t there always a “But” with STRS?], suggesting cents per share is not a good measure of trading cost. Several examples were given and pointing-out that passive management doesn’t require “much research.” 

The final slide of this presentation was titled “Is This Meaningful?” which showed 5-years vs OPERS that STRS added $1.2 billion and 5-years vs Russell 3000 Value added was $1.1 billion with a closing comment that your in-house Investment Department has “delivered on its promise.”  

The closing presentation, which was great and enlightening, [really, not sarcastic] was on the Trading Desk Overview. Rob and I had never heard this presentation. The 5th floor of STRS is a trading center, always connected to 50 countries' market centers. STRS is capable of trading 23 hours fifty-five minutes per day, in-house, or at the STRS traders' homes or by phone. Trades can be made by a “phone tree”, but most trades are done through a computer order management system which quickly checks compliance and cheapest trade costs and other needs. I am sure you will be happy to know that the investment staff, IT and senior staff can do their personal trading through the system. [How about that, another perk.] 

The Benefits Department presented next. Proposed 2023 plan coverage changes were made and voted accepted. In the Non-Medicare plan there is a current $20 copay to your PCP for the first two visits and then 20% coinsurance for all future visits. This was changed to $20 copay each visit, saving about $9 per visit to subscribers. In Medicare and non-Medicare plans, the drug maximum out-of-pocket was decreased to $4,000. 

With this change there is also a change in Medicare enrollees to Express Scripts’ Medicare Preferred Value & Broad Performance Medicare Network. 4,294 enrollees will be positively impacted by this since their non-preferred pharmacy will become preferred and 4,102 enrollees will be negatively impacted as their preferred pharmacy moves to non-preferred status. STRS wants you to know that 98% of the negatively impacted live within three miles of a future preferred pharmacy. Medicare Part B reimbursement continue but will appear differently on pension statements. New, all Survivor recipients and survivor annuitants will receive the Medicare Part B reimbursement. Again, these changes will not happen until January 1, 2023. 

The STRS Health Care Fund funded ratio is 193.49%. Not voted but under consideration, STRS proposed to increase the premium subsidy to 2.2% per year of service, capped at 30 years. Projected premium costs would be lower for 94% of enrollees. All this info will appear during Open Enrollment, months away. The process of change and information starts now. 

[An interesting aside to the Benefit Department report was Fichtenbaum bringing up that he is on the Health Committee and shouldn’t the changes be brought up there and who decides the recommendations? The Health Committee has not met in years. Board member Arthur Lard, who chairs the committee, stated STRS does a fine job and there was no reason for the committee to meet. When I was an active, I sat on my district’s health committee that met at least semi-annually, there was always a lot to discuss. Lard is a perfect example of a status quo Board member. Fichtenbaum asked, then, how to propose a change in health benefit coverage not presented by staff. Answer, give the Benefit Director a call. So much for working committees.]  

Executive Director Neville Report reviewed 6 areas including the “Auditor of State’s Top Rating for Transparency” for second year. All 6 areas, good news. Price asked about Keith Faber audit and Siedle lawsuit. The audit continues and the lawsuit has recently been dismissed. Five retirees and one active spoke during Public Participation. All spoke to displeasure of the Board and/or staff.   

The Finance Department presented the proposed 2023 Budget with significant increases in Compensation, a 6% increase, and Fringe Benefits, a 5.5% increase. Overall, the proposed operating budget has a 4.9% increase. Salary and wages include a 3% merit-based pay raise. [An annual event going back to the 90’s, we think]. When questioned by a Board member, over 95% of the staff receives this merit-based raise. The Wage and Salary 6 percent increase in the budget was blamed on 27 pay periods, “which is a product of being a bi-weekly employer and occurs every 10-11 years.” According to STRS, the 27th pay accounts for $2.1 million of the $2.6 million increase. [OK teachers, help us out.]  A 27th check should be cost neutral. STRS staff are mostly salaried employees, not hourly compensated. 

Salaried employees are paid by the salary year. In 2018 the STRS assistant director of investment earned $367,480. That is, he/she’s salary. It was divided by 26 pay periods. In my estimation, if that was he/she's salary now, it would be divided by 27 pay periods for the salaried year. Yes, bi-weekly pay would go down, but the pay periods increase by one, cost neutral. STRS appears to be issuing an entire extra pay PLUS a 3% merit-based raise. When a 27th check hits in your district, did the district just add an additional check to you? No, your bi-weekly pays were reduced. Your pay calendar also ran between two years. You were paid August or September thru July or August. STRS needs to fully explain why the 27th check needs an extra $2.1 million dollars and is not cost neutral. A year is a year is a year, even if every 10-11 years there is a quirk in the pay periods.  This should not be a bonus year, a “thirteenth check” to staff so to speak. The same goes for fringe benefits, fully explain the 5.5% increase.]  

The meeting ended with Routine Matters. Under new business Fichtenbaum and Steen made suggestions about Public Participation that were shot-down and about building/meeting access to actives which were shot down.    

The next Board meeting is May 19th. Rob and I would encourage actives to mark calendars and attend the June 16th meeting, in person, in Columbus. Usually, July does not have a meeting and many actives will be back to work by the August 18th meeting. Actives’ words need to be heard. Retirees are always invited to join us in Columbus.   

Rob Walters & Dan MacDonald