Dan MacDonald reports on the STRS Board meeting of August 18, 2022

From Dan MacDonald

August 26, 2022

STRS: AN ERA ENDS. WE WILL SEE.

I attended the August 18, 2022 STRS Board meeting. Scheduled to start at 8:30 a.m. with the Audit Committee, a 45-minute delay happened when STRS’s Webinar service would not come on-line. Thanks to all of you out their trying to sign on. Little was shared in the room and I doubt nothing was shared on line. I would suspect many of you were not able to sign in because a whole new code was needed. The Audit Committee meeting started at 9:16 a.m. with a quarterly internal summary, followed by outside consultant Crowe LLC who is working on the FY22 Financial Statement Audit. The reports ended with outside consultant ACA Group sharing a performance update. ACA is ‘the leading governance, risk, and compliance advisor in financial services.” They provide “reasonable but not absolute assurance” that STRS investments are reporting correct info.

The Board meeting then followed starting at 10:26 a.m. with a call to order and June’s minutes approval. Outside pension trustee advisors KMS Actuaries then presented on their findings - they believe the actuarial numbers are correct, that improved transparency in outside consultant Cheiron’s reporting is desirable and that actuarial assumptions are reasonable and have been somewhat revised based on a recent experience study. They made 6 recommendations including “provide the next auditor with transparent calculations” and “clarify grandfathered retirement rates” and provide more robust disclosures regarding the Combined Plan benefits in the pension report.

The Executive Director then gave his reports on July and August which covered 8 areas. Nothing crucial to share. Eight persons took advantage of Public Participation. Seven were critical of the Board and one spoke on the accuracy of STRS financial reports and on behalf of the three incumbents who lost their board seats.

After an 80 minutes lunch break, the Investment Department shared returns. The total fund return for June was a negative 4.40%. Total investment assets decreased by $7.2 billion during FY22 and ended at approximately $87.6 billion. Overall, for FY22, the total fund return was a negative 3.61%, BUT the investment department outperformed the total benchmark return of negative 5.62%. [In other words, STRS is saying if there wasn’t active investment handlings of our money, the total fund would have been down another $1.8 billion dollars.] July’s preliminary total fund return was a positive 3.85% with total investment assets at approximately $90.6 billion. After this information was shared, they continued with the proxy voting summary for six months, the review of securities compliance policies and procedures, the semiannual derivative exposure as of June 30, 2022, a domestic equities review, outside consultant Callan’s trustee summary report [Callan emphasized that diversity works and gave kudos to the department in difficult investment times] and ended with outside consultant Cliffwater doing an overview of STRS’s alternative investments.

The Human Resource Services Department gave its biennial report on staffing, compensation, and benefits review. Females represent 45% of associates. The department head couldn’t say how many were in management/leadership positions. Minorities represent 19% of associates. The department head couldn’t say how many were in management/leadership positions. Turnover rate was 8.5%. Recruitment is mostly by INDEED or in-house personal referral.

Routine Matters followed which was robust since the Performance Based Incentive motion to award $9.66 million in incentives finally arrived. After everyone made their defense of their vote, the motion passed 9 to 2 [Steen & Fichtenbaum]. Routine Matters also made Chair assignments for committees for 22-23. Future Board Chair Carol Correthers named herself to chair 4 committees. Steen challenged her being chair of the audit committee. One of the outside consultants pointed out her holding that chair could be a conflict of interest and recommended that she shouldn’t. The Board’s lawyer, when questioned, stated that there was no legal reason she can’t. The motion on appointments passed with Steen and Fichtenbaum abstaining. The Board meeting ended with old/new business and the awarding of plaques to Jeffrey Rhodes, Rita Walters, and Robert McFee [incumbents voted out-of-office] and McFee warning the new board not to act rashly. Following adjournment, the Ad Hoc Committee for Board Education & Planning met.

The next Board meeting is scheduled for September 15, 2022.

Dan MacDonald is an STRS retiree and Executive Director of AFT Local 279 (Cleveland).

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STRS version of the meeting

E-UPDATE

Aug. 19, 2022

STRS Ohio Investment Returns for Fiscal 2022 Beat Benchmarks, Preserve $1.8 Billion in Down Year for Stocks, Bonds

During the August meeting of the State Teachers Retirement Board, Investment staff and consultants shared fiscal year 2022 investment returns. Despite challenging market conditions for stocks and bonds, STRS Ohio investments outperformed the board-approved benchmarks, preserving $1.8 billion in value for the teachers’ pension fund (net of all fees, costs and expenses).

STRS Ohio’s diversified portfolio and strong returns in the real estate and alternative asset classes helped the fund achieve a fiscal year 2022 total fund return of –3.61%, besting the total fund benchmark of –5.62%. The total fund net return was –3.73%.* Fiscal 2022 marks the first negative return in more than a decade for STRS Ohio and follows a +29.16%* total fund net return in fiscal 2021.

STRS Ohio Gross Investment Returns Over Various Time Periods (Through June 30, 2022)

·        5-year total investment return: 8.57%

·        10-year total investment return: 9.32%

·        20-year total investment return: 8.13%

STRS Ohio Net Investment Returns Over Various Time Periods* (Through June 30, 2022)

·        5-year total investment return: 8.44%

·        10-year total investment return: 9.19%

·        20-year total investment return: 8.01%

*After all management fees and costs, including carried interest and other fund expenses.

STRS Ohio currently manages about 70% of assets internally. CEM Benchmarking estimates STRS Ohio saves about $100 million per year through internal management. A portion of compensation for STRS Ohio’s investment staff is earned through performance-based incentives. Based on investment performance for fiscal year 2022, as well as the trailing five-year period, the Retirement Board approved performance-based incentive payments totaling approximately $9.7 million at its August meeting. Incentives are more heavily weighted toward five-year returns, aligning with STRS Ohio’s interests as a long-term investor. Only eligible investment staff are included in the PBI program.

STRS Ohio Calculates and Reports Investment Performance in Accordance with Best Practices

ACA Performance Services confirms STRS Ohio’s total fund performance is calculated and reported in accordance with the Global Investment Performance Standards (GIPS) — globally recognized as industry best practice. ACA Performance Services performs an annual verification and performance examination of the accuracy of STRS Ohio’s investment return reporting and said STRS Ohio’s GIPS compliance has been verified since 2006.

ACA shared that all requirements to be GIPS compliant have been met and also noted that the GIPS standards require net returns for asset owners which are net of all costs, including carried interest. The firm provides verification services for 62 of the 100 largest institutional investment managers.

McFee, Rhodes, Walters Recognized for Board Service

The Retirement Board recognized Robert A. McFee, Jeffrey Rhodes and Rita J. Walters for their years of service as board members. The board thanked them for serving their fellow educators and noted that pension and health care funding improved during their board tenure, two health care rebates were approved and benefits were enhanced for active and retired members.

Independent Audit Report Supports Work of STRS Ohio’s Actuary

An independent actuarial audit commissioned by the Ohio Retirement Study Council showed the work of STRS Ohio’s actuarial consultants is considered strong. The firm that conducted the study, Pension Trustee Advisors, Inc. KMS Actuaries, LLC (PTA/KMS) presented the results of its study at the August Retirement Board meeting.

The purpose of an actuarial audit is to provide an independent verification and analysis of the procedures and methods used by the STRS Ohio consulting actuary. The report concluded, “We found Cheiron’s work to be strong. It was reasonable, consistent and accurate.” The complete audit report is available on the STRS Ohio website.

Retirements Approved

The Retirement Board approved 1,201 active members and 164 inactive members for service retirement benefits.