Dan MacDonald's report on the April 20, 2023 STRS Board meeting

STRS FY2024 BUDGET & THE SUSTAINABLE BENEFIT ENHANCEMENT PLAN PRESENTED

For me, the STRS Board meeting started on Wednesday, April 19, when the Investment Committee met in the afternoon to interview two alternative investment consultants, Albourne and Callan. Ultimately, Callan was offered the contract as discussed, determined and voted by the Board at the end of Thursday’s Board meeting.

After call to order and the approval of Board minutes, Mr. Neville addressed the FY2024 Budget. Initially departments’ submissions would have raised the budget by 5.9%, but Neville said he pushed back and now is under a 3% increase. Additionally, he wanted to make it clear, that the Performance Based Incentives for FY2023, come out of FY 2024 budget. In May’s Board meeting, the PBI policy for 2024 will be discussed and voted.

The Finance Department then presented the proposed budget with emphasis that STRS Ohio “exists for the members;” that is its mission: “to serve Ohio’s public educators.” Emphasis was placed on transparency, acknowledging monthly expense reports that are detailed and an actual vs budget report printed in Routine Matters handout of each Board meeting. 

Operating Budget: Total compensation will be down by $618,100, -1%, [but remember that last year STRS staff received an additional full check because of the way the payroll calendar rolled out to 27 weeks vs. the usual 26 weeks. From Google: “The 27th pay cycle -- for workers who get paid weekly or every two weeks -- happens because of what's called "payroll creep," when an extra day each year creeps into the calendar.”

School Districts do not do payroll the way STRS does payroll. Your salary is your salary and that’s what you get. More specifically, last year’s budget slide states “27th pay accounts for $2.1 million of the $2.6 million increase” for FY 2023 budget. None of this was, of course, was mentioned.]

Incentive compensation is up $2,600,000 or 30.6% [Think Performance-Based Incentives and Neville’s opening remarks]. Fringe benefits up $1,238,800 or 6.5%. Professional and technical services up $503,300, or 4%. All other operating expenses down $623,800, or -4.7%. The proposed budget includes a 2% pool for merit-based increases and promotions [Think pay raises for most]. Bottom line, operating budget is up 2.8%, well under the initial 5.9% departments requests.

Capital Budget: Information processing and computer software is up $1,774,900, or 32.3%. Building improvements, maintenance and office are down $1,292,900, or -54.7%. Bottom line, capital budget up 6.1%.

The Investment Department report was brief. The preliminary total fund return for March was a +1.21% gross. The preliminary FY 2023 total fund return is estimated +4.29% gross; +4.20% net. Total assets ended March at approximately $88.1 billion, higher by $500 million in FY23.

There were eight speakers during Public Participation. Two addressed recent new social media distributions from STRS, The Real Facts and The STRS Ohio Reflection Series. One  addressed misinformation vs honesty and integrity praising STRS. Two addressed the current election and dangers [of which one pointed out multiple robocalls to actives regarding the current election]. Three addressed benefit losses.

After lunch the Finance Department had consultant Cheiron share with the Board Economic Assumptions for the June 30, 2023 Actuarial Valuation. Cheiron pointed out that the plan has significant negative cash flows. Normal cost + interest is not being met by contributions. Bottom line, Cheiron said to stick with current assumptions: Discount rate at 7%; Inflation at 2.5%; Payroll growth at 3%.

With that out-of-the way, Cheiron than presented its Sustainable Benefit Enhancement Plan. Cherion developed 3 fiscal integrity tests to evaluate whether an enhancement would materially impair the fund’s fiscal integrity. Two of three tests arrived at zero dollars available, the third, $300 million. All three tests needed to be passed, therefore $0.00 available. Much discussion followed on the numbers used being too cautious.

Then Cheiron presented the “De Minimis Enhancement.” Cheiron determined that in the event the SBEP {Sustainable Benefit Enhancement Plan} budget is zero, a de minimis enhancement that would not materially impair the integrity of the system might be available. The de minimis enhancement amount could not be more than 1% of the actuarial value of the assets, provided the Plan is projected to be fully funded in 20 years or less after the inclusion of the de minimis enhancement. In 2023, for the FY2024 budget, a de minimis enhancement of up to $0.83 billion [$830,000,000] would not materially impair the fiscal integrity of the system.

Lively discussion followed by all Board members. Correthers mentioned actives first. Many addressed splitting. Steen mentioned a 0.9 COLA plus contribution deduction for actives from 14% to 13.7%. Exploring actives going to 34 years for full benefits would cost approximately $1.33 billion, therefore out of range. Pushing the amount available to a higher level was explored. Infinite choices.

[I need to make comment, and I think, I need input. $0.83 billion is a lot of money, but not enough to bring back a permanent COLA, nor to reduce a year, 35 to 34, for actives to be able to have a full retirement package. Last month’s financial report stated above we are only $500,000 above last fiscal year's closing. At one time during the past couple years, the general fund was approximately $94.8 billion. We are NOW at approximately $88.1 billion, as written earlier in this document.

Within Cheiron’s 3 tests, one formulated to $300,000, the other two tests came out as $0.00. The general fund, FY2022 closed at 78.9% funded. Taking $0.83 billion for enhancement, against a fund that is only $500,000 ahead of last year’s closing puts further strain on the fund $830,000,000 - $500,000. 

This doesn’t make sense to me. You? A benefit enhancement now, puts off something permanent. Believe me, Board members and STRS leadership desire to give; that is clear, but is it best? I personally think the de minimis money should remain in the general fund until the market recovers and a sustainable benefit enhancement can exist. I need and want input from actives and retirees.]

The meeting concluded with Routine Matters, [the transparency portion of the meeting], and under new business a report from Correthers on a workshop she attended and a vote for Callan as Alternative Investment consultant. The next Board meeting is slated May 17, 18, 29 with the Board meeting on the 18th.

Dan MacDonald, Executive Director, Local 279-R