Dan MacDonald's personal report on the August 2024 STRS Board meeting: "Two Long Days"

From Dan MacDonald

August 18, 2024 

STRS August Board Meeting, Two Long Days 

I attended the August 15th and 16th STRSOH Board meeting. Implementation of recommendations from the Funston Audit has Board members meeting in committees that then report to the entire STRS Board; therefore, the days flow from committees to entire Board back to committees. Although the Board has had committees in the past, this is really a new concept in progress.  

Thursday morning began with the Governance Committee meeting [Correthers, Fichtenbaum, Davidson, Herrington, Jones]. Some other Board members were present, but are not on the committee. 

If you recall, the Governance committee had AON as its consultant, but they withdrew. Three companies were separately interviewed to become consultants. The committee asked the staff to vet these three companies and three others that have not been interviewed. The committee then worked on Pension Funding of Member Benefits and development of a Sustainable Benefits Plan (SBP). 

STRS staff suggested to add language changes to the funding policy – for instance, “The funding objective is to: take steps to adjust benefits to the level prior to the adoption of measures from 2012 to 2017, while preserving the fiscal integrity of the system as determined by the Board’s actuary.” [Current policy does not describe a SBP so one might be helpful. I see this as a financial plan which is partly in policy, currently ignored, but certainly not spelled out.] 

New language suggested addresses both actives and retirees, COLAs and reducing years of service. These objectives would be in the funding policy. [Note that a 1% COLA actuarily costs $7 BILLION dollars; 2% 14 BILLION; 3% $21 Billion. This money is currently not available so do not think this is suddenly going to happen. A lot of discussion over all of this.  You can find the presentation slides at STRSOH.org under ABOUT, then BOARD MEETINGS then AUGUST MEETING MATERIALS “Pension Funding of Member Benefits Policy Updates.”] Only half this presentation was given as four hours brought the committee meeting to noon. The previously discussed policy changes were reviewed and recommended to be taken to the Board.

Near 12:15 pm the actual Board meeting was called to order. After minutes were approved and the Board addressed revised committees [Michelle Flanigan now seated, and committee assignments adjusted], Public Participation took place. Ten people spoke. A variety of topics addressed: fees paid external investors, PBI’s being a good thing, not fulfilling fiduciary responsibilities, suggestion to take a vote of no confidence, Siedle audit and what is being hidden, contractual obligations ignored, hostile takeover accusation, special meetings, and equities held in the STRS investment portfolio of a company that abuses affordable housing. The lunch break followed at 1 p.m.

After the break, the Finance department had STRS’s actuary consultant, Cheiron, present on Sustainable Benefit Plan Priorities. The thrust of the presentation addressed the challenge to balance different member interests [think actives, retirees] and not forgetting that contributions and investment earnings should equal benefit payments and expenses [they are not]. Supplemental benefit discussion and the Pension Funding Policy, along with the Sustainable Benefits Plan, are discussion items for the next seven months.

The Board meeting recessed about 3:30 pm. The Audit committee [Davidson, Falls, Fichtenbaum, Sellers, Steen] then opened and met publicly until 5:40 pm when it went into Executive Session. 

The audit department presented its past, current and future internal audits of the departments of STRS. Outside auditors Crowe LLP presented the timeline for its yearly independent audit. 

Outside consultant, ACA Group, also presented regarding governance, risk, and compliance. STRS was praised for its GIPS Standards compliance since 2006 and ACA’s review of STRS accounting/financial practices. 

The committee meeting public session ended after Acting Director Lynn Hoover discussed the Funston fiduciary audit, which was completed in May of 2022, and the current status of its 172 recommendations. 63 completed; 51 in progress; 24 planned; 5 in disagreement; Board still to decide 29. [Yes, it does add to 172]

Day 2 began with the Investment Committee meeting [Falls, Fichtenbaum, Herrington, Hunt, Steen] which lasted 210 minutes. STRS Director Worley reported a June return of positive 1.07% with the investment assets ending the year at $95.3 billion, up $5.2 billion since the closing June 2023. The total net return for FY 2024 was 10.53% [Remember that the actuarial assumption is 7%. This does not mean a COLA is suddenly on the table. I think $107 billion was mentioned as overall liability needed to address to be fully funded and a Sustainable Benefits Plan is being developed and discussed. STRS is closing the gap.]

July’s return was positive 1.2% with total assets at $96.1 billion, up by $800 million in FY 2025.

Domestic Equities were then reviewed.  Outside consultant Meketa then shared a Performance Report as of June 30, 2024. Once again STRS did well against its peers. [I know, no COLA,] Outside consultant Callan presented its review of the Alternatives Portfolio, which has improved the risk-adjusted returns of the total fund through added diversification and strong performance. 

Meketa was then back addressing and leading discussion on an assets-liability survey the Board had taken and its implications. One finding: “There is far more agreement in the survey results than what comes through during Board meeting discussions.”

Meketa went over all 23 questions with the Board showing their responses. The presenter was challenged on whether he represented the staff or the Board. He made it clear that he was there for the Board and would help them with what they should be asking and requesting. [First time I ever have heard a consultant pledge that position.]

The committee then voted on a Reference Portfolio Benchmark. The committee passed 4-0 with Herrington not voting. The proxy voting summary then was presented – 53,748 proposals voted; 7,127 ballots responded to during the six-month period. There also was a review of securities compliance policies and procedures and a semi-annual derivatives exposure report presented.

That was Friday morning. The STRS Board was called to order at 12:30 pm and immediately broke for lunch. The meeting was called back to order at 1:52 pm with some votes coming from committees to the Board, all passed. Mr. Davidson did request a legal opinion regarding the May 16 removal of the chair and vice chair.

The Executive Director report covered activities at STRS for July and August. Against 42 other systems, STRS call center earned the highest service level score. Info was shared on member and employer outreach and a legislative report. [It’s an election year.] 

An Ohio Retirement Study Council sub-committee has concern regarding STRS intergenerational equity and any 13th check or COLA payout by STRS. [STRS is special and ORSC should explain the ways STRS is different than any of the other 4 state pensions other than their desire for no COLA.] 

The Benefits department then addressed 2025 Proposed Premiums. Over 90% of STRS plan enrollees have no premium increase, including Health Care Assistance Plan enrollees. Non-Medicare enrollees do increase from $279 to $319. A non-Medicare spouse has a $161 increase. This is a year for dental and vision insurance. Remember that these plans are offered only every other year.

Routine Matters began about 4:05 pm.  FY 2024 PBIs were authorized. Fichtenbaum was voted chair, and Jones was voted Vice chair. Someone named Michael Harkness was elected to fill Steve Foreman’s contributing member seat. Foreman resigned. Former Board Member Arthur Lard was also nominated, but he wasn’t elected.

Under old business, Board members Jones and Sellers presented on seminars attended.

Under new business, Neville’s paid leave was extended another month. Davidson asked the governance committee to take up the definition of teacher service. Correthers pointed out that at least 3 meetings will not be on the third Thursday of the month, February, April, June.

The meeting adjourned at 4:41 pm. Next meeting scheduled for September 18, 19, 20.

[New Board member Michelle Flanigan jumped right into discussions and probing. Chair Fichtenbaum pushed back on many of the financial presentations. Davidson probed and put forth ideas and suggestions. Falls continued to acknowledge other ideas and search for consensus. Sellers probed and Steen pushed Board members to continue the push for teachers. His final meeting is next month. Actually, everyone on the Board was engaged throughout the two long days. Personally, I also heard senior staff addressing active/retiree issues that have been continually raised. Acknowledgement is a start.]