Date: Mon, 4 Feb 2008 12:59:25 -0500
From: jmcgree@COLUMBUS.RR.COM
Subject: Report to OEA-R On Recent STRS Board Activities
To: OEA-R@LISTS.OHEA.ORG
STRS Board Report
2/4/08
Last week was a busy week for STRS Board
members. This rather lengthy report reflects that level of activity.
Although my comments are a bit wordy, they cover several important
developments and I urge you to wade through them.
- Jim
Ohio Public Pensions Forum Meets in
Columbus
On January 28 and 29 five members of the STRS
Board (Jeff Chapman, Mary Ann Cervantes, Mark Meuser, Conni Ramser, and
Craig Brooks) attended the Ohio Public Pensions Forum in Columbus. The
conference was also attended by STRS Executive Director Damon Asbury,
Deputy Executive Director Robert Slater, STRS Chief Investment Officer Steve
Mitchell, STRS Governmental Affairs Director Terri Bierdeman, STRS
Communications Director Laura Ecklar, STRS Member Benefits Director Sandy
Knoesel and other STRS officials. The forum was created in 2007 to answer
the need for high quality continuing education for the staffs and Board
members of Ohio’s five public pension systems. The second annual conference
saw over one hundred pension officials attend to hear expert speakers on
investment, governance, the economic outlook for the country and other
topics.
One recurring theme was the need for governing
boards to focus on policy and be “big-picture-oriented” and not become
bogged down in details and operational decisions. It is often difficult for
boards to strike a balance that includes aggressive but appropriate
oversight without micromanaging by reserving too many decisions to the
Board.
For the systems’ investment officials there
were two days of detailed discussions about the intricacies of hedge funds,
real estate investment trusts, and other arcane investment world details.
There were dozens of graphs and charts that people like Steve Mitchell (STRS
investment chief) were able to decipher with ease but which left many others
in the audience scratching their heads. Trends and investments to be
carefully studied before jumping into, were reviewed.
It was an excellent example of bringing
high-quality continuing education to Columbus, something often called for by
board members who object to the expense of sending retirement system
officials to out-of-state conferences and workshops.
STRS Board Holds Annual Retreat
The STRS Board held its annual retreat on
January 30 and 31, discussing a variety of topics and finally deciding some
long-simmering issues. The retreat is an actual Board meeting that is open
to the public but is not as structured as regular monthly meetings that
focus on departmental reports and program decisions. The retreat format
provides the opportunity to address “big” issues and resolve problems that
require more time than is usually available at regular sessions.
The following are highlights of the retreat.
STRS Board Works on Governance Issues
It is no secret that there has been
considerable acrimony at STRS meetings of the past few years. The system was
stressed by the stock market downturns from 2001-2003, the resulting benefit
cutbacks (spousal health care subsidy elimination, 13th check,
etc.), the ethics investigation and resulting convictions of board members,
the removal of the Executive Director, and the legislature’s overhaul of the
composition of the STRS Board. This much change in this short time period
has created working sessions that at times seemed more like negotiations
between military superpowers at the height of the Cold War than
collaborative efforts among a dedicated group of professionals all seeking
the same ends. There has been a palpable lack of trust and respect among
Board members and between the Board and the staff at STRS.
In a series of breakout sessions led by
facilitator Ian Lanoff (Groom Law Group) on Wednesday, the Board tackled the
basics of governance – what do each of the key elements of the organization
need from each other to accomplish the necessary work, what elements of the
operation need to be changed and which are working, and how should the Board
spend its limited available time?
It would be impossible to recreate the
totality of the products of this day’s work, but I observed some genuine
soul-searching among Board members and staff about issues that have been
getting in the way of the Board’s ability to act effectively. Here, in no
particular order, are some of the items that seemed to reach consensus:
1.
Fiduciary Duty –
·
The Board needs timely, accurate,
complete information from staff to make good decisions.
·
The elected and appointed
fiduciaries on pension system boards need to act at the level of “Prudent
Expert” according to court cases of the past few years, not just as “prudent
persons” as required of non-profit, volunteer boards. This is the highest
standard required and means that Board members have a fiduciary duty to become
trained in as many areas of pension system operation as possible and to
continue their education throughout their tenure on the Board. This has been a
hot topic at many STRS Board meetings in the past few years as the cost of
Board travel and training became political issues. There now seems general
agreement that continuing education for Board members is necessary, but that
it should be held locally whenever possible and, if out-of-state travel is the
only option, the expenses should be held to a minimum. The Board should also
be more involved in online courses and formal training as part of regular
Board meetings.
·
Board members need to ask the
right questions in the right way, and need to be active overseers of their
policies, ensuring that the Executive Director is managing the staff in
accordance with established Board policy.
2.
Board / Executive Director Relationship –
·
The Board should be
“policy-focused” not “operationally-focused.” It is the Board’s job to
establish policies that reflect the mission and goals of the organization. It
is the Executive Director’s job to direct staff in accordance with those
policies. The Board must provide oversight of the Executive Director without
usurping his authority to make decisions within policy.
3.
Time Management –
·
The Board should devote most of
its time to items that have a major impact on members of the system but also
have a major “fiduciary” impact on the system. In other words, issues with a
minimal financial impact on STRS should receive a lower priority than items
like investment policy, member benefits, etc. An example of this might be that
on-going arguments over the profitability of the child care center should not
take time away from an analysis of the risk-to-benefits ratio of a large
portion of the investment portfolio. Both items may be “important” but the
Board should put things in perspective and spend their limited time on the
fiduciary “biggies.”
Board Hears Report From “Headhunter”
On Thursday morning Gary Hudepohl of Hudepohl
& Associates, the search firm hired to aid in the selection of the next STRS
Executive Director, provided an assessment of his efforts to date. Among his
main points:
·
The position of Executive Director
of Ohio STRS is one of the top public pension system jobs in the country and
therefore should attract several outstanding candidates from around the
country.
·
Several factors make this job
attractive: the financial stability and health of Ohio STRS’ pension funds,
the generally positive relationship with the state legislature (evidenced by
their cooperation on divestment issues that are thus far voluntary), the
Columbus community that is viewed as very “livable,” the ability of STRS to
provide attractive compensation, and a host of engaging challenges
(healthcare, for example).
·
There are, unfortunately a couple
of factors that work against STRS in recruiting a top executive director: the
widely noted acrimonious relationship among Board members, and the apparent
lack of trust between the Board and the Executive Director and staff. Hudepohl
noted that the adversarial tone of many STRS Board meetings is well-known in
the circles of our candidate pool. He bluntly stated that if the Board didn’t
clean up its act (my inference, not his exact words) that STRS would not be
able to hire the kind of person we need and deserve based on our other
positive characteristics. He stated flatly that a top manager will want to
have more executive authority than recent Board actions and policies of STRS
would seem to indicate the Board is willing to give. He stated flatly that
excessive restrictions on the Executive Director would repel the top talent
from the job. Hudepohl pulled no punches and laid down the challenge to the
Board that they must change behavior if his search is to be successful.
Hudepohl called the effort to find a new
Executive Director a “war for talent” and that the only way to win this war
was to straighten out the governance issues that have been bouncing off the
walls of the STRS Board Room for the past several years. He noted the Board
seemed to agree on “mission” but were “off” in execution, not focused on
strategic issues, and had no agreement on what proper “oversight” is.
Ian Lanoff, the facilitator from the Wednesday
sessions who has worked for Les Wexner and The Limited, Inc. over the past
ten years, told the Board that in all of his experience in hiring top
executives, he had never heard a report that so clearly provided direction
to a Board of Directors that they needed to attend to the messages they were
sending to outside stakeholders, however unintentional those messages may
have been. He mentioned that it was not a matter of “playing nice” but of
the need to create an atmosphere that would attract the kind of Executive
Director that is needed. Hudepohl also noted the need for a “unified public
face” or as OEA President Pat Frost-Brooks in her comments to the STRS Board
in December called it “speaking with one voice.”
Hudepohl reported that he hoped to have a set
of possible candidates to the Board in March and to have a viable candidate
selected in April.
Quadrennial Actuarial Review Presented
Representatives of Buck Consultants presented
a detailed and lengthy report to the Board on the system’s actuarial
assumptions. This is done every four years to check whether or not the
assumptions comport with reality. Their conclusion: most of the assumptions
are in good shape, but some tweaking should be done in the area of payroll
growth. Also, some changes in STRS demographics should be reflected in the
assumptions.
These actuarial assumptions determine the
Funding Period of the retirement fund, the amount of time it would take to
pay all of the system’s liabilities if all assumptions are met. This is
something akin to the length of a home mortgage. The standard in the
industry is that a pension’s Funding Period should be no longer than 30
years. As of July 1, 2007, based on current assumptions, the STRS Funding
Period was 26.1 years.
Buck recommends reducing the anticipated
statewide payroll growth from 4.5% to 4% based on the shortfall in this area
that has largely been due to the reduction of teaching positions in recent
years. It is somewhat impacted by the increasing number of higher paid
retirees being replaced by relatively lower paid new hires. They noted that
in the future this would be a positive development as teachers further down
the salary schedule are generally entitled to longevity steps that increase
their annual pay faster than the base pay raises that result from collective
bargaining.
After accounting for all changes in economic
projections as well as demographic tweaking, the Funding Period for STRS
would grow to 34.6 years based on July 1, 2007, numbers. The assumptions
will be discussed and approved at a future Board meeting.
Board Puts Several Pending Issues To
Rest
At the October Board Meeting, Board member
Dennis Leone moved to amend or create policies regarding the payment of
legal fees for STRS staff members in the execution of their jobs, severance
pay, and authority delegated to the Executive Director. His objections
centered on payment of fees to a personal attorney for a staff member who
felt independent counsel was needed to ensure proper representation during
the ethics investigations, and the payment of severance benefits for
employees laid off in the computer services department who were no longer
needed in their area of implementation of the new computer system. In both
cases Leone maintained the Executive Director acted improperly and outside
of Board policy. He therefore recommended changes in the standard policy
language that authorizes the Executive Director to “act in all matters for
the Board.”
The staff presented information that severance
pay for employees who are laid off is standard practice in the private
sector in which STRS, operating as a business, competes for employees. In
reviewing the policies of twelve public and private institutions in the
Columbus area, it was found that all had used severance pay to mitigate
certain security and legal risks to their enterprises. The standard was
between 1 and 1.5 weeks of severance pay for each year of service. The staff
also pointed out that each of the employees signed legally binding documents
absolving STRS of any future alleged discrimination that could result in
costly litigation. They also pointed out that the payment of severance was
less expensive than implementing the “retention incentives” program the
Board had previously approved to guard against the untimely resignation of
key personnel prior to the completion of essential projects. The estimated
savings, including the elimination of salaries to associates no longer
needed, were pegged at $380,000 in the first year alone even when the total
expense of $93,000 for severance and insurance benefits was taken into
consideration.
As a result of this discussion the Board
approved a new severance policy that provides for one week of pay for each
year of service, with other fringe benefits continuing for that same period
of time at the same level as during their employment. The associate must
sign a “Release of All Claims” document before severance will be paid, thus
eliminating the possibility of wrongful termination or discrimination
lawsuits. The Executive Director will be required to review his proposed
implementation of this policy with the Board in executive session, but no
public vote will be required to approve the payment of severance benefits.
The resolution of the “Legal Fees” issue was
resolved with a unanimous vote in support of a new policy that requires an
associate who requests legal representation to consult with the STRS General
Counsel on the matter and, if denied representation, appeal to the Ohio
Attorney General pursuant to Ohio Revised Code 109.361. Unless otherwise
required by law, STRS will not pay for the private legal expenses of
employees outside of the designated process without approval by the Board.
To clean up the last of the pending
controversies, the Board unanimously voted to go back to the original motion
authorizing the Executive Director and other Administrative Officers “to act
for the Board in all matters related to personnel and current expenses.” In
effect, this boilerplate language gives the administration the power to hire
and fire personnel and pay the bills. All of the other pension systems have
similar authorizing documents. It should be noted that Dr. Leone was absent
for this vote, having to leave the meeting early for a previous commitment.
