CalSTRS Report November 4,5, 2021

By Pat Geyer, CalRTA Liaison to CalSTRS

Executive Summary

  1. As of September 2021, the total fund was $321 billion, slightly up from August which ended at $318 billion.
  2. The Collaborative model is working. CalSTRS estimates that in 2020 the collaborative model saved the fund $309 million.
  3. Service Retirement, Disability, and Survivor Benefit modifications were down in number from 2018 to 2021.
  4. Cassandra Lichnock gave the Chief Executive Officer report.
  5. Lisa Blatnick is the new Chief Operating Officer, the position vacated by Cassandra Lichnock.
  6. Melissa Norcia was appointed at CalSTRS’ Chief Administrative Officer, the position vacated by Lisa Blatnick. She was formerly director of Human Resources.
  7. Kristel Turko is CalSTRS Director of Human Resources replacing Melissa Norcia who became Chief Administrative Officer.
  8. Mark Gini assumed the role of Ombuds following Tom Barrett’s retirement. Christina Nguyen took over as Ombuds Coordinator after Patty Clark retired.
  9. The Headquarters expansion project is approximately 47% complete as of September 30, 2021. The completion date is scheduled for December 2022.
  10. The proposed CalSTRS total 2022-23 operating budget is $687.9 million and includes 1293 positions (an increase of 61 positions). This represents an increase of $62.2 million or about 10%.

 

Investment Committee

The Committee began with hearing statements from the public. Alex Day, a teacher asked CalSTRS to divest from fossil fuels. Joan, Paula, and Lyn retired teachers also called in to ask CalSTRS to divest in fossil fuels.

The Committee heard the GIPS (Global Investment Performance Standards) performance report.  The report stated that the One-Year Returns as of June 30, 2021 were 27.11%.  CalSTRS went from $246 to $306 billion.

Chris Ailman, CIO presented the CIO Report: As of September 2021, the total fund was $321 billion, slightly up from August which ended at $318 billion. The CalSTRS fund is 76% invested in the United States, 1.5% invested in China. The most common public equity is in technology such as Apple, Microsoft, Alphabet, Facebook. Risks are inflation, unemployment.  Surprises could be Chinese aggression against Taiwan or North Korea.

Kelly Criss is the new head of Investment Operations.

The stock market is at a high.  The Federal Reserve is at risk because of the change in leadership. CalSTRS returns tend to follow the market and the market is dominated by technology.  Will COVID testing requirements cause employee dissention?  Employees are leaving.  One does not know how this will affect the market.

The Collaborative model is working. CalSTRS estimates that in 2020 the collaborative model saved the fund $309 million. CalSTRS is the partner of choice which can be an advantage. CalSTRS plans to hire 91 new employees over the next three years, but CalSTRS still will depend on external managers.   There is a possibility of a branch office in investments, possibly San Francisco or Los Angeles.  Challenges for CalSTRS are the need for more resources (add employees with talents),

The Annual Investment Cost Report was presented.  2020 costs increased in carried interest.  Management fees increased because there were more assets, and external managers are more expensive.  However, CalSTRS is a low cost fund compared to its peers.  The Collaborative Model , bringing investment in house has resulted in savings – $781 million in savings the last four years.  $309 million in savings in 2020.

Audits & Risk Management Committee

The Committee heard the annual report on benefit payment increases and decreases. Service retirement changes were the most common, with 15,806 members seeing a benefit payment decrease (total value $64,632,019) and 26,128 members seeing a benefit payment increase (total value $12,564,229) in 2020-21.  The amount of the benefit decrease on average was much larger than the benefit increase change.

Service Retirement, Disability, and Survivor Benefit modifications were down in number from 2018 to 2021.

Staff completed 96 out of 106 employer audits.  81% of the employers had at least one finding.  Staff is working with employers to resolve the findings (103 of the findings are resolved, 138 findings are not resolved).  Most employer audits have to do with actives. The focus was on unused sick leave, post-retirement earnings, and special compensation.  The independent auditors’ reports were accepted.

Two internal audits are in progress: Production Data & Application Deployment and Third Party Vendor: Genesys Telecommunications Laboratories, Inc.

The 2021 Management Letter was presented by Larry Jensen & Julie Underwood. A deficiency in internal controls exists. Control does not allow staff to prevent or detect and correct misstatements on a timely basis. CalSTRS is working on the problem.

The 2022 Enterprise Compliance Services Plan was presented: (1) Governance: structure the program with clearly defined roles and responsibilities, (2) Culture: ethical and compliant behavior embedded in the foundation and daily operations, (3) Risk Assessment: periodic assessment of risk exposure related to misconduct or noncompliance with laws, regulations, policies and standards, (4) Policies and Standards: defined guidance to support organizational ethical expectations and compliance with applicable laws and regulations, (5) Training and Communications: appropriately tailor subject matter topics to support understanding of compliance and ethics, (6) Confidential Reporting: efficient and effective mechanism that allows anonymous reporting, (7) Case Management & Response: system and process to effectively and efficiently manage, investigate and resolve hotline reports, (8) Monitoring: system for routine monitoring of organizational compliance risk, controls and behaviors, (9) Third Party Compliance Management: risk-based application of due diligence over third-party relationships, and (10) Program Management: defined structure to manage, measure and evaluate program effectiveness.

The 2022 Internal Audit Plan was presented.  The proposed 2022 audits are:

  1. Financial/Governance (Financial Statements, Real Estate, Currency and Performance Management, Securities, Benefit Payment modifications)
  2. Digital Transformation (Pension Solution, Information Security, Software Management, Disaster Recovery, Cloud Security, Software Development Cycle)
  3. Member/Employer (Survivor Benefits, Death Benefits)
  4. Organizational Strength (Travel and Contract Management, Mail, Strategic & Business Planning, Global Reporting Initiative)

The 2022 CalSTRS audit plan is for 120 employer audits.

Board Governance Committee

The Committee discussed the revised work plan.  Issues were: How to take advantage of the hybrid meeting format, and how can meeting materials be enhanced to support the delivery of information.  The law allows public meetings to be virtual, but this must be approved by the State in January.

The Committee discussed a revision to the Board Governance Manual.  Under Section 4, subsection G (7) Staff recommends keeping the current sanction and adding sanctions that would allow CalSTRS discretion to immediately terminate the contract/agreement and/or withhold payments for entities in violation of policy. This will allow the Board to act immediately.  CalSTRS has only had 1 violation in the last three years.  However, many companies have had problems and this revision will give CalSTRS more clout.

Teachers’ Retirement Board

Cassandra Lichnock, CEO gave the Chief Executive Officer report.  Melissa Norcia was appointed as CalSTRS’ Chief Administrative Officer.  She was formerly director of Human Resources.   Kristel Turko is CalSTRS Director of Human Resources replacing Melissa Norcia who became Chief Administrative Officer.  Lisa Blatnick is the new Chief Operating Officer.

Mark Gini assumed the role of Ombuds following Tom Barrett’s retirement. Christina Nguyen took over as Ombuds Coordinator after Patty Clark retired. The majority of cases come from those receiving a benefit, specifically receiving a service retirement benefit. Other inquiries related primarily to survivor benefits and employer reporting.  The Ombuds office heard 288 cases down from an average of 328 to 370 cases a year.

The Headquarters expansion project is approximately 47% complete as of September 30, 2021.  The completion date is scheduled for December 2022.  Projects completed this month were the placement of the bridge which will connect the two buildings at the 4th floor.  Additional activities were: 1. Beams at office levels 3 and 4, 2. Framing , 3. Penthouse structure, and 4.Lobby stair cases.  Costs relating to the building delay are 5 to 7% of the original budget of $15 to 21 million.

Lisa Blatnick, COO, discussed the Headquarters Occupancy and Tower Leasing Plans.  CalSTRS plans to continue with a blended workforce: work at home 1 to 2 days a week, in office 3 or 4 days. This will require a reconfiguration of office plans including a 20% reduction in desk purchases.  Benefits and Services, Financial Services, Administrative Services and Audit Services will move to the new building.  There is a lack of quality office space in Sacramento, and CalSTRS is optimistic about leasing space in the new building.

The Pension Solution Project (computers) plans to go live by October 2023.  There will be an update at the CalSTRS January Board meeting.

Rick Reed and Davis Lamoureux reviewed CalSTRS funding levels and risks.  Key findings are: 1. The state’s share of the funding obligation will end by June 2023, ahead of schedule.  2.  Long term contribution levels for employers are expected to be higher.  3.  Anticipated decrease in enrollment in K-12 could lead to future declines in the size of active membership, resulting in lower than anticipated payroll growth. 4.  CalSTRS largest risk remains investment-related.  5.  Full funding is dependent on CalSTRS meeting its actuarial assumptions.  Last year’s CalSTRS portfolio performance was good.

CalSTRS sponsored 3 State Legislative Bills.  They are:

AB539 (Cooley ) to expand CalSTRS Collaborative model. (Chaptered)

Ab551 (Rodriguez) offers a traditional (tax deferred) IRA in addition to the Roth IRA. (Inactive File)

SB634 (L,PE&R) Makes various minor changes to the Teachers’ Retirement Law. (Chaptered)

Other legislation of interest is:

AB845 (Rodriguez) creates disability retirement due to a COVID-19 related illness if the disability arose out of the member’s employment and sunsets January 1, 2023 (Chaptered)

H.R. 82 Eliminates and GPO and WEP from the Social Security Act (House Committee)

AB890 (Cervantes) requires the boards of CalSTRS and CalPERS to submit an annual report regarding participation of emerging or diverse asset managers in the systems” investment portfolios.  (Chaptered)

AJR9 (Cooper) to repeal the Government Pension Offset (GPO) and Windfall Elimination (WEP)

John Stanton gave a virtual presentation on Federal legislation.  He is encouraged by a Democratic Party President and a Democratic Party Legislature.  He anticipates legislation on climate risk, investor protection, and infrastructure.

Next was a review of the CalSTRS Basic Financial Statements as of June 30, 2021.  CalSTRS had no significant change.  Total net investments were $341 billion.  Total Liabilities were $40.7 billion.  There was a $64 billion increase in assets for the year.

The proposed CalSTRS operating budget for 2022-23 is $374.5 million.  The estimated net increase for the fiscal year 2022-23 is $48.6 billion.

The proposed CalSTRS total 2022-23 budget is $687.9 million and includes 1293 positions (an increase of 61 positions).  Of this amount $313.4 million is for External Investment Management and $374.5 million is for the proposed operating budget.  This represents an increase of $62.2 million or 10%.  The annual incentive award for the Chief Investment Officer is $1,103,094.  Including the proposed awards for the Chief Executive Officer and the Chief Investment Officer, the incentive payments for all plan participants for this fiscal year, totaling $16.9 million, represent 0.25% of the value added from those specific investment decisions.

Members of the public spoke.  David Walrath, CalRTA said that no retiree should be held liable for mistakes others make.  Keven, CTA Retirement Committee Chair said don’t punish employees for employer error.  Mary Kay Scheid asked STRS to not impact retirees for employer system error.  Two other members of the public asked CalSTRS to divest in fossil fuels.