CalSTRS Report, July 8 – 9, 2021

By Pat Geyer, CalRTA Liaison to CalSTRS

Executive Summary

  1. The CalSTRS fund closed above $308 billion as of June 30, an all-time record high.
  2. The CalSTRS staff continues to work remotely. However, after September 7 staff will be able and encouraged to return for 1-5 days in the office.
  3. The Board approved a policy revision to establish a Risk Budget range of 10 to 60 basis points in the Fixed Income Portfolio and add private credit up to a maximum of 5%. Discussion of Benchmarks will continue at the offsite meeting in October.
  4. CalSTRS staff reported that CalSTRS member COVID deaths through May 15, 2021 totaled 638. Only 25 were active females and 31 were active males.  The rest were retirees.

Investment Committee

The Committee reviewed the Real Estate Policy.  The objectives of the Real Estate Policy are: (1) generate enhanced yield, (2) provide a stable cash flow, (3) hedge against inflation, (4) provide diversification.  Portfolio includes Core (50-75%), Value Added (10% to 30%) and Opportunistic (10% to 30%).

The Global Equity Policy will be consolidated into one Global Equity Index replacing the Separate U.S. and Non-U.S. indices.

The Committee reviewed  Investment Committee Charter.

The Committee reviewed and approved the Investment Work Plan.  Details will come later.  Committee discussed reducing the carbon footprint.

Next the Committee reviewed and approved the 21-22 Investments Business Plan.  This includes a is a 10-year budget plan assuming status quo and a second plan featuring a conservative implementation of the Collaborative Model. Another feature is Succession Planning for CalSTRS leaders as well as asset class staff.  Chris Ailman asked for more diversity in staff.

Investment policy and management plan revisions reflect a 2% reduction in Public Equity, a 1% reduction in Fixed Income, a 1% increase in Private Equity, a 1% increase in Inflation Sensitive assets, a 1% increase in Risk Mitigating Strategies.  These revisions are part of the transition to the long-term target allocations approved by the board at the November 2019 investment committee.

Chris Ailman, CIO reported that the CalSTRS fund closed above $308 billion, an all-time record high.  The CalSTRS staff continues to work remotely.  However after September 7 staff will be asked to return for 1-5 days in the office.  October 31 to December 25 will be a different schedule.  When in office each staff person will have a separate cube.  By early 2022 CalSTRS staff plans to work in office.

The Board heard a policy revision to establish a Risk Budget(1%) range of 10 to 60 basis points  in the Fixed Income Portfolio and add Private Credit up to a maximum of 5% of Fixed Income assets. Discussion of the benchmarks will possibly continue at the CalSTRS offsite meeting in October.

The Committee heard a report on Diversity in the Management of Investments.  This effort began in 1989 with the emerging managers program.  As of 2019 the CalSTRS Investments Branch is 32%Asian, 5% Black, 10% Hispanic, 2% Pacific Islander and 49% white.

Audits and Risk Management Committee

The Committee heard the Independent Auditor’s Report on Internal Control Over Financial Reporting.  There were four deficiencies of internal control and recommendations for improvement.  #1 Internal Control over Reporting Fair Value and Fair Value Hierarchy (Level) of Certain Private Equity Co-Investments.  Management continues to evaluate current policies for fair value measurement. #2 Active Member Data-Completeness and Accuracy. Employees took computer-based training and complete 18 webinars.  Employer Services Training developed 10 job aids located on the Employer Support Portal.  Topics include: Pay Rates, Benefit Structures, Cash Balance Benefit Program, Creditable Compensation, Creditable Service and Working after Retirement. #3 Medicare Premium Payment completeness and accuracy of all “eligible participants”.  #4 Precision of Financial Statement Review.

The Committee heard the 2021 Internal Audit Plan Mid-Year Progress Report.  Staff completed 57 of the 106 Employer audits.  103 audits are in progress.  61 audits had findings which included special compensation.  CalSTRS Member Account Services will assist Employers to correctly report the items that were found to be misreported.  Most of the audit findings are in K-12 and Charter Schools and include incorrectly reported compensation.

Types of risk are: (1) depreciation and asset retirements posted to the incorrect fund, (2) Delivery addresses may be entered/modified versus pulled from an approved list, (3) incorrect general ledger entries, (4) Duplicate invoices may accidently be paid.

Audit Services appreciates the review and concurs with the observations.  Audit Services will develop a plan for improvement and will report progress during regular reporting.

The next Audits and Risk Management Committee meeting will be November 2021.

Teachers’ Retirement Board

The Board heard a summary of the 2021-22 Board/Committee Work Plans.  The Board heard a summary of CalSTRS 2021-22 Annual Business Plans. Goal 1 is Financial/Governance. The first objective under this goal is to achieve full funding.  Also of interest under this goal was the initiative to support the Collaborative Model of Investments which would involve a blended investment workforce with new technologies, operational processes and infrastructure in the hybrid work environment. Goal 2 is digital transformation – new technology.  Goal 3 is to strengthen partnerships and services to members, employers, and stakeholders.  Goal 4 is organizational strength – efficiency and growth in a changing business environment.

CalSTRS has an operating budget of $307,382,375.  CalSTRS has 1,361 authorized positions.

State and Federal Legislation of interest to CalSTRS was presented.  CalSTRS has two sponsored bills, AB539 (Cooley) expands the Collaborative Model to include managing more assets internally and leveraging external partnerships.  AB551 (Rodriquez) authorizes CalSTRS to offer a traditional (tax deferred) Individual Retirement Account (IRA).

CalSTRS also supports H.R. (Davis) to eliminate the GPO and WEB, and S.558 (Feinstein) to establish a permanent Climate Risk Advisory Committee.

The Board heard an update on the Pension Solution IT Project.  Staff is working to mitigate the impacts of COVID-19.  Staff working at home has had impacts (Personal Leave Program).  So far training activities has been successfully conducted virtually.  Staff continues to monitor the impact on employers and partners due to their pandemic-induced challenges.  Challenges are (1) Testing activities delayed, (2) Higher staff turnover, (3) User Acceptance Testing and Training impacted due to staff working remotely. As of now, the Pension Solution IT Project is expecting a go-live delay of 18 – 24 months.

Cassandra Lichnock gave the CEO report.  CalSTRS is modifying how the staff works together (the Hybrid Model).  Most staff are still working remotely with hopes of starting to bring staff back to the office in September.

The new CalSTRS building finish date is December 2022.  But there is a schedule delay and concern about increased costs.  One present concern is the lack of cooperation of the Fire Marshall.

CalSTRS staff reported that CalSTRS member COVID deaths through May 15, 2021 totaled 638.  Only 25 were active females and 31 were active males.  The rest were retirees.

The next CalSTRS Board and Committee meetings will be in September 1-2, 2021.