CalSTRS Report, November 4,5,6, 2020

By Pat Geyer, CalRTA Liaison

Executive Summary

  1. Major concerns are: COVID, China, possible contested election, Presidential tweets, stock volatility, unemployment, oil prices.
  2. Goals for CalSTRS are to stay the course but be nimble, be opportunistic, diversify, and focus on lowering fees.
  3. The December meeting will be a CalSTRS Board meeting only.
  4. The classifications of Senior Portfolio Manager and Senior Investment Director were approved
  5. It was announced that Jack Ehnes, will be retiring July 1, 2021.
  6. The Board approved 2021-22 Operating Budget of $309 million for 1232 authorized positions.
  7. CalSTRS fund was $248.3 billion an increase of $8.3 billion due to investments and retirement contributions.
  8. CalSTRS member COVID deaths are 55 female and 46 male. 5 deaths are active members; the rest are retired members.
  9. 92% of the CalSTRS staff are working from home. 

Client Advisory Committee

Lisa Blatnick and Scott Chan reported on the Collaborative Model.  The Model includes regulation, resources, and competition.  Staff and flexibility are most important.  The goal Is to position CalSTRS to act globally.

Julie Underwood reported on the Operational Budget.  The budget will be presented to the Board on Thursday.

Melissa Norcia reported on Investment Classifications and Compensation.  This item will be presented on Wednesday in the Investment Committee.  It uses the collaborative model and people are important.  Two new staff positions are planned (Senior Investment and Senior Portfolio Managers).  The goal is to strengthen staff – more people and more technical.  David Davini, retired member spoke about his concern –  the CalSTRS budget is growing and there are no extra services for members.

Joycelyn Martinez-Wade reported on legislative proposals.  The CalSTRS bill has passed and been signed by the Governor.  There is a statue-of-limitations proposal as it relates to collections.  There is also a bill on creditable compensation.  2020-21 legislative proposals will come out in December.

Under Regulations Update there are two changes on public comment regulations and appeals regulations.  Two CalSTRS members had issues:  Jennifer Baker reported that employees and retirees have issues.  Ed Foglia is concerned about District errors.  Districts need more training and Districts must have consequences.

Investment Committee

Sustainable Investment & Stewardship Strategies (SISS)  was established as the Corporate Governance Program in 1978.  In 2019 it was renamed the SISS program.  It included the (1) SISS Investment Portfolio, (2) Stewardship and (3) Strategic Relations Management.  Currently CalSTRS had nine investment beliefs.  Chris Ailman wants the ESG to be integrated into the other asset classes.  He wants CalSTRS to be a leader in sustainability.  In January the Committee will hear the SISS private market policy, and in May the public market policy.

The Committee heard the Annual Investment Cost Report. Total costs have increased over the last five years.  But when compared with the growth of the fund they have increased less than 1%.  Private markets and active strategies have higher costs.  Private asset allocation (real estate and private equity) has increased over the last five years.  In 2019 costs were $1 billon external management, $327 million hybrid-private managed investments, and $39 million internally managed .  Internally managed assets represent 48% of the total assets and 3% of the costs.  Compared with its peers CalSTRS is a low cost fund.

Chris Ailman, CIO gave the CIO Report.  Major concerns are: COVID, China, possible contested election, Presidential tweets, stock volatility, unemployment, oil prices.  Country risks are China, Taiwan, and Iran.  It may be difficult to get 7% return over the next 10 years.  Goals for CalSTRS are to stay the course but be nimble, be opportunistic, diversify, and focus on lowering fees.

Alan Emkin saw growing division because of the inequality in the economy.  Low interest rates will benefit borrowers and risk takers.

The next Investment Committee meeting will feature a speaker on China.  The December meeting will be a CalSTRS Board meeting only.

Compensation Committee

The Committee approved incentive awards for 2019-20.

Melissa Norcia presented the Labor Market Benchmarking Study update.  The final results will be published in May 2021.  This update is done every two years and could result in changes to base salary, salary range, and incentive adjustments.

Melissa Norcia also reported on the Investment management classification concept.  Two new investment classifications are proposed: Senior Portfolio Manager and Senior Investment Director.  These positions will be part of the CalSTRS five-year plan.  Discussion followed about how these changes would impact costs, how do these changes compare with other public pension funds.  Sharon Hendricks would like to see the five-year plan and how and when these positions would be filled.  Harry Keeley is concerned that CalSTRS not grow too fast.  The classifications of Senior Portfolio Manager (4 positions) and Senior Investment Director (9 positions) were approved.

Teachers’ Retirement Board

It was announced that Jack Ehnes, will be retiring effective June 30, 2021.

The Board approved the Multi-Year Investment Plan ($40.9 million).  It established 109 positions and funding for External Investment Audit Services dispersed over five years.  The hiring is going slower but still on schedule.

The Board approved the 2021-22 Operating Budget of $309 million for 1232 authorized positions.  This represents a net baseline budget decrease of $31.8 million over the prior year.

The Board discussed the Public Comments Regulations.  It was recommended that the regulations be amended to allow the presiding chair to recognize additional speakers.  A question was raised about how this regulation would be used in a virtual format.  Final approval of the Regulations will be in January.

The CalSTRS Basic Financial Statements as of June 30, 2020 were presented.  The CalSTRS fund was $248.3 billion an increase from the prior year of $8.3 billion due to investments and retirement contributions.   There was a about 5%  increase in benefits paid out which is consistent with prior years and is a retult of increase in the number of retirees and the annual cost of living adjustments.

Jack Ehnes, CEO reported that the Teachers’ Retirement Board will meet on December 9.  There will be four primary agenda topics: consideration of board sponsored legislation, annual actuarial funding/risk report, semi-annual risk management report and pension solution project report.  No committees are currently scheduled to meet in December.  Ombudsman, Tom Barrett will retire January 1, 2021.

Through August 31, 2020 CalSTRS member COVID deaths are 55 female and 46 male.  5 deaths are active members; the rest are retired members.

92% of the CalSTRS staff are working from home.

The Headquarters Expansion Project is 23% complete and is on schedule and on budget.  In the future more CalSTRS employees may work from home, so CalSTRS may lease part of the new building.  The new building is scheduled to be complete July 2022.

John Stanton, Washington, D.C. consultant gave his report.  Mr. Stanton covered multiple new and proposed rules by the SEC and Department of Labor.  The rules would make proxy voting more challenging for institutional investors, make it more difficult for investors to file shareholder proposals, and would discourage ESG investing by private sector retirement plans.  Climate change is an issue, but gas and oil companies are opposed to much of the legislation.  Reopening after COVID will require Federal and State help.  A stimulus bill is moving.  Trump will fight the returns of the election.  Biden will need to pick “middle of the road” people.

Benefits and Services Committee

In January 2020 CalSTRS emailed a survey to a sample of 52000 active and retired members.  3165 responded,  2,114 active and 1051 retired.  67% reported being satisfied or highly satisfied with CalSTRS.  30% were neutral and only 3% were dissatisfied.  Older respondents were more satisfied.  Likelihood to recommend CalSTRS increases with age.  Over 90% of the respondents were satisfied or completely satisfied with their retirement.

Melyssa Adams provided an update on outstanding death benefits.  From 2001 through June 30, 2020  CalSTRS has paid over 102,000 death benefits totaling $895 million.  $78,376,000 is outstanding (unpaid), approximately 8% of the total number. Contributing factors to CalSTRS inability to pay these benefits are: 1) beneficiary has not provided all necessary information, 2) beneficiary is unable/unwilling to provide necessary information, 3) unable to locate beneficiary. It is hoped that the new Pension Solution Computer program will have more options to identify and target these accounts.

Board member Sharon Hendricks would like CalSTRS to be more proactive about prompting members to update their beneficiaried through myCALSTRS.

Audits and Risk Management Committee

Internal audits are in progress.  Staff completed 60 out of 72 employer audits in the plan.  101 audits are still in progress.  Crowe (consultant) reported that there were no audit adjustments.  Management was very helpful.  Crowe noted certain deficiencies in internal control over financial reporting as well as opportunities to enhance operating efficiency while conducting the financial statement audit.   CalSTRS management is responsible for implementing the corrective actions in response to the recommendations on the management letter.

The 2021 Enterprise Compliance Work Plan is in progress.  It is working to mature compliance protocols and processes across the organization.  In addition, the plan continues to develop compliance principles, standards and strong ethical culture

The 2021 Internal Audit Plan includes employer audits, internal audits, contract/co-sourced audits, consulting/advisory services, management and administration.  There is no rule book on how to audit during a pandemic.

The Committee adopted the 2020-21 audit plan.

Board Governance Committee

The Board adopted Teachers’ Retirement Board Policy Manual revisions related to the Education Policy. This was a second conversation about this topic.  The Board heard an informational item on the Teachers’ Retirement Board Policy Manual  revisions regarding the Policy Prohibiting Insider Trading.

The Board discussed the Teachers’ Retirement Board Policy Manual revisions  related to the Board Chair Policy.  Research from Mosaic Governance Advisors found predominate stages in the board lifecycle are:(Stage 1) founding board, (Stage 2) transactional board, (State 3) policy board, (Stage 4) visionary/institutional board. Most peers are in stage 3, some are in stage 4.  CalSTRS is mostly in stage 3.

The Board heard an informational itme on the Teachers’ Retirement Board Policy Manual Revisions regarding CEO and EIO Evaluation Policies.

Sharon Hendricks, Board member, asked for a future discussion on how the CalSTRS Board adjusts to COVID (Board meetings? Location? Public access?).