CalSTRS Report – July 10, 15, 16, 17 2020

CalSTRS Report

Executive Summary

  1. Member Service Centers will remain closed until further notice due to COVID-19, however services continue using virtual platforms; webinars, phone, email and U.S. Postal Service.
  2. As of July 15, 2020, CalSTRS assets are $250 billion.
  3. CalSTRS 3-year return is 6.5% (not STRS best); the 30 year return is 8%.
  4. The Collaborative Model-Pillars Project, managing assets internally, is going well.
  5. David Lamoreaux, Actuary reported that the Defined Benefit Supplement program is 125% funded as of June 30.The Cash Balance Benefit Program is 121% funded.
  6. It is expected that the board will set a rate of about 18.1% of payroll for 2021-22, resulting in employers having to contribute to CalSTRS at a rate just below 16% of payroll.
  7. All CalSTRS Board meetings will be by Zoom through 2020.The next CalSTRS Board meeting is September 3-4, 2020
  8. Staff likes working from home.

Client Advisory Committee

The Committee heard a report on the 2019 budget.  An amount of $1.64 billion (long term relief) and $600 million (short term) was all used for short term relief.  CalSTRS is now back on track to full funding by 2046.  The CalSTRS Board lowered the 2021 employer rate to just below 16%.  It is expected it will return to about 18% in 2022-23.  The plan is to be fully funded by 2046.  The lack of a “catch up” provision slightly weakens the long-term plan.

Joycelyn Martinez-Wade gave the legislative update.  The Senate will meet July 27.  The Capitol building is presently being disinfected.  The CalSTRS House Bill is not moving.  CalSTRS provisions have been added to AB 2101 and hope is that AB2101 will move forward. Generally all is going well legislatively.

Public comments on the regulations update will begin July 12.  CalSTRS prefers a letter or phone conversation rather than a personal visit. The CalSTRS call in number is 833-986-0555.

The Ethics and Compliance Hotline began in June.   The number is 844-896-9120.  More information is found on the CalSTRS website.

Brian Rice gave the Low-Carbon Economy Transition update.  Society now recognizes the climate change is real.  CalSTRS plans for more speakers and will have a portfolio of low carbon transition investments.

Sandy Blair reported on the Retirement Readiness.  In March CalSTRS workers began work-at-home.  However the call center was only down for 2 days.  Member Service Centers will remain closed for the remainder of 2020, but all services are still being offered remotely.  Webinars are growing fast.  Plans are for a telephone benefit planning session.  In August, CalSTRS and You Group sessions begin.  Individual sessions are possible via Zoom.  Individual telephone sessions are available from 8 am to 5 pm.

Virtual Board Meetings are planned for 2020.

Investment Committee

The Investment Business Plans were presented.  The Business Plans for 2019-20 shows a fund AUM of $226,854,000,000 as of March 31, 2020 and provides the estimated AUM growth over the next 10 years.  The plan presents the collaborative model where CalSTRS staff will manage more assets in house while also looking to utilize more “direct” types of investments, which are both anticipated to reduce costs.  The most challenging asset classes to implement the collaborative model in are private equity and real estate.

The Coronavirus will result in more “work from home”.  Retail and office space will be hurt.  Residential is still doing well, but a coming recession may hurt it.  Betty Yee is concerned with the types of jobs available after the COVID-19 pandemic and the relationship between affirmative action and these new changes.  Harry Keiley is concerned about changes to Human Capital Management after the crisis, such as the inequity in worker vs executive pay. Board Member, Sharon Hendricks believes risks to workers are a big issue.

The Investment Committee Charter is being updated to reflect the investment changes.  The Private Equity Contract with Meketa will be extended for an additional year to accommodate a more thorough RFP process.  The Commodity Portfolio Policy will no longer be a separate policy; it is covered under other policies.  Two changes have been made to the Delegation to Staff policy in March (Delegation to staff of Infrastructure portfolio commitment is changed from $300 million to $500 million) and (Innovative Strategies policy limits co-investments to $100 million at time of investment).  The Investment Policy and Management Plans were approved.

Under asset allocation Long-Term Targets were set.  Public Equity will go from 51% to 42%, Private Equity from 9% to 13%, Real Estate from 13% to 15%, Inflation Sensitive from 3% to 6%, Innovative Strategies 0%, Risk Mitigating Strategies from 9% to 10%, Fixed Income from 13% to 12% and Cash remains at 2%.

Chris Ailman, Chief Investment Officer gave his report.  As of June 2020, CalSTRS assets were $246 billion; CalSTRS assets as of July 15 are $250 billion.  On July 20, CalSTRS announced the official and audited return is 3.9% for the fiscal year 2019-20.  The greatest source of portfolio risk is public equity.  Non US Equity and Emerging market equity investments are below targets.  Real Estate and Private Equity are above targets.  Staff is successfully working remotely.

The Investment Business Plan was approved.  Chris Ailman stated that the collaborative model and co-investments will reduce costs.  The biggest impediment is getting good people.  CalSTRS may move to more internal managers.

Chris Ailman reported that the risks are: COVID-19, the economy, President’s tweets, the stock market, unemployment, and oil prices.  Positive events are Government stimulus, social distancing, medical research, and low inflation.  Surprises could be a pandemic or cyberattacks.

CalSTRS 3 year return is 6.5% (not STRS best); the 30 year return is 8%.  Staff likes working from home.

The Collaborative Model-Pillars Project, managing assets internally, is going well.  Challenges are: 1. Human resources (getting people for each position and training), 2.  Procurement process, 3. Improve travel plans and reimbursement, 4. Hybrid – technology, communication, legal, financial.  The Goal of the Pillars project is to reduce costs and increase return.

The Committee heard a speaker from Blomberg New Energy Finance.  He reported that oil demand and oil prices will continue to increase.  It will take some 10 years to reduce dependence on oil.

The next Investment Committee meeting will be September 2020.

Audits and Risk Management Committee

The Committee heard the Employer Audit Report.  There is no travel to districts required for limited scope audits; all is on-line.  Due to COVID-19, the goal for 2020 has been amended: The initial goal of 72 audits as increased by 47 for a total of 119 audits (23 full scope audits, 96 limited scope audits).  School districts are impacted by the virus.  All full scope audits have been temporarily suspended, CalSTRS is currently working on limited scope audits.  However, CalSTRS is flexible and audits are still going forward as usual.  The problem is that staff is not able to meet and travel to districts.  Flexibility is crucial.

The Committee heard the Progress Report on the 2019 Independent Financial Statement Auditor’s Management Letter.   (Incorrect member data) – MAS Training and Development team have developed a series of computer-based trainings for employers.  (Accuracy and Completeness of the Real Estate Valuation Report) – Investments have enhanced existing internal control structure to include a completeness procedure and secondary review.  (Monitoring Investment Valuation) – Management has completed the valuation of its controls and will complete the implementation of the revised controls in June 2020.

The 2020 Internal Audit Plan Progress Report and Mid-Year Update were presented.  Staff completed 25 of the 84 of the employer audits in the plan.  130 audits are also in progress.  The focus was on Unused Sick Leave, Post-Retirement Earnings or Special Compensation.  Results were 14% had no findings, 86% had one or more finding.  72 audits are planned for next year.

Leonard Goldberg, CTA spoke to the committee.  Schools are still working and appreciate CalSTRS flexibility.  More training is needed from CalSTRS.  Award Districts and Counties that do well.  Don’t change or lower retiree benefits.

An update was presented on the 2020 Enterprise Compliance Services Plan.  Key accomplishments were: a plan to perform integrated risk assessment, communication on a standardized approach to policy development, expanded the compliance and ethics hotline, simplified the Enterprise Compliances Services (ECS) mission statement and purpose.

Teachers’ Retirement Board

David Lamoureux, System Actuary reported that the Defined Benefit Supplement program is 125% funded as of June 30.  Staff recommends that no additional earnings credit be added to these funds at this time.

The Cash Balance Benefit Program is 121.6% funded.  Staff recommends that no additional earnings credit be added to these funds at this time.

Jack Ehnes, Chief Executive Officer gave his report.  Jack announced the CalSTRS Virtuosos (superior, sustained performance).  They are Chris Louie – Staff Services Analyst, Curtis Rogers – Associate Accounting Analyst, Elia O’Brian – Associate Government Program Analyst, Jennifer Spangler – Technical Services, Lan Le – Pension Program Manager, Tien Le – Associate Government Program Analyst, and Youmaly Hoff – Information Technology.

Staff has been successful in working from home.  75% estimated that they could work from home indefinitely –successfully.  Some would prefer a work from home/ on-site combination.

The 2020-21 State of California Budget was adopted.  The final budget includes the following changes: employer rate will now be 16.15% of payroll, a 2.95% reduction from the rate of 19.1% of payroll that was originally part of the CalSTRS Funding Plan.  The State rate remains the same.

The Headquarters expansion project continues with COVID-19 -19 safety precautions. It is estimated to be completed by 7-6-22.  The risks are: 1. Getting public agency permits, 2. Timely delivery of PGE, and 3. COVID-19.  Another concern is how much space will be needed by CalSTRS employees.  STRS may lease out extra space.

Betty Yee, Board member reported that the Offsite meeting may be virtual.  Board education is essential.

The Appeals Committee work plan has meetings as needed.  There will probably be a virtual appeals hearing in September.  The Audits and Management Committee work plan has three meetings for 2021.

The Benefits and Services work plan has a demographic study, employer training, a member satisfaction survey report, an analysis of the death benefit.

The Pension Solution training is going on.  There will be three meetings in the next fiscal year.

The Board Governance Committee will meet 3 times a year.  They plan a revision of the Board Governance Manual.

The Compensation Committee will meet 4 times.  They will look at long-term incentives, consultant compensation, and a salary study.

The Investment Committee will review the following topics: A low carbon economy, growth in China, the collaborative model implementation, asset allocation study, and oversight of the total fund.

All CalSTRS Board meetings will be by Zoom through 2020.  September is fiduciary training.  The next CalSTRS Board meeting is September 3-4, 2020.  CalSTRS will also meet on November 4-6, 2020.