By Pat Geyer, CalRTA Liaison to CalSTRS
- One deficiency reported was internal controls over financial reporting (completeness and accuracy) of member data.
- CalSTRS performance is strong; the 10 year return is 11%.
- CalSTRS Real Estate had a 12.8% return, but now has a 14% return
- As of December 2021 the CalSTRS fund was $327.6 billion.
- New CalSTRS Board members are Sarten Vasmez and Blake Johnson
- The 2022 audit plan was presented.Yetman reported that the Headquarters Expansion is not a significant risk but is very visible
- The CalSTRS Board approved additional funding of $18,500,000 to complete the Headquarters Expansion project.Project completion is scheduled for January 31, 2023.
- Cassandra Lichnock is the new CEO for CalSTRS
- The Enterprise Risk Management Report was presented.The pension fund investments remain in the low risk category
The Committee began with statement from the public. Speakers 1,2,3, and 6 were against investment in fossil fuels. Speaker 4 was against Hertz reporting overdue car rental payments to police who arrest and jail the people. Speaker 5 was against Petsmart in Texas because workers can’t organize; Petsmart is unfair to workers.
The Committee heard the Semi-annual performance reports. CalSTRS performance is strong; the 10 year return is 11%. Meketa reported that any return above 10% is great. The hope is to get 7% or greater in the future. The Federal Reserve may be raising rates. CalSTRS will continue to “stay the course”. Board member Harry Keeley asked at what point does CalSTRS change policy because of Ukraine? Stephen McCourt of Meketa replied that (1) the United States has frozen USSR and Afghanistan access to Federal Funds, (2) Sanctions have been a surprise, U.S. and Germany have shut down some pipelines. (3) Investment uncertainty because of the USSR attack.
CalSTRS Real Estate had a 12.8% return, but now has a 14% return. Because the U.S. GDP is estimated to grow by 3.5% there is a chance that Real Estate will drop in return. Real Estate is a moderate hedge against inflation, and some inflation is expected next year. Experts predict that retail malls will see a decline. CalSTRS has limited global real estate investment; its international investments are in Asia and Europe. Challenges are very rich values and funds are putting more money in real estate.
Private Equity is strong. The 1 year return was 21%. CalSTRS outperformed others by 1 to 3%. Buyouts did best. Co-investments are 18% of private equity investments.
Chris Ailman gave the CIO report. As of December 2021 the CalSTRS fund was $327.6 billion. No major changes are planned. CalSTRS has $171.5 million invested in the USSR, 3.1% of the CalSTRS index. The USSR has a strong bank, a strong ruble, but the Russian stock market and assets are frozen. Many companies are pulling out which will result in depression in the USSR. No one knows what will happen when the USSR stock market opens.
At the May meeting, CalSTRS will discuss diversity and emerging markets. CalSTRS supports Racial Equity (more on this topic in the future). CalSTRS will not make big investment moves, but allocation is down in risk categories.
New CalSTRS Board members are Sarten Vasmez and Blake Johnson. (Please check this)
At the next CalSTRS meeting in May will be a discussion of diversity, carbon footprints of companies, and climate.
Audits and Risk Management Committee
The independent auditors (Crowe LLP) presented their 2021 Auditor’s Management Letter. The audit was 100% remote. Crowe will move back to a hybrid audit later. The next complete audit will be in November, 2022. One deficiency reported was internal controls over financial reporting (completeness and accuracy) of member data.
Next the 2021 Enterprise Compliance Services Plan results were presented. Areas of concern were Operational Responsibility – should consider additional staffing as program matures, Standards and Procedures – develop a supplier code of conduct, Training and Communication – promote compliance trainings for high-risk compliance topics, Detect Non-compliance – perform self-assessment of Plan, engage external audit of program, expand monitoring program.
The 2021 Internal Audit Plan Final Progress Report was presented. The most common audit findings have to do with misreporting of earnings (to Defined Benefit instead of to Defined Benefit Supplement). That was an increase of 42% over last year’s audits. Only 10% of the districts had no findings. Most impacted were active members.
A variety of other audits were performed. Information security is CalSTRS greatest risk.
The 2022 audit plan was presented. Yetman reported that the Headquarters Expansion is not a significant risk but is very visible. Joy Higa asked if audit findings are in one asset class are other asset classes checked too. Chris Ailman responded that anything found is shared with the other asset classes. Yetman is concerned that CalSTRS will lose relationships because of isolation. Audit staff has had some turnover. The 2022-23 audit meeting work plan was presented. In July 2022 the 2021 Progress Report, Internal audit plan and 2022 Compliance plan will be presented.
A review of new audit standards and report requirements were presented. Auditors must be independent in both fact and appearance. Threats to independence are adverse interest, advocacy, familiarity, management independence, self-interest, undue influence.
Under GASB, new accounting standards were presented. They include #87 – leases, #88-interest costs before end of construction, #91-conduct debt obligations, #92-consistincy, and #93-rates.
Teachers’ Retirement Board
Cassandra Lichnock presented the CEO report; The Sustainability Report was released. Topics include Member retirement education, CalSTRS Funding Plan progress, Transition to net zero, Diversity, equity and inclusion. Other activities are: Integrating sustainability goals, updating topics and defining sustainability strategy, evaluating internal corporate poolicies for greenhouse gas impacts.
The CalSTRS Board approved additional funding of $18,500,000 to complete the Headquarters Expansion project. Project completion is scheduled for January 31, 2023.
CalSTRS has approved a project to modernize the website. The website will be updated, the search function will be improved, make CalSTRS members a top priority.
Under State and Federal legislation SB868 (Cortese) will provide a Supplemental Benefit Maintenance Account increase of between 5% and 15% to be paid quarterly beginning July 1, 2023. Members who retired between January 1, 1990 and December 31, 1998 will get a 5% increase. Members who retired between January 1980 and December 31, 1989 will get a 10% increase. Members who retired prior to January 1, 1980 will get a 15% increase. SB868 (Cortese) was introduced in the Legislature January 2022. CalSTRS supports SB868
AB1877 (Fong) provides an exemption from the annual postretirement earnings limit for teachers filling a critical need in a special education position.
Under federal legislation CalSTRS supports H.R.82 which eliminated the GPO and WEP from the Social Security Act, supports S.588 which establishes a permanent Climate Risk Advisory Committee on the Financial Stability Oversight Council. CalSTRS opposes SB1173 fossil fuel divestment. The bill violates CalSTRS policy.
The CalSTRS Strategic Plan for 2022- 2025 was adopted. The plan’s priorities are (1) Trusted Stewards, (2)Leading in innovation and management change, and (3) Sustainable Organization – integrate a unified environmental, social, and governance ethos.
Cassandra Lichnock is the new CEO for CalSTRS.
The Board heard a report on the Long-Term Incentive Plan. Additional discussions and information will be at future meetings. Board member Hendricks is concerned with the disparity between pay for executives and ordinary workers. Board member Keiley is concerned about the eligibility pool. He wants to know what are the skills. Board member Yee is concerned about competitors. For discussion at future meetings is the issue about recruiting new staff.
The Enterprise Risk Management Report was presented. The pension fund investments remain in the low risk category. In the pension fund category the risk increased because of the Pension Solution Project delays. Information security remains a high risk because of possible data breaches and cyber criminals. Operational and Reputational risks remain in the low risk category. Staff remains confident that CalSTRS will be able to continue to deliver and remains prepared for current and future risks.
The next CalSTRS meeting will be May 2022.