Minutes of State Teachers Retirement Board Meetings
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MINUTES OF STATE TEACHERS RETIREMENT BOARD MEETINGS August 19, 2021 August 19, 2021 August 19, 2021 The State Teachers Retirement Board met at the STRS Ohio offices in Columbus, Ohio, on Thursday, August 19, 2021, at approximately 9:45 a.m. The Chair, Rita Walters, called the meeting to order. The following members were in attendance: Carol Correthers, Claudia Herrington, Scott Hunt representing the Superintendent of Public Instruction, Arthur Lard, Yoel Mayerfeld, Robert McFee, Dale Price, Jeffrey Rhodes, Wade Steen and Ms. Walters. APPROVAL OF MINUTES Ms. Walters moved, seconded by Ms. Correthers to approve the minutes of the June 2021 Retirement Board meeting. Upon roll call the vote was as follows: Ms. Walters, yes; Ms. Correthers, yes; Ms. Herrington, abstain; Dr. Hunt, yes; Mr. Lard, yes; Mr. Mayerfeld, yes; Mr. McFee, yes; Mr. Price, yes; Mr. Rhodes, yes; Mr. Steen, yes. The motion carried. STRS OHIO RESPONSE TO BFS REPORT The chair recognized executive director Bill Neville for the STRS Ohio Response to Benchmark Financial Services (BFS) Report. Mr. Neville began by reviewing the background for the detailed analysis of the BFS Report he, staff and the consultants would be providing. The consultants were: Brady O’Connell, senior vice president – Callan LLC, Mike Joeken, senior vice president – Callan, LLC, Jay Klopfer, executive vice president – Callan LLC, Steve Nesbitt, chief executive officer – Cliffwater LLC, Michael Reid, vice president and client relationship manager – CEM, Karen Foley, partner – ACA Performance Services and Karyn Vincent – senior head, global industry standards and GIPS standards executive director – CFA Institute. Mr. Neville stated that the BFS Report which was released June 7, 2021, was not a forensic investigation or forensic audit. A forensic investigation or forensic audit is an examination of a company’s financial records to derive evidence which can be used in a court of law or legal proceeding for the purpose of uncovering criminal behavior such as fraud or embezzlement. Mr. Neville noted that the BFS Report does not make any specific allegations of fraud or criminal conduct against the system. In fact, the BFS Report states “We were not hired to detect or investigate fraud, concealment or misrepresentations and did not attempt to do so. We were not hired to, and did not attempt to conduct a formal or legal investigation or otherwise to use judicial processes or evidentiary safeguards in conducting our review.” The report was not developed in accordance with recognized professional standards. The author is not bound by the professional standards of the Governmental Accounting Standards Board, the American Institute of CPAs or the Actuarial Standards Board. Mr. Neville stated the BFS Report contained numerous misstatements and allegations which are unsupported by evidence. Many conclusions are offered with little support other than the author’s opinions. STRS Ohio’s response centered on eight “findings” identified in the report. • STRS Ohio is committed to the principles of transparency and complies with its obligations under the Ohio Public Records Act. Earlier this year, STRS Ohio received the “Highest Achievement in Open and Transparent Award” from the Auditor of State’s office. This top rating was awarded to only 14% of the more than 2,800 audited entities. In February 2021, STRS Ohio received a public records request from counsel to BFS, requesting 45 categories of documents. Despite the overly broad nature of the request, STRS Ohio provided over 800 documents and 22,000 pages and repeatedly requested clarifications to reasonably identify the public records being sought. BFS did not provide clarification or revise its public records request. Instead, BFS filed two public records mandamus actions related to the request. Pursuant to the Ohio Public Records Act, a public office may withhold or redact records that are covered by an exemption and relevant legal authority. Several vendors made valid trade secret assertions and redacted certain information in records provided to BFS in April 2021. In July 2021, STRS Ohio obtained consent of those vendors to release the unredacted documents to BFS. • Appropriate oversight exists under Ohio law to govern STRS Ohio. The general purpose of the Ohio Retirement Study Council (ORSC) is to advise and inform the state legislature on all matters relating to the benefits, funding, investment and administration of the five statewide retirement systems. ORSC is required to conduct an independent actuarial review and a performance audit of each system every 10 years. Independent Fiduciary Services, Inc. completed a fiduciary audit of STRS Ohio in December 2006. At the August 2021 ORSC meeting, the council selected Pension Trustee Advisors (PTA/KMS) to perform the actuarial audit of STRS Ohio and Funston Advisory Services was selected to conduct the fiduciary audit of STRS Ohio. Additional oversight includes a financial audit conducted by an independent accounting firm hired by the Ohio Auditor of State, annual expenses are posted to the online Ohio Checkbook, the Ohio Treasurer serves as the custodian for STRS Ohio assets; the STRS Ohio Retirement Board meets 10 times per year to review investments, financials and other system operations, the board approves governing policies and the board contracts with two investment advisors and an actuary who serve as fiduciaries to the system. • Recommendations from the 2006 IFS Fiduciary Audit were appropriately reviewed and addressed by the State Teachers Retirement Board and staff in early 2007. II The STRS Ohio Retirement Board reviewed and discussed the audit in early 2007 and voted to approve the analysis and responses as related to the audit in February 2007. The 2006 IFS Fiduciary Audit made 85 recommendations, the majority of which were “accepted” and implemented by STRS Ohio. STRS Ohio disagreed with 10 recommendations and 23 other recommendations would have required action by ORSC, the Treasurer of State’s Office and/or the legislature. Noted in the IFS executive summary: “the results of this review demonstrate that STRS is generally in line with best practices with regard to much of its overall governance, administration and management of its investment program.” The IFS executive summary also noted: “STRS governance policies and rules are impressively comprehensive and they cover all of the significant aspects of governance a sophisticated public pension fund requires.” • Investment fees are appropriately scrutinized. STRS Ohio did not have losses of $8.6 billion over 14 years. The BFS Report makes this false claim based on comparisons to the wrong benchmark. Alternative investments have exceeded total fund returns over the past 1, 5, 10 and 20 years ended June 30, 2021. • Investment costs and performance are accurately reported by the system. The BFS Report misapplies CEM data to wrongly claim that STRS Ohio underperformed its policy return by $400 million annually. CEM correctly reported that STRS Ohio’s net total fund return benefited from active management. STRS Ohio properly discloses investment fees and expenses. The BFS claim of unreported carried interest is not accurate. Total fund returns are always presented net of all management fees, fund expenses and carried interest. STRS Ohio financial statements comply with GASB requirements. STRS Ohio has staff dedicated to reviewing and monitoring fees and costs. Investment managers cannot withdraw fees from pension accounts. • STRS Ohio is required by law to report its investment performance in compliance with the performance presentation standards established by CFA Institute (known as the GIPS® standards). STRS Ohio complies with GIPS® standards for reporting performance, which is an effective way to demonstrate the board’s commitment to legal and fiduciary obligations and assures the board that the performance data they receive is transparent and complete. External GIPS® Standards Verification and Performance Examination is conducted annually by the ACA Group which provides the same level of assurance as a financial statement audit issued by a CPA firm. • Investment consultant conflicts of interest are adequately disclosed and considered. III STRS Ohio has not suffered losses due to investment consultant conflicts. The BFS Report misapplies findings from a 2007 GAO report. The board’s investment consultants Callan and Cliffwater provide extensive conflicts disclosures. Callan discloses services provided to money managers, including range of fees, in its Form ADV and provides STRS Ohio with a list of money manager clients quarterly. Callan maintains policies and procedures designed to segregate pension consulting from money manager services. Cliffwater discloses potential conflicts in its Form ADV. Cliffwater does not offer separate services targeted to money managers and does not receive fees or any other compensation from money managers for fund selections and recommendations to its clients. • The board complies with the fiduciary standards stated in Ohio Revised Code 3307.15, which mirror the ERISA fiduciary standards, and the system maintains adequate fiduciary liability insurance. As a governmental plan, STRS Ohio is not subject to the provisions of ERISA. However, many state and governmental plans are subject to fiduciary standards based on those imposed by ERISA and Ohio is no exception. Ohio Revised Code language governing STRS Ohio (ORC 3307.15) generally mirrors ERISA and specifically includes the duties of prudence, loyalty, exclusive