SACRAMENTO, Calif. - California State Teachers' Retirement System board members are divided on whether the chief investment officer should compete for his job for the first time in eight years and whether his independence should be reduced.
The contract for Tom Flanigan, CIO for the $65 billion fund, expires Dec. 31. He is paid $225,000 per year, plus a travel stipend and an office allowance.
Decisions on a number of issues regarding the CIO position were expected to be made at a board meeting in the second week of July. But James Mosman, chief executive officer for the teachers' fund, said the board might take until September to decide.
One issue is whether the board will decide to offer Mr. Flanigan another contract or hire an executive search firm to look for other candidates.
Mr. Flanigan competed for contracts in 1983, 1985 and 1988. Three years ago, the board bypassed a search and gave what the board calls a sole source contract to Mr. Flanigan. But Mr. Mosman said some members of the board, particularly the board's constitutional officers, believe eight years is too long for any contract without competitive bidding.
"There are a certain number (of board members) who feel it should go back to the marketplace, if they continue (the position) on a contract basis," said Mr. Mosman. Almost all other CalSTRS workers are employees, not independent contractors.
If the board wants more candidates, it will need to release a request for proposal in September to meet a December deadline.
One concern is whether candidates will compete seriously if an incumbent is in the running. Hiring an executive search firm would avoid that problem, but it could cost the fund as much as $100,000.
Another major issue is the degree of control the board wants over its CIO. Currently, most employees report to Mr. Mosman. And Mr. Flanigan's contract doesn't spell out his reporting relationship, although he makes recommendations to the board on how to structure the pension fund's portfolios.
If the board decides Mr. Flanigan should report to Mr. Mosman, the board might have to change Mr. Flanigan's employment status to an employee rather than independent contractor. As long as the CIO remains an independent contractor, "further control over the CIO's daily activities will be difficult, if not impossible," a board report said.
Matt Fong, California state treasurer and a member of the CalSTRS board, said he favors the more traditional approach where "the CIO reports to the CEO." With that approach, the system has a known chain of command and accountability, said Mr. Fong.
The fund's legal staff has told the board that the chain of command issue can be resolved without changing Mr. Flanigan's status as an independent contractor, but more information from the staff is needed, he said.
Once the chain of command issue is resolved, the issue of Mr. Flanigan's status as an independent contractor or an employee can be addressed, said Mr. Fong.
Separately, Mr. Fong said the board is "evolving" in how it runs the fund.
"When we have been doing RFPs .*.*. I am told that the financial community looks at STRS as a closed book," he said. "They should re-think doing business with STRS and not think it is business as usual as it has been in the past 10 years," said Mr. Fong. He said the CalSTRS board is becoming more engaged in the decision-making process.
Both CalSTRS and the California Public Employees' Retirement System began hiring their CIOs on a contractual basis in 1983 to avoid the civil service system's regulations and salary caps. CalPERS hired its CIO on a contract basis until two years ago.
Voter approval in 1992 of Proposition 162, the Pension Protection Act, is one of the reasons CalSTRS is looking at the issue of how it employs its CIO.
The act gave state and county systems in California more autonomy and the ability to pay higher salaries. Some board members are now wondering whether the independent contract positions should be modified or abolished.
One issue for Mr. Flanigan: As an employee, he would have to participate in the state retirement system, which has a 10-year vesting requirement. That requirement is unlikely to be acceptable to Mr. Flanigan, who now has an individual retirement account.
Mr. Flanigan couldn't be reached for comment.
Although the current CIO position doesn't offer a bonus, one is likely in the future, according to Mr. Mosman. "I am sure that on a going-forward basis there will be a performance piece," he said.
The board has retained the consulting firm Watson Wyatt Worldwide, San Francisco, to make recommendations for paying the fund's top investment positions. The executive compensation committee of the board will determine criteria for paying bonuses.
