Dr. Buser answers questions from retiree Judi

Assets and what affects them; bonuses

From: Stephen Buser
To: Molly Janczyk
Subject: Re: QUES:Damon, Steve
Date: Tue, 08 Nov 2005 08:20:15 -0500

STRS uses two measures of assets, depending on the purpose of the measurement. Market value is what we see in monthly reports from the investment staff. A smoothed version of market value (average over 4 years) is what the actuaries use in their annual reports on financial condition. Except for this distinction, the answers to your questions are the same for both measures of assets.

1) As long as sales of stock and sales of real estate take place at STRS estimates of market value, there is no added impact on assets as STRS measures assets. I.e. if a stock has gone up in value, or if real estate has gone up in value, that change in value is reported even if STRS has not yet sold the stock or real estate. Note that STRS is able to closely track the market value of most stocks it holds. However, like everyone else, STRS can only estimate the market value of real estate or alternative investments. Hence, when those sales occur, there will often be an adjustment to reported asset value.

2) As for the effect of the HC premiums STRS collects, that money helps offset part of the medical bills that STRS pays on behalf of members. Co-pays and other out of pocket expenses of members lower the total value of medical bills that are submitted to STRS. The total value of medical bills STRS pays on behalf of members is much larger than the HC premiums it collects. Nevertheless, the net cost would be larger yet if not for co-pays and out-of-pocket-payments by members. So if these items and/or HC premiums were to increase by more than the increase in STRS HC costs, there would be more money left in the equivalent of the STRS checking account ("cash account"). Unfortunately, the pattern has been going the other way. That is, despite increases in co-pays and out of pocket charges, the total value of remaining HC bills submitted to STRS has been growing by a larger dollar amount than the dollar increase in HC premium. Hence the net effect on the STRS checking account has been negative. (But the size of the negative effect is smaller that it would be without the increase you have identified. The STRS cash account is counted as part of total assets for STRS. Hence, the reduction in the total value of STRS assets due to HC is smaller (hence total assets are larger) whenever STRS cuts costs of any type, or increases HC premiums, or raises co-pays. or increases pout-of-pocket expenses.

Of course, when it comes to payments made on behalf of members, whether for pensions of HC, there is a net benefit of the expense in so far as providing such payments is the primary jog of STRS. It is simply a matter of balancing the expense, and value for one group of members, such as current retirees, against the financial interests of another group of members, such as actives who are worried about the financial security of their future pension and health care benefits.

3) As for the bonuses, if you are talking about the effect that the payment of bonuses has on asset values, they are like any other STRS expense. Payments are made out of the STRS cash account. Hence STRS assets are lower if bonuses are paid. However, under the current system, bonuses are only paid if there are even larger increases in the value of assets. Hence, despite the fact that the actual payment of bonuses decreases asset values, in theory at least, the incentive is for the investment staff to increase the value of assets through sound management, and the gain from such effort will be much larger than the amount of bonuses paid.

If you are asking, instead, if the savings from reductions in various types of expenses impact the amount of bonuses, I think the answer is generally no -- and certainly not the last couple of years. I do not know how bonuses for non investment staff were determined in earlier years. That was before my time and the practice has since ended. The current bonus program is limited to investment staff and is based on the performance of the particular assets they manage. If investment staff earn more money for the system than we would have expected based on the general increase (or decrease in financial markets), then STRS awards bonuses equal to a small part of the added value. However, if STRS increases assets by such measures as cutting costs or by increasing HC premiums, no added bonuses are awarded.

From: Judi
To: Molly Janczyk
Subject: Fwd: RE: Fwd: Judge Reece: STRS official impact statement re. bonus decision Date: Date: Mon, 7 Nov 2005

Please ask STRS. I'm on a friend's computer just briefly.

1. Does STRS sales or real estate as well as sales of stocks and incoming HC premiums and cuts in co-pays, and deductibles affect assets?

2. Are bonuses affected by these assets?