February Board News from STRS: Retirement Board Actions and Discussions

February 20, 2006

Last week, the State Teachers Retirement Board held several committee meetings, as well as its monthly meeting. Following the regularly scheduled meetings, a report titled "Board News" is posted on the STRS Ohio Web site, as well as mailed to a number of members and education organization representatives who have requested it. As a registrant of the STRS Ohio news e-mail list, you will also receive this report each month. The February report follows.

FEBRUARY BOARD NEWS

HEALTH CARE ACTUARIAL VALUATION REPORT RECEIVES BOARD REVIEW The February meeting of the Retirement Board included the annual actuarial valuation report of the system's Health Care Stabilization Fund from the system's actuary, Buck Consultants. Health care costs for the STRS Ohio Health Care Program are paid out of this fund. Currently, monies for the fund come from premiums charged to STRS Ohio retirees and their dependents who are enrolled in the program, 1% of employer contributions and investment earnings on these funds.

The valuation report tells the Retirement Board two things: (1) the solvency period of the fund, and (2) what percentage of employer contributions would be needed to fund the health care program on full-reserve basis. While STRS Ohio has calculated both these numbers for several years, the latter figure will become increasingly important next year when public retiree health care plans will be required to include this information in their annual financial reports.

As of Dec. 31, 2005, the Health Care Stabilization Fund contained $3.465 billion and is projected to last until 2021. Last year's report showed a solvency period of 2018, but two years were added due to better-than-projected investment returns on the fund for calendar year
2005. In addition, STRS Ohio expects to receive its subsidy from the Medicare Part D program earlier than originally anticipated. During the board presentation, it was noted that, while the solvency period for the fund extends for 15 years, the principal in the fund will begin to slowly deteriorate beginning in 2009 and the members' portion toward the program's gross health care costs will begin increasing dramatically.

The actuarial valuation report also showed that the funded status of the health care program has decreased to 36.7% for 2006 from 38.4% in 2005. Consequently, this means the contribution rate needed to fully fund the health care program increased to 4.58% of employer payroll from 4.17%. This percentage is still in line with the proposal discussed during the recent Health Care Program Member Education and Engagement Campaign conducted by STRS Ohio and the Health Care Advocates for STRS (HCA). That campaign gauged support for increasing member contributions to STRS Ohio by 2.5% and employer contributions by 2.5% of teacher payroll. These increases would be phased in over a five-year period, in 0.5% increments. Due to the results of that campaign, and with the continued support of the HCA, STRS Ohio is pursuing legislation to enable these contribution increases to occur. Plans for continued member education and engagement on this topic are also being developed.

Based on the results of this actuarial valuation report, the Retirement Board and staff will begin looking at plan design and premium options for the health care program for calendar year 2007. It is anticipated that premium rates will be determined in August.

DISABILITY APPLICATION PROCESS STREAMLINED At its February meeting, the Retirement Board voted to approve several changes that will streamline the disability application process for STRS Ohio members. The changes shorten the disability application process while preserving a member's ability to appeal the denial or termination of disability benefits. However, the appeal will now be heard by a three-member Board Review Panel. This ensures members will still be able to appeal in person directly to board members and receive a peer review, but also allows more board time to be spent on global Retirement Board issues. The three-member panel will be in place for members who file a disability application or for recipients whose disability benefits are terminating on or after July 1, 2006.

ASSOCIATE COMPENSATION DISCUSSION CONTINUES The Retirement Board continued its discussion of the compensation and benefits study recently completed by Aon/McLagan. Benefits to the membership of making compensation adjustments to key managers and specialists were outlined and closely examined by the board. These benefits to members were viewed as "investments" in the system's success and included:

- Sustaining above-market returns on the investment portfolio;

- Retaining a high level of expertise across key areas of STRS Ohio, thus ensuring uninterrupted excellent pension and benefit services; and

- Ensuring the lowest possible level of risk attributable to management decision-making.

The board is expected to take action on staff recommendations at its March meeting.

RETIREMENT, INVESTMENT TRANSACTIONS APPROVED The Retirement Board approved the following retirements and investment transactions:

- 22 disability retirements were granted.

- 115 active members were approved for service retirement; 148 inactive retirements were approved.

- In January, fixed-income purchases totaled $464 million, domestic equity purchases totaled $632 million and real estate purchases totaled $48 million.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

BOARD RETREAT DISCUSSION RESULTS IN ADDITIONAL GUIDING PRINCIPLES When shaping various strategies for the provision of health care coverage, pension benefits and services for STRS Ohio members, the staff uses "guiding principles" adopted by the Retirement Board as its parameters. During the board's annual planning retreat earlier this month, the board reached consensus on several additional guiding principles during its discussions about pension funding. The Guiding Principles for Benefits now include these additions:

- Manage the retirement plan options offered to the membership as long as it's cost-effective.

- Provide a benefit package with the highest level of financial security possible within funding limits while striving to be a top quartile pension plan.

- Strive to meet the financial goal for pension benefits of having a funded ratio of at least 85% and an amortization period of no more than
30 years for the unfunded pension liability.

- Consider pension benefit improvements only when the funding period is less than 30 years and the funding level exceeds 85%.

- Recognize the length of Ohio service credit when allocating available pension resources.

The Health Care Program Guiding Principles were enhanced with this addition:

- Health care costs should be allocated realistically between active members, employers and retirees.

STRS OHIO POSTS 12.08% RETURN FOR CALENDAR YEAR 2005 During the February board meeting, it was reported that STRS Ohio posted a 12.08% return on its investment funds for calendar year 2005. This rate of return exceeded the total fund benchmark (a hybrid index of industry benchmarks) by 1.48%. All asset classes outperformed their benchmarks, with real estate and international investments doing particularly well. The market value of the total investment fund totaled $63.4 billion on Dec. 31, 2005.

STRS Ohio manages approximately 80% of its investment assets internally versus using outside commercial money managers, a practice that saves STRS Ohio approximately $70 million every year.