STRS: Accomplishments and Major Actions of the Retirement Board and Senior Staff Since January 2005 Board Retreat

Thanks to Joyce Baldwin for providing this report in a non-PDF format

From STRS website: http://www.strsoh.org/whatsnew/news3.html

Governance/Organizational Reviewed Board Policies and made changes to reflect the new 11-member board composition, as well as changes contained in recent pension legislation (Sub. S.B. 133). Revised mission statement to read: To partner with STRS Ohio members in providing financial performance and member service that assures financial security for current and future retirees. Also added a Guiding Principle that states: Make decisions that produce the greatest possible net benefit for members. Approved 2005­2006 budgets, which includes the lowest operating budget in the past five years. It reflects an 11% decrease in travel, 7% decrease in communications, a 22% decrease in supplies and materials, and a 19% decrease in other expenses, plus a $1.1 million reduction in contract services for information technology. Authorized the executive director in March 2005 to engage an external consultant to complete a full compensation and benefits study for STRS Ohio. In September, the Ohio Retirement Study Council (ORSC) and Independent Fiduciary Services (IFS) agreed this study, being conducted by Aon/McLagan, would be incorporated into the scope of the IFS study. Authorized the executive director to issue an RFP for the board's investment consultant. Eleven proposals were received on Jan. 27, 2006. Received Award of Excellence in Financial Reporting for the 15th consecutive year from the Government Finance Officers Association. Received the Public Pension Coordinating Council¹s Standards Award for 2005 in recognition of meeting professional standards for plan design and administration. Received ³AAA² issuer credit rating from Standard & Poor¹s. Conducted annual telephone survey of active and retired STRS Ohio members. Continued to see improvement in ratings dealing with overall impressions of STRS Ohio, as well as on trust and confidence issues. In particular, a majority of both actives and retirees (1) have favorable impressions of the system; (2) believe the system has earned their trust and confidence; (3) believe the system is open and honest when communicating with members; and (4) are extremely satisfied with the services provided by the system. Further, about eight out of 10 actives and retirees stated that STRS Ohio exceeds or meets their expectations as a provider of pension benefits, and that STRS Ohio is an excellent or good value, based on contributions paid versus services and benefits received. Perceptions about health care coverage are not quite as strong, due almost entirely to cost.

Member Services Received No. 1 rating in service for the eighth consecutive year, according to the results of a worldwide survey released by Cost Effectiveness Measurement Inc. (CEM). Authorized purchase of new pension system management software, the Vitech V3 system. Approved the use of VR Election Services for the 2006 Retirement Board election. VR Election Services provides more voting options for members. In addition, increased use of telephone and Internet voting, which VR Election Services provides, will result in reduced costs for STRS Ohio over time. Removed Social Security numbers from a number of STRS Ohio communications and pension benefit payments.

State and National Advocacy Took a leadership role in the formation of the Public Sector HealthCare Roundtable. The purpose of this group is to champion the interests of sponsors of government health care plans to ensure that federal health care policy supports the availability of affordable health care for all public employees and retirees. Reiterated stand against any attempts to make Social Security coverage mandatory for STRS Ohio members. Also repeated previous stance of supporting modification of the Government Pension Offset (GPO) and Windfall Elimination Provision (WEP), but not at the expense of mandatory coverage. Working through the Coalition to Preserve Retirement Security, held briefings with Washington lawmakers and their staff to reinforce the arguments against mandatory Social Security coverage for public employees. Successfully concluded securities litigation suit, independent of the class action, against WorldCom. This resulted in a recovery of more than $14.5 million, reportedly almost three times the amount STRS Ohio would have recovered as part of the class. Received jury verdict of $7.8 million against Medco. The potentially landmark verdict marks the first time a PBM (pharmacy benefits manager) has been found to have a fiduciary obligation to its client.

Pension Funding/Benefits Enacted elements contained in Am. Sub. H.B. 449 (effective April 11, 2005). Allows reemployed retirees to receive a lump-sum payment of member contributions and interest before age 65. Allows Retirement Board to set the amount of matching funds that is included in the reemployed retirees¹ lump-sump payment or monthly annuity that is paid at age 65 or later. To bring equity between the funding of the reemployed retiree benefit and the active member benefit, the Retirement Board voted to provide a 50% match on contributions plus interest when determining the payment of a lump-sum or monthly annuity benefit, effective July 1, 2005. (Contributions made through June 30, 2005, receive a 100% match plus interest; contributions made July 1, 2005, or later receive the 50% match plus interest.) These changes result in an additional $12­14 million annually that will be paid toward the system¹s unfunded liability. Completed an Asset/Liability Study that resulted in a slight adjustment to the asset allocation. More of the system¹s investment assets move to real estate and international equities, as these have traditionally been strong performing asset classes for STRS Ohio; in addition, the allocation to alternative investments increases slightly. To accommodate these increases, the amount committed to domestic equities lessens. As part of the study, it was noted that no combination of major asset allocation changes, new asset classes or this fine-tuning of the current policy allocation will improve the system¹s financial outlook significantly over the next nine years because market performance is expected to be weak. Adopted Annual Investment Plan for fiscal year 2005­2006 that projects moderate total fund return (probably not above 8%). Achieved record investment assets at end of fiscal 2005 (June 30, 2005) with a market value of $59.1 billion. Continued to achieve increases in the market value of investment assets in the first half of fiscal 2006 with investment assets at $63.4 billion at Dec. 31, 2005. Received actuarial valuation for pension fund. As of July 1, 2005, the funding period stands at 55.5 years; the funded ratio is 74%. Changed interest rate on member withdrawals to 2% for members with less than three years of service credit and to 3% for members with three or more years of service credit, effective Jan. 1, 2006, going forward. Completed review of Sub. S.B. 190 that provided benefit enhancements to both active and retired members. It was noted that the system¹s unfunded accrued liability would be smaller and the funding period would be shorter if Sub. S.B. 190 had not provided retroactive increases in pension benefits for existing retirees and had not increased benefits for future retirees. However, at the time Sub. S.B. 190 was enacted, the financial condition of STRS Ohio was much stronger. Based on a review of the five years of experience since the bill was enacted, the actual cash flow impact of the legislation on the pension fund basically matches what was predicted. However, other events have occurred that have also affected the system¹s actuarial funding, such as the prolonged and significant market downturn that occurred from 2000­2003. During the board¹s discussion, rumors regarding the possible rollback of the 35-year benefit contained in Sub. S.B. 190 were also addressed. The board noted that there are no plans at this time to eliminate the enhanced pension benefit formula for 35 years of contributing service. Implemented H.B. 10 (effective June 6, 2005) that limits the time period to one year for retirees to change a plan of payment to include a new spouse. Implemented a provision of Sub. S.B. 133 (effective Aug. 1, 2005) that allows certain full-time reemployed retirees at higher education institutions to choose between STRS Ohio and an alternative retirement plan. Provided these amendments to H.B. 272 that reflect needed changes to Chapter 3307, Ohio Revised Code. These include: Changing the eligibility requirements for service retirement and disability benefits to require a member to have 5.00 years of actual Ohio teaching service for which member and employer contributions were made to the system.Changing the eligibility requirement for survivor benefits to be 1.5 years of actual Ohio teaching service rather than 1.5 years of any service. Extending the benefit of the right to return to a prior position if a disability benefit is terminated during the first five years to a member enrolled in the Combined Plan. Requiring employers who grant a leave of absence to a Combined Plan member to pay the employer share of contributions if the member elects to purchase that leave of absence. Changing the default choice for final plan selection for Defined Contribution and Combined Plan members to the plan that they initially selected. During their fifth year of membership, these members have an opportunity to make a final plan selection. The law currently states that the member defaults to the Defined Benefit Plan if no action is taken during the final selection period window of 180 days. The board also approved a reduction in that window to 90 days.

Health Care Funding/Health Care Benefits Accepted valuation report for the Health Care Stabilization Fund. The report noted that the fund is forecasted to remain solvent until 2018. Reviewed investing the Health Care Stabilization Fund in a different, less volatile asset mix than the pension assets. Determined that the better return was more significant than the potential lower risk. Voted to file for the 28% subsidy offered through Medicare Part D to plan sponsors such as STRS Ohio for prescription drug expenses incurred in 2006. The subsidy could total about $33 million. Adopted Guiding Principles and Goals for the STRS Ohio Health Care Program. Goals are as follows: Continue the integration of Medicare Part D to preserve the viability of the STRS Ohio Health Care Program. Make necessary changes to the STRS Ohio Health Care Program, including an aggressive cost- management program, to maintain a principal of $3 billion in the Health Care Stabilization Fund through 2009.* Explore options for new funding sources for the STRS Ohio Health Care Program while meeting pension obligations. Educate members and other stakeholders on the economic realities associated with health care financing and gain necessary support for sustaining health care in the future. Guide members to understand and accept personal responsibility for their health and for the cost-effectiveness of their health care. Adopted Health Care Strategic Plan for 2007­2009, with extensive input provided by the Health Care Advocates (HCA) for STRS. Plan outlines steps the board and staff will take to: Control medical and prescription drug costs. Encourage members to take an active role in managing their health. Engage members in discussions regarding how to fund health care coverage in the future. Approved the continuation of the prescription drug management program called Prescriber Advisor, as well as the LifeMasters disease management program, due to the cost savings incurred by STRS Ohio and the program participants. Chose to treat 2006 as a ³transition year² and capped health care premium increases at 3% over the 2005 rates for all plans; also reduced copayments for generic prescription drugs purchased through the Caremark program. When taking its action for 2006, the board cautioned that this increase did not match the projected trends for health care cost increases in 2006. If the board followed these trends in setting premiums, STRS Ohio members would see their premiums increase an average of 12%, with premiums for spouses increasing even more. If no additional funding can be found for the Health Care Program, more cost-cutting decisions will have to be made by the board as early as 2007. The board will be faced with making up the difference between the 2006 expected premium increase of 12% and the actual 3% premium increase cap, plus the expected upward trend in costs for 2007. Higher premiums, changes in enrollment and/or plan design changes will be necessary. Eliminated premium for Health Care Assistance Program. Set the Medicare Part B premium reimbursement percentage at 2.349% per year of service credit up to 30 years for calendar year 2006, with the reimbursement cap returning to the 2003 level thereafter. In conjunction with the HCA, conducted successful Health Care Member Education and Engagement Campaign that actively engaged 10,000 STRS Ohio members. Results showed that (1) the information shared by STRS Ohio and the HCA increased members¹ recognition of the need to save for health care; and (2) there is majority support for creating a dedicated revenue stream for health care through the permanent increase of member and employer contributions over a five-year period (2.5% each, phased in .5% increments). Staff and HCA representatives have also been meeting with legislators and leadership to educate them about the campaign and vet the contribution proposal. Supported legislative initiative (H.B. 272) that requires reemployed retirees to obtain health care benefits from their employer regardless if the employer is public or private provided health care is offered to employees in comparable positions. This bill also allows STRS Ohio, OPERS and SERS to create some type of medical savings accounts for active members that they could draw upon during retirement.

*Without any new additional funding, this would require cost savings of $47 million between 2007­2009. This also assumes a 1% employer contribution, Medicare Part D subsidies of $33 million per year and an 8% return on investments.