March Board News from STRS

A note from John Curry: Please take note of THAT MISERABLE 1% dedicated to healthcare is mentioned in paragraph 3 of this board news email from STRS. They didn't mention that the Highway Patrol retirement system uses 3.5%, OPERS chips in 4%, SERS earmarks 4.91%, and Police & Fire place 7.75% into their healthcare program for healthcare for retirees -- so, I will. These percentage figures came from a 2004 report commissioned by the Ohio Retirement Study Council.

March 14, 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 member of STRS Ohio with an e-mail address on file, you will also receive this report each month. The March report follows.

MARCH BOARD NEWS

BOARD APPROVES FUND REPORT FOR OHIO RETIREMENT STUDY COUNCIL Since the amortization period for STRS Ohio's unfunded actuarial accrued liability (UAAL) on the pension fund is more than 30 years as of July 1, 2005, STRS Ohio is required by law to send a report to the Ohio Retirement Study Council (ORSC). (ORSC is the legislative oversight committee for Ohio's five public pension plans.) STRS Ohio's current funding period is 55.5 years. The report must explain how the Retirement Board will reduce the amortization period to 30 years or less.

At its March meeting, the Retirement Board approved the report that will be sent to the ORSC this month. The report notes that the Retirement Board understands that as a fiduciary, its first and foremost priority and legal obligation is to protect the system's ability to honor the pension and other benefit promises in state law. The board also recognizes the importance of providing affordable health care coverage to its retirees and dependents. Currently, monies for the Health Care Stabilization Fund come from premiums charged to program enrollees, 1% of payroll from employer contributions and investment earnings on this fund.

The health care actuarial valuation report received by the Retirement Board in February 2006 showed that the Health Care Stabilization Fund balance of $3.465 billion is projected to last until 2021, based on current actuarial assumptions. The report also showed that the funded status of the plan is 36.7%. This latter figure will become increasingly important next year when public retiree health care plans, including the five Ohio public pension plans, are required to show the amount of employer contribution needed to fund their health care plans on a full-reserve basis (i.e., a 30-year funding period) in their annual financial reports.

In effect, STRS Ohio faces two actuarial funding challenges. STRS Ohio is addressing both challenges by aggressively seeking support for a legislative proposal that would allow the system to increase members' contributions to STRS Ohio by 2.5% and their employers' contributions by
2.5% of teacher payroll to create an ongoing and dedicated revenue stream for the STRS Ohio Health Care Program. These increases would be phased in over a five-year period, in .5% increments.

The health care actuarial valuation report showed that an annual contribution of 4.58% is needed this year and each following year to fund the STRS Ohio Health Care Program on a 30-year basis. This percentage is in line with STRS Ohio's legislative proposal.

Further, if this contribution increase can be obtained, the current 1% of employer contribution going toward health care can start flowing back into the pension fund - an influx of approximately $94 million per year that has a significant impact on the speed at which the UAAL can be reduced. Also contributing to pension solvency will be the unrealized market gains that were not reflected in the most recent actuarial valuation, plus future investment returns.

In short, the Retirement Board, in concert with the Health Care Advocates for STRS (HCA), have developed a legislative proposal that, if successful, strengthens pension solvency and shores up health care in the future to achieve a 30-year funding period for both the pension fund and the health care fund; meets the expectations of current and retired Ohio public educators; and lessens the risk of additional liabilities being placed on the Ohio Legislature and/or Ohio taxpayers if the retiree health care program ends.

STRS Ohio's executive director, Damon Asbury, is tentatively scheduled to present this report to the ORSC in May. A complete copy of the report can be viewed or printed from the STRS Ohio Web site (www.strsoh.org), beginning on March 17, 2006.

STRS Ohio staff and representatives from the HCA continue to hold meetings with legislators to educate them about the health care legislative initiative and obtain feedback. Work on the draft legislation is also continuing.

RETIREMENT BOARD BEGINS DISCUSSING HEALTH CARE PROGRAM FOR 2007 At the March meeting, STRS Ohio staff began discussing the premium outlook for 2007 for the retiree health care program with board members. For calendar year 2006, the board approved a package of health care premiums that capped all increases at 3% over 2005 rates. At that time, the board cautioned that this increase did not match the projected trends for health care costs increases in 2006. If the board followed these trends in setting premiums, STRS Ohio members would have seen their premiums increase an average of 12%, with premiums for spouses increasing even more. When setting the 2006 rates, the board also noted that, without additional funding for health care, the board would 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.

At this time, health care cost trends are projected to be at or above 10% for the next several years. Consequently, preliminary premium estimates for 2007, based on 2004 claims costs, forecast an approximate 15% increase for a non-Medicare benefit recipient with 30 years of service and 19% for a 30-year benefit recipient with Medicare. Spouse premiums would be higher. Potential increases could vary among plans. The board authorized staff to look at changes in plan design (e.g., increased deductibles, changes in co-insurance and changes to the prescription drug plan) to reduce the projected premium increases. A final decision on 2007 premiums is scheduled for the board's August meeting.

ASSOCIATE COMPENSATION DISCUSSION COMPLETED Following several months of discussion, the State Teachers Retirement Board unanimously voted to restructure the base salary structure for STRS Ohio associates and to revise the Performance-Based Incentive (PBI) Plan for eligible Investment associates. The action included restrictions and limitations pertaining to how many associates could now qualify for base salary adjustments; changes must also fall within the current budget. In addition, all subjective and discretionary factors were eliminated from the awarding of PBIs. An eligible Investment associate may only receive the maximum incentive payout when relative outperformance of 52 basis points gross on the total investment fund is achieved, as well as specific asset class returns. (Relative outperformance means the rate of return generated by STRS Ohio Investment associates and outside money managers must exceed the total fund benchmark return.) The changes are designed to allow STRS Ohio to offer competitive compensation levels when compared to both public and private pension funds.

In March 2005, the Retirement Board authorized Executive Director Damon Asbury to contract with Aon/McLagan to conduct a study to review and provide recommendations on the competitiveness of the compensation and benefits package STRS Ohio offers to associates.

There has been a concerted effort on the part of the Retirement Board and staff to reduce the overall operating budget by operating as "lean" as possible. Non-Investment expenses have been reduced by $10 million over the past two years. At the same time, the board has acknowledged the importance of having a staff who has the skills, ability and commitment to successfully carry out their responsibilities -- whether managing investments; accounting for plan assets and expenditures; providing member benefits, services and communications; working with employers; or serving in critical support areas.

The overall staffing levels have been reduced significantly since the peak in 2002. Currently, STRS Ohio has about 120 fewer associates and now totals 614 associates (as of 12/31/05). The completed Aon/McLagan study gave the Retirement Board and staff an objective, third-party review of the total compensation and benefits package that is offered to recruit, motivate and retain STRS Ohio associates. The study showed that total compensation for Investment and higher-level non-Investment positions was not competitive, falling below the recommended market rates for similar positions.

FIVE STRS OHIO MEMBERS QUALIFY FOR BOARD ELECTION Five contributing members of STRS Ohio have qualified for this spring's Retirement Board election. The candidates for the two seats on the board are John K. Brackett, University of Cincinnati; Mark Fredrick, Cleveland Municipal Schools; Thomas E. Hall, Miami University; Mark H. Meuser, Gahanna-Jefferson City Schools; and Constance (Conni) K. Ramser, Jackson Local Schools. The election is for the four-year term beginning Sept. 1, 2006, through Aug. 31, 2010.

Ballots, candidate information and voting instructions will be mailed on April 4, 2006; the deadline for voting will be May 1, 2006. Members will be provided with three ways to cast their votes -- mail, telephone or Internet. Members are particularly encouraged to vote by telephone or Internet, as this results in a cost savings to STRS Ohio. For every completed mail ballot returned to STRS Ohio, the pension system has to pay for the return postage. Telephone and Internet votes avoid this extra postage expense for the pension system.

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

- 34 disability retirements were granted.

- 99 active members were approved for service retirement; 16 inactive retirements were approved.

- In February fixed-income purchases totaled $895 million, domestic equity purchases totaled $520 million, and real estate purchases totaled $55 million.

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