STRS April 2006 Board News

APRIL BOARD NEWS

PROPOSED BUDGETS FOR 2006-2007 PRESENTED TO RETIREMENT BOARD...At its April meeting, the Retirement Board had its first look at the proposed system budgets for the 2006-2007 fiscal year. The proposed operating budget total of $89,558,000 reflects a 4.6% increase from the current year's budget, which totals $85,603,800. The proposed budget for the next fiscal year is 7.1% lower than the peak budget for the 2002-2003 fiscal year. Overall staffing levels have been reduced by more than 100 associates since then; in addition, non-Investment expenses have been reduced by $10 million over the past two years.

In presenting the budget to the board, staff noted that the increase for next year is due primarily to two factors. The first is the conversion to hard dollars from soft dollar arrangements in investments. Previously, a portion of commission dollars (known as "soft dollars") generated on securities transactions was used to pay for some investment research services. For the past two years, STRS Ohio has been transitioning to paying for these services through "hard dollars" that are reflected in the system's operating budget. This transition from soft dollar expenditures to hard dollar expenditures, which will be completed at the end of the 2006-2007 fiscal year, follows "best practices" in the investment industry, is more economical for STRS Ohio and adds transparency to the cost of investment services. The second major factor impacting next year's proposed budget are the adjustments made by the Retirement Board last month to the total compensation provided to STRS Ohio's Investment associates.

The budget presented to the board also noted continued significant decreases totaling $1.9 million in such areas as board and staff travel, communications, professional and technical services, and repairs and maintenance.

The proposed capital budget for next year totals $3,164,200. Additionally, the system will be spending $11,440,300 on the Vitech project that will replace STRS Ohio's obsolete pension management computer system. In developing the budgets, staff was driven by these board directives:

- Make system operations in all areas as "lean" as possible, without jeopardizing delivery of pension benefits and services and health care coverage to members; adversely impacting investment operations; or failing to meet fiduciary responsibilities or legal requirements.

- Provide an appropriate compensation and benefits package and work environment to attract, retain and engage highly motivated associates.

- Comply with all Board Policies.

- Address Retirement Board priorities.

- Demonstrate and communicate to members that STRS Ohio is managing operating expenses prudently.

The Retirement Board will be asked to approve the budgets at its June meeting.

WORK ON HEALTH CARE MEMBER EDUCATION AND ENGAGEMENT CAMPAIGN CONTINUES..STRS Ohio staff and representatives of the Health Care Advocates for STRS continue to discuss the proposal for an ongoing and dedicated revenue stream for the STRS Ohio Health Care Program with active and retired members around the state. This spring, more than 2,000 individuals will hear about the legislative initiative STRS Ohio is pursuing. Surveys distributed at the active meetings continue to show majority support for the proposal to increase member and employer contributions, consistent with the data collected from more than 10,000 active members last fall. Some school districts have voiced their opinion about the proposal, noting that school funding issues make it difficult for them to support an increase in employer and/or employee contributions. Opportunities for face-to-face conversations with school board members, superintendents and legislators, as well as continued outreach to members, are being pursued. At its April meeting, the State Teachers Retirement Board approved draft legislation that would give the board the authority to increase member contributions up to 2.5% and employer contributions up to 2.5% to exclusively fund the STRS Ohio Health Care Program for current and future retirees. The next step is for the Legislative Services Commission to finalize the bill language. This should be completed later this year.

STRS OHIO RANKS NO. 2 IN SERVICE..In 1998, STRS Ohio was one of eight leading international pension systems that sponsored the inaugural Benefit Administration benchmarking project developed by CEM, Inc., of Toronto, Ontario. The purpose of the survey was to provide insight into benefit administration costs, service levels and industry best practices. Today, more than 53 retirement systems from the United States, Canada, Australia and the Netherlands participate in the annual study that represents pension funds serving more than 18 million members.

Since the inception of the Benefits Administration Survey, STRS Ohio has earned the No. 1 ranking in service for seven consecutive years. However, for 2005, STRS Ohio fell short of the first-place ranking by two points.

During the presentation detailing the survey results, staff noted that costs incurred in delivering member services have been gradually trending downward during the past three years. The eventual replacement of the currently outdated pension management computer system, known as Legacy, with the new Vitech system will help reduce costs in this area. Staff will continue to focus on reducing administrative costs while not negatively impacting members' current high satisfaction with services provided by the system, such as availability of counseling sessions, short wait times for calls to the Member Services Center, two-week turnaround times for the processing of benefits and estimates, and timeliness of communications.

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

- 35 disability retirements were granted.

- 171 active members were approved for service retirement; 129 inactive retirements were approved.

- In March, fixed-income purchases totaled $1.406 billion, domestic equity purchases totaled $1.579 billion and real estate purchases totaled $23.7 million.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

FIRST MEDICARE PART D REIMBURSEMENT REQUESTED..STRS Ohio has submitted an initial request for payment for the Medicare Part D subsidy. This request for approximately $7.64 million covers prescription drug claims paid during January and February for STRS Ohio enrollees in the Caremark and AultCare prescription drug plans. Finance and Health Care associates have been working since last fall to complete the registration and payment request processes required by the Centers for Medicare and Medicaid Services (CMS). We have received word from the CMS that payment will be sent to STRS Ohio by the end of May. Beginning in July, CMS will allow STRS Ohio to submit monthly payment requests, including back payments for March through June.