From STRS: Report on May 2006 Board Actions and Discussions

May 24, 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 May report follows.

MAY BOARD NEWS

BOARD RECEIVES ELECTION RESULTS

One current board member was retained and a new board member will be seated as a result of the recent Retirement Board election. The board's vice chair, Conni K. Ramser, and Mark H. Meuser will fill contributing member seats on the board. Their four-year terms run through Aug. 31,
2010.

BOARD REVIEWS HEALTH CARE PLAN DESIGN CONSIDERATIONS FOR 2007 AND BEYOND

At its May meeting, the Retirement Board continued its discussion about potential health care program premiums and plan design changes for calendar year 2007. To begin the discussion, the board received information about benefit recipients and spouses who have disenrolled from the STRS Ohio Health Care Program, and how the disenrollment impacts those who remain in the program.

As health care premiums have increased during the past few years, fewer new retirees have signed up for the STRS Ohio Health Care Program. This trend, known as adverse selection, has had a compound effect because many previously enrolled members have left the program. STRS Ohio needs to position itself to attract healthy members and replenish the risk pool by maintaining affordable rates.

The board then reviewed considerations presented by STRS Ohio Member Benefits staff for 2007 health care plan design modifications as well as far-reaching strategies to improve the long-term viability of the health care program. The plan design changes that were discussed are intended to mitigate the effect of adverse selection. The board gave staff direction to further quantify the financial impact of proposed changes and to seek member input on any possible changes before presenting 2007 recommendations at the June board meeting. The board is expected to act on recommendations in June so that 2007 premiums can be presented to the board for approval in August.

ASSOCIATE BENEFIT ADJUSTMENTS FOR 2006-2007 RESULT IN COST SAVINGS

The board voted to adjust several STRS Ohio associate benefits, including sick time payout, health insurance and educational assistance. The net result of these changes is a cost savings of more than $400,000 for the system. Approved benefit changes will go into effect in fiscal year 2007.

BOARD RETAINS RUSSELL INVESTMENT GROUP AS GENERAL INVESTMENT CONSULTANT

The Retirement Board chose the Russell Investment Group from among three finalists as its general investment consultant. The selection of Russell Investment Group is subject to agreement on a contract, which is expected to run for three years.

The primary reason cited for retaining Russell is to maintain continuity of the investment program, given the Investment staff's outstanding performance since Russell took over the general consulting relationship.

At the Investment Committee's request, the board will also seek Russell's input on other organizational issues that have not been included in past contracts, such as the actuarial rate of return and the pricing of liabilities. The board will direct Russell to focus on high-level issues such as investment policy, asset allocation and risk budgeting, and less on performance reporting. This new structure is expected to result in a significant cost savings.

INTEREST RATE FOR DEFINED CONTRIBUTION ALLOCATION CHOICE SET STRS

Ohio members participating in the Defined Contribution Plan or Combined Plan have the option of allocating their contributions to the STRS Total Guaranteed Return Choice. This option provides a guaranteed interest rate on contributions and transfers made in a given year. In exchange for this protection against any possible negative returns, participants must "lock in" their contributions and transfers until the end of a five-year term. The interest rate is paid on the contributions and transfers until the end of the five-year term and is credited to the account on a daily basis. For the STRS Total Guaranteed Return Choice
2011, which begins on July 1, 2006, the Retirement Board approved an interest rate of 5.5%, which represents a premium above the five-year Treasury rate.

As of April 30, 2006, there are 9,617 members in the Defined Contribution Plan and 5,753 members in the Combined Plan. Total assets in the defined contribution accounts exceed $222 million.

APPOINTMENTS MADE TO MEDICAL REVIEW BOARD

The Retirement Board appointed two physicians to serve on the Medical Review Board, effective May 19, 2006. The new appointees are James N. Allen, Jr., M.D. with The Ohio State University Medical Center's Division of Pulmonary and Critical Care Medicine at University Hospital East, and Stephen F. Pariser, M.D. with The Ohio State University Medical Center's Department of Psychiatry.

RETIREMENT, INVESTMENT TRANSACTIONS APPROVED

The Retirement Board approved the following retirements and investment transactions:

- 43 disability retirements were granted.

- 73 active members were approved for service retirement; 75 inactive retirements were approved.

- In April, fixed-income purchases totaled $944 million, domestic equity purchases totaled $516 million and real estate purchases totaled $29 million.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

ORSC RECEIVED 30-YEAR FUNDING PRESENTATION

On May 10, STRS Ohio presented the statutorily required report to the Ohio Retirement Study Council (ORSC) on the Retirement Board's plan for reducing the pension funding period to 30 years from the current 55.5 years. Dr. Asbury explained the current situation facing STRS Ohio pension funding of decreased payroll growth due to school budget cuts and the impact of charter schools. The plan presented includes increases in both employer and member contributions and strengthens pension solvency while shoring up health care to achieve a 30-year funding period for both funds.