June Board News from STRS

June 20, 2006

Last week, the State Teachers Retirement Board held several committee meetings, as well 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 June report follows.

JUNE BOARD NEWS

RETIREMENT BOARD CHAIR, VICE CHAIR NAMED; BROWN RECOGNIZED FOR SERVICE During its June meeting, the Retirement Board elected Jeff Chapman as its vice chair for the coming year. Chapman joined the board in September 2005 following his election to a retired member seat on the board. According to Board Policies, Conni Ramser, who is currently serving as vice chair, automatically moves into the position of chair. Normally, both Chapman and Ramser would be moving into these leadership positions on Sept. 1, 2006. However, Dr. Robert Brown, the current board chair, has announced his retirement from his teaching position at The Ohio State University, effective June 30, 2006, and thus is resigning from the Retirement Board. As a result, both Ramser's and Chapman's terms in office will begin on July 1.

During the board meeting, a resolution recognizing Brown's service to the board was presented. The board expressed its appreciation for his dedication, wisdom and service to the members and benefit recipients of STRS Ohio.

RETIREMENT BOARD ADOPTS ANNUAL INVESTMENT PLAN The Retirement Board adopted an Annual Investment Plan for fiscal year
2007 (July 1, 2006-June 30, 2007) following a presentation by members of the system's Investment Department. This plan outlines the staff's investment strategy for the various asset classes (fixed income, domestic and international equities, real estate and alternative investments).

After assessing a number of factors, STRS Ohio staff is predicting that the United States' economy will continue to move through its mid-cycle slowdown that began this year during fiscal year 2007. Energy costs could remain elevated during the fiscal year, but are not likely to increase dramatically from current levels. Consequently, growth in core inflation measures (which exclude food and energy costs) should remain around 2%. Personal spending in the United States is expected to slow, but growth in capital equipment investment should remain fairly steady as companies continue to look for ways to improve productivity. STRS Ohio also projects a modest growth of 2.1% in consumer prices. With the recent decline in the worldwide equity markets in late fiscal year 2006, STRS Ohio expects to see its total fund returns for fiscal year 2007 to be in excess of 8%, which is above the required actuarial rate of return of 8%.


SEVERAL HEALTH CARE PROGRAM CHANGES APPROVED FOR 2007 During its June meeting, the Retirement Board continued its discussion about health care program costs and potential changes for calendar year
2007. Included in information provided by staff were the results of recent research done with about 100 benefit recipients who are current enrollees in the Aetna and Medical Mutual Plus and Basic Plans.

The board has been considering several changes to these plans to become more competitive in the marketplace by enhancing some services and lessening the projected increase in monthly premium costs for these plans for 2007. At its June meeting, the board directed staff to implement several plan changes for 2007 to achieve a savings in gross health care costs, estimated at this time to be $16.5 million. This number represents a savings for the Health Care Stabilization Fund through reduced claims payments and for individual plan enrollees, who will experience a lower increase in premiums from those projected earlier this year. In August, the board will review the actual 2007 premiums.

Several of the approved changes enhance the Basic Plan offered through Aetna and Medical Mutual. Right now, about 8,300 STRS Ohio benefit recipients and their family members are enrolled in the Basic Plan, which offers lower monthly premiums in exchange for a higher annual deductible and out-of-pocket maximum for each enrollee. Recent research shows that more benefit recipients are considering the Basic Plan as a viable health plan option for them and their dependents. To make the Basic Plan even more attractive, it will cover preventive services, such as annual physicals, mammograms and colorectal cancer screenings, at
100% in 2007; no deductibles or coinsurance costs will apply. Also, the annual prescription drug benefit for the Basic Plan will increase to $5,000 from $3,100 per enrollee and generic drugs will be exempt from the benefit maximum. In other words, the enrollee pays 100% of the cost of prescriptions for the remainder of the year only after STRS Ohio has paid $5,000 in retail and mail-service prescription drug costs. Further, the enrollee will continue to pay just the copayment for generic drugs, even if the $5,000 maximum is reached.

In addition, two coverage features are being added to both the Plus and Basic Plans. The annual amount for outpatient alcoholism treatment will be increased to $1,000 from $550. Also, coverage for nutritional counseling will be expanded to single conditions that can be impacted by changes in diet. These conditions include diabetes, hypertension, kidney disease and obesity.

In 2007, several changes will also be made to the prescription drug coverage available through the Aetna and Medical Mutual Plus and Basic Plans, as well as through the Paramount plans. To encourage the use of generic drugs, the Tier 2 copayments will increase to $30 from $25 at retail. In addition, mail-service copayments will increase for all tiers, from the current levels of $20/$50/$100 to $25/$75/$125. Even with this change, STRS Ohio members still realize a cost savings when they receive their drugs through mail service. The final change affects the Plus Plan and Paramount plans. Enrollees will see their annual out-of-pocket maximum for their prescription drug benefit increase by $500, to $2,000 from $1,500. Once an enrollee has paid a total of $2,000 out of pocket in retail and mail-service copayments, the enrollee pays nothing for covered drugs for the remainder of the year.

This package of changes should help to mitigate adverse risk, which is having a compounding effect on STRS Ohio Health Care Program premiums. Currently, STRS Ohio is seeing a disproportionate share of individuals enrolling in the health care program who have high medical and prescription drug costs. As a result, annual premiums must increase beyond medical cost trend to cover the additional costs. The changes adopted by the board for 2007 will help attract and retain healthy enrollees by increasing coverage for preventive services and keeping premiums more competitive. While actions taken by the board will reduce premium increases for 2007, individuals who use health care services, especially brand-name prescription drugs, will pay higher out-of-pocket costs.

In other action, the Retirement Board approved STRS Ohio continuing to apply for the Medicare Part D subsidy in 2007. For STRS Ohio benefit recipients, this means that if you are enrolled in an STRS Ohio-sponsored health care plan, you will not need to enroll in a Medicare Part D prescription drug plan for 2007. STRS Ohio will continue to offer prescription drug benefits through its health care plans that are as good as or better than the standard Medicare Part D prescription drug benefits.


FISCAL YEAR 2007 BUDGETS ADOPTED The Retirement Board approved the proposed system budgets for the
2006-2007 fiscal year. The operating budget, which totals $89,558,000, reflects a 4.6% increase from the current year's budget and is 7.1% lower than the peak budget for the 2002-2003 fiscal year. The operating budget total also reflects changes that were approved in May by the Retirement Board to several STRS Ohio associate benefits. The net result of these changes was a cost savings of more than $400,000 for the system. In a related action, the board approved a new procedure that requires all administrative and/or project-based operating expenditures of $100,000 or more to be approved by a formal vote of the board prior to expenditure. The procedure excludes preapproved administrative expenditures pertaining to the salary or benefits of STRS Ohio associates.


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

- 40 disability retirements were granted.

- 39 active members were approved for service retirement; 54 inactive retirements were approved.

- In May, fixed-income purchases totaled $756.7 million, domestic equity purchases totaled $1.1 billion and real estate purchases totaled $35.9 million.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

STRS OHIO RECEIVES CERTIFICATE OF ACHIEVEMENT RECOGNITION The Government Finance Officers Association has awarded its Certificate of Achievement for Excellence in Financial Reporting to STRS Ohio for the 2005 Comprehensive Annual Financial Report. This is the 16th consecutive year STRS Ohio has received this national recognition.

WORK CONTINUES ON HEALTH CARE INITIATIVE The Legislative Services Commission has begun drafting STRS Ohio's proposal for creating a dedicated revenue stream for the health care program into bill form. There has been no agreement yet by a legislator to sponsor the bill. STRS Ohio staff and representatives from the Health Care Advocates for STRS will continue to meet with legislators either in Columbus or in their districts over the summer.
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