October 2006 Board News from STRS

From STRS, October 20, 2006

This week, the State Teachers Retirement Board held 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 October report follows.

OCTOBER BOARD NEWS

NEW APPOINTEE JOINS STATE TEACHERS RETIREMENT BOARD Thomas W. Johnson took his seat at the board table at the State Teachers Retirement Board's October meeting. Johnson was appointed by Gov. Bob Taft on Sept. 15, 2006, to complete the four-year term begun by Judith Fisher. He is currently an executive-in-residence at The Ohio State University in the John Glenn School of Public Affairs. He is the former director of the Office of Budget and Management for the State of Ohio and previously served in the Ohio House of Representatives for 22 years, where he was chair of the House Finance and Appropriations Committee. Johnson will serve on the board through Sept. 28, 2008.

ANNUAL ACTUARIAL REPORT PRESENTED TO BOARD At its October meeting, the State Teachers Retirement Board got its first look at the annual actuarial valuation report of STRS Ohio's pension fund from its actuary, Buck Consultants. The report provides a "snapshot" of the actuarial position of the retirement fund as of July 1, 2006. STRS Ohio's actuarial gains and losses for the past fiscal year (July 1, 2005-June 30, 2006) are documented, including their impact on the system's total liability going forward. The actuary looks at the system's experience in several areas, including investment gains and losses, payroll growth, salary increases, retiree mortality, and the number of retirements and other "separations" from the system, such as account withdrawals -- all of which can either reduce or increase the system's liabilities from one year to the next.

For fiscal year 2006, the retirement system experienced an actuarial gain. The major factor contributing to this gain was the excellent investment returns experienced during the past three years. Due to STRS Ohio "smoothing" its investment returns over rolling four-year periods, the actuarial valuation of the pension fund doesn't show the full positive impact of these returns; more than $4.3 billion of additional gains have been "deferred" to subsequent years. Nevertheless, the fund saw an investment return gain of more than $1.49 billion. The retirement fund also experienced an actuarial gain due to action taken by the Retirement Board last year to lower the interest rates paid on account withdrawals.

Employer payrolls for teachers continued to fall below the 4.5% actuarial assumption, increasing by only 2.03%. This marks the third consecutive year that payroll growth has been below 4.5% and resulted in a $457 million actuarial loss. In addition, more educators retired with 30 years of service than projected, meaning STRS Ohio is now paying out more in retirement benefits going forward than anticipated for this point in time. This factor resulted in a $196 million actuarial loss.

Taking all the actuarial gains and losses into consideration, the retirement fund recorded an actuarial gain of more than $958 million. Overall, the system's accrued liabilities dropped to $19.4 billion from $20.1 billion and both the pension system's funding period and funding ratio improved.

The funding period is the number of years required to pay off the unfunded accrued liability of the system. As of July 1, 2005, STRS Ohio's funding period was 55.5 years. However, with this year's actuarial gains, the funding period dropped to 47.2 years, as of July 1, 2006.

The system's funded ratio -- the market-related (smoothed) value of assets compared to liabilities -- increased to 76.1% compared to 74% last year. This means that STRS Ohio currently has on hand 76% of the assets needed to pay all benefits accrued by STRS Ohio members to date -- even though the liabilities are not payable all at once.

During the next several months, the Retirement Board will continue to discuss the report's results, including analyzing factors that can impact the pension fund's actuarial status - both positively and negatively. For example, increasing the investment return assumption from 8% would decrease the system's liabilities, while lowering the payroll growth assumption would lengthen the system's funding period (how long it would take to pay off system liabilities). These assumptions are currently scheduled for review in 2008. (Assumptions are typically reviewed every five years.) However, the board will be looking at comparative data to see if any actions are needed before then. The progress of the legislative initiative to increase member and employer contributions to help fund retiree health care also will be monitored. This proposal, if successful, would enable the 1% employer contribution going to health care to be returned to the pension fund, further improving the actuarial status of the fund.

AUDITOR OF STATE RESPONDS TO LEGAL EXPENSE EXPENDITURE QUESTION Earlier this year, two STRS Ohio associates were reimbursed for the legal expenses they incurred in assisting the Ohio Ethics Commission and the Columbus City Attorney's office in the prosecution of a former board member for ethics violations. To date, a total of $1,400 has been reimbursed. During its Sept. 14, 2006, meeting, the Retirement Board voted to waive the board's attorney-client privilege for discussions held in executive sessions on May 17, 2006, and Aug. 18, 2006, regarding the payment of these fees. Taking this action enabled the Auditor of State to discuss the expenditure with board and staff members to determine if the reimbursements were allowable. The response received from Auditor of State Betty Montgomery on Oct. 20, 2006, is now posted on the STRS Ohio Web site. (http://www.strsoh.org/pdfs/AG_opinion.pdf)
BUDGET INFORMATION POSTED ON WEB SITE During the October meeting, the Retirement Board approved a motion that provides for a new posting on the STRS Ohio Web site (www.strsoh.org). Each month, the report of administrative expenditures compared to the annual operating budget will be posted under "Related Links" found under the "Retirement Board" section of the Web site. Expense notes will accompany the data.
INTERNAL MANAGEMENT OF INVESTMENT ASSETS CONTINUES TO SAVE STRS OHIO DOLLARS STRS Ohio has participated in comparative studies of public and private pension funds done by CEM Benchmarking Inc. since 1996. Currently, more than 290 funds located in the United States, Canada, Europe and Australia are evaluated annually regarding the cost effectiveness of their investment programs. The most recent report covering calendar year
2005 showed that STRS Ohio saved $93.6 million that year through its significant internal management of investment assets.
BOARD APPROVES EXPLORATION OF PHARMACY BENEFIT MANAGER OPTIONS For several months, STRS Ohio and the Ohio Public Employees Retirement System (OPERS) have been discussing ways to work together to lower cost trends for their retiree health care programs' prescription drug expenses. Both systems would like to explore traditional pharmacy benefit manager (PBM) arrangements (such as the type that currently exists between STRS Ohio and Caremark) and also alternative PBM models that may offer more program flexibility and support for other approaches that lower drug costs. As a result, the State Teachers Retirement Board approved a joint project between the two systems to hire Buck Consultants to help them find a PBM for the three-year period, Jan. 1, 2008-Dec. 31, 2010. By working together, both systems benefit from the collective purchasing power of almost 303,000 covered individuals (198,000 for OPERS and 105,000 for STRS Ohio) and gross annual drug costs of more than $680 million ($458 million for OPERS and $222 million for STRS Ohio). STRS Ohio's share of the contract with Buck Consultants will fall between $80,000 and $99,985 plus travel expenses.
RETIREMENT, INVESTMENT TRANSACTIONS APPROVED The Retirement Board approved the following retirements and investment transactions:
- 490 active members were approved for service retirement; 178 inactive retirements were approved. - In September, fixed-income purchases totaled $232 million, domestic equity purchases totaled $1.46 billion and real estate purchases totaled $31.3 million.
ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

HEALTH CARE PROPOSAL ON A STEADY COURSE Efforts by STRS Ohio staff and members of the Health Care Advocates for STRS (HCA) to gain legislative approval for the proposal to increase contributions to fund the health care program are moving along on a steady course. To date, staff and HCA representatives have met with 115 members of the General Assembly. The proposal to increase employer and employee contributions 2.5% each (phased in over five years at a rate of 5% each year) has also been drafted into legislation. Meetings will resume after the November election. The team is hoping to get a bill introduced during the lame-duck session.

STRS OHIO RECEIVES 2006 PPCC ACHIEVEMENT AWARD STRS Ohio has once again successfully met the rigorous requirements for the Public Pension Coordinating Council Achievement Award. The purpose of this award is to promote high professional standards for public employee retirement systems and to publicly commend the systems that meet those standards.

To earn this commendation, STRS Ohio was able to document compliance with specific principles in the areas of benefits, actuarial valuations, financial reporting, investing and disclosure to members. These principles have been reviewed by prominent members of the public retirement system community and are widely acknowledged to be marks of excellence. Systems that earn the PPCC Achievement Award are commended for taking the extraordinary steps to ensure exemplary management.