Report from CORE president Dave Parshall re: November 6 Damon/CORE meeting

From CORE president Dave Parshall, November 6, 2006

Dear CORE membership:

The Committee of CORE that meets with Damon Asbury met with Damon on November 6th. Please find enclosed copies of Damon's printed responses to questions presented to him prior to our meeting. [Printed at the bottom of this post] In addition, questions which reached us too late to submit before our meeting were also discussed. A summary of Damon's and his staff's responses to these questions are summarized below.

1. The Ferguson contract with STRS for a personnel search was discussed. Ferguson is conducting a search for three or four positions at STRS. The contract calls for maximum payment of $315,000 if they fill all three positions. The amount will be reduced by 1/4 for each they don't fill. The contract is for 18 months and STRS can break the contract any time they wish. If STRS would hire someone during the contract that was not found by Ferguson, then STRS still owes the contracted amount. However, Damon assured us that STRS would never do this. They would cancel the contract to avoid this payment. Keep in mind the reason for hiring Ferguson is that: STRS is searching for senior level personnel which are very difficult to find. We want the best in handling our funds.

2. Travel Cost for board members by law are capped at $6000 annually per board member for out-of-state travel only. Costs for in-state travel are based on the individual travel needs of each board member. Some live long distances from board meetings, etc., and others do not. For this reason there is no dollar amount imposed. But there is strict oversight. This also question is related to the next issue discussed.

4. ORSC audit is due by the last day in 2006, or at least that is what they told Damon.

5. By long standing tradition the STRS board chair does vote on issues other than to break a tie. This is not according to Robert's Rules. But all previous boards have done this.

Report submitted by Dave Parshall

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Damon Asbury's Responses to CORE Questions at meeting with CORE officers November 6, 2006

1. I would like to propose that a 15-year plus teacher be allowed to pay 1/4 of a 30-year premium for health care. Likewise, a 15-year teacher be allowed to pay 1/2 of the premiums of a 30-year teacher. IF the premium is $100,000, then a 15 plus teacher should pay $125.00 and a 15-year teacher should pay 150.00. As a teacher who taught 15 years and one who will not have Medicare and one for whom it is difficult to afford insurance now, I feel that my 15 plus years should count for something.

RESPONSE: Thank you for your suggestion to charge retirees with 15 years of service lower premiums. Unfortunately, your suggestion conflicts with one of the 10 Guiding Principles of the STRS Ohio Health Care Program adopted by the Retirement Board. This guiding principle is "Recognize the longevity of Ohio service credit when allocating available health care resources." Consequently, STRS Ohio pays the highest subsidy, 75%, to retirees with 30 or more years of service (2.5% for each year of service up to 30 years) while retirees with 15 years of service receive a 37.5% subsidy because they worked half as long as the 30-year retiree. Participants who retired before Jan. 1, 2004, and have less than 15 years of service do not receive a subsidy. Members who retired Jan. 1, 2004, or later with less than 15 years of service do not have access to the STRS Ohio Health Care Program.

In your question, your statement "one who will not have Medicare" is somewhat confusing. While we do not have all of your information regarding your eligibility for Medicare, in general, most individuals are eligible for Medicare if they are age 65 or older. You do not need to contribute to Social Security to be eligible for Medicare. For more information about Medicare and your eligibility to enroll, call your local Social Security office or use the toll-free number 1-800-772-1213. Additional information about Medicare benefits may be obtained by calling Medicare at the toll-free number 1-800-633-4227 or visiting the Web site at http://www.medicare.gov/.

If you enroll in Medicare, it's important to understand that participants in the STRS Ohio Health Care Program must provide proof of their enrollment in Medicare B to STRS Ohio if they are eligible for Medicare Part B (medical insurance) coverage. Retirees usually send us a copy of their Medicare card. Participants also must enroll in Medicare Part A (hospital insurance) if it is available at no cost. If you have any other questions about the STRS Ohio Health Care Program, please call our Member Services Center toll-free at 1-888-227-7877.

2. STRS should check out the possibility of using audio streaming (voice only) as a device for sharing the STRS meetings with more STRS retirees who cannot attend the monthly meetings. WLIO TV station in Lima uses this all of the time. Our inquiry to that station was that the cost was $500.00 plus a high speed internet connection (which I am sure STRS already has). We have been asking STRS for this consideration for YEARS now.

RESPONSE: In response to the request for audio recordings of board meetings, we now provide CDs of each meeting upon request. They are provided at no charge and available a few days after each board meeting. Any member who would like to be sent these CDs should contact the Executive Department at STRS Ohio. [Blogger's note: I think this means contact Joyce Baldwin, BaldwinJ@strsoh.org. She has helped me get tapes; I didn't know CDs were available now. KBB]

3. What is the STRS plan for unfunded liability which is 55 years now? Is it going up or down in the future? How long will it take to get to 30 years?

RESPONSE: The amortization period for the unfunded pension liability has now declined to 47.2 years as of July 1, 2006, primarily as a result of investment gains over the past three fiscal years. Also, there are additional investment gains that have not yet been recognized for actuarial purposes. Last year at this time, we had predicted a funding period of 49.6 years, so you can see that it dropped even lower.

There are a number of factors that can impact the funding period of the pension plan -- both positively and negatively. As noted above, investment gains or losses are one factor; other factors include payroll growth, retiree mortality and salary increases. In addition, the progress of our legislative initiative to increase member and employer contributions to help fund retiree health care also must be monitored. This proposal, if successful, would enable the 1% employer contribution currently going to health care to be returned to the pension fund, further improving the actuarial status of the fund. While it is always difficult to make predictions, it would appear that reaching a 30-year funding period by 2012 is feasible.

We will continue to talk about pension and health care funding in our STRS Ohio newsletters, postings on our
Web site, and through our e-mail news service.

4. Have any contingency plans been developed yet? This was suggested by Leone and Buser and many STRS retirees.

RESPONSE: In the investment world, the markets (bonds, stocks, international) react instantaneously to bad news. Therefore, one cannot protect a fund from the immediate declines that result from that bad event without hindering the fund's ability to achieve its required actuarial rate of return over the long term. However, once the event happens and the market declines, it is important to assess whether that negative event has been fully discounted (or priced) in the market place or if a further decline is likely. This decision is the critical and most difficult one.

Many people commonly believe the events of Sept. 11, 2001, caused the bear market earlier this decade. In fact, prior to Sept. 11, the stock market had already declined nearly 30% and the recession officially ended in that September quarter of 2001. The stock market began its decline in the winter of 2000 due primarily to the longevity of the bull market, extremely high valuations and an impending recession. The U.S. economy resumed its growth in the fourth quarter of 2001 and has now logged 16 consecutive quarters of real growth.

A few people believed that further, devastating attacks on the United States or other negative world events were likely over the past four years and that STRS Ohio should have significantly adjusted the asset mix to prepare for it. However, had STRS Ohio eliminated all equities and real estate, thus placing the portfolio in cash and bonds, STRS Ohio would be approximately a $50 billion fund today, not the more than $65 billion fund that it actually is. Forecasting exactly how the stock market is going to behave is nearly impossible. Alan Greenspan, probably the most knowledgeable financial expert in the United States, cautioned in late 1996 that the U.S. stock market was extremely overvalued. The stock market continued to rise, producing a gain of more than 100% in the 3-1/2 years after his statement.

Given the above discussion, large institutional pension funds adopt a long-term asset allocation that will produce the desired return over the long-term within an acceptable level of risk, while recognizing there will be volatility in the short-term. This is effectively a contingency plan for a pension fund with a long-term horizon. The Retirement Board completed a major asset/liability study 10 months ago and implemented a new asset allocation mix that did not significantly increase the risk of the portfolio. The benefit of a long-term asset allocation strategy was demonstrated by STRS Ohio's latest 10-year annual compounded return of 8.3% per year, which exceeds the required actuarial rate of return. These returns were achieved despite the difficult, low return period of 2001-2003. In addition, while markets can be very volatile over shorter periods, STRS Ohio attempts to mitigate its volatility of returns by utilizing tactical asset allocation in the Annual Investment Plan and the four-year actuarial smoothing.

Should the market go through a sustained period of subpar returns, or be inpacted by a catastrophic event, the staff, Retirement Board and board investment consultant would review the assumptions in the asset/liability study to confirm their appropriateness in that environment.

5. Has a replacement for Steve Mitchell been trained to run the Investment Department in case something should happen to Steve? We cannot afford to overlook such strategic planning.

RESPONSE: It is really not appropriate for us to discuss specific personnel issues. However, Steve Mitchell has always realized the importance of succession planning and has had one or two assistant directors of Investments in place at STRS Ohio for the past 15 years. Presently, he has two assistant directors of Investments. Both have primary responsibility for an asset class in addition to serving as a backup to Steve. While they are closely involved in all investment strategy and operational decisions involving the investment department, Steve keeps them informed on all facets of the administrative side of investments as well as key issues and topics important to the organization as a whole. Also he requires that they understand the actuarial statements of STRS Ohio and that at least one of them attend the ORSC monthly meetings. Both individuals have MBAs and have been employed by STRS Ohio for 20 years.