January Board news from STRS

From STRS, January 19, 2007
Subject: [News] January Board News Details Retirement Board Actions and Discussions

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 January report follows.

JANUARY BOARD NEWS
2006 ANNUAL FINANCIAL STATEMENT AUDIT COMPLETED Clifton Gunderson completed its audit of the STRS Ohio financial statements for the fiscal year ended June 30, 2006. In reporting the results of the audit to the State Teachers Retirement Board at its Jan. 18, 2007, meeting, the auditors noted that the system's financial statements were fairly stated in accordance with generally accepted accounting principles. During its audit, Clifton Gunderson also considered internal controls over financial reporting and tested compliance with certain laws and regulations. Its report indicated that no material weaknesses in internal controls or instances of statutory noncompliance were found. As a result, STRS Ohio received an unqualified opinion, which is the highest level of opinion that an organization can receive. STRS Ohio's financial statements are included in the Comprehensive Annual Financial Report, which is available for viewing on STRS Ohio's Web site or by calling the Member Services Center (see article below).
ANNUAL REPORT FOR 2006 NOW AVAILABLE Every year, STRS Ohio publishes its annual Comprehensive Annual Financial Report. This report has received the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association of the United States and Canada for 16 consecutive years, as well as recognition from the Public Pension Coordinating Council.

The current Comprehensive Annual Financial Report provides a detailed look at STRS Ohio's investment activities, plus financial, actuarial and statistical information for fiscal year 2005-2006 (July 1, 2005-June 30, 2006). The report can be accessed through the STRS Ohio Web site at www.strsoh.org. Copies of the report can also be requested by calling STRS Ohio's Member Services Center toll-free at 1-888-227-7877.

HEALTH CARE LEGISLATION WILL BE REINTRODUCED On Dec. 14, Rep. Scott Oelslager (R-Canton) introduced the STRS Ohio-proposed health care bill. House Bill 707 carried with it the support of the Health Care Advocates for STRS -- a coalition of major management, professional and retiree organizations representing Ohio's public K-12 and higher education teachers. The STRS Ohio proposal calls for increasing public teachers' contributions to STRS Ohio by 2.5% and their employers' contributions by 2.5% of teacher payroll to create an ongoing, dedicated revenue stream for the STRS Ohio Health Care Program. These increases would be phased in over a five-year period, in .5% increments.

Now that the 127th General Assembly has convened with the start of the calendar year, the bill will have to be reintroduced. Rep. Oelslager has agreed to again be a sponsor. With the reintroduction of the bill, members, employers and legislators will have an opportunity to thoroughly discuss the issue of retiree health care for Ohio's public educators. Issues that could impact the discussion include a proposed school-funding constitutional amendment, the possible reintroduction of a bill to expand alternative retirement plans offered by private vendors to K-12 educators, and heightened awareness of the retiree health care liabilities faced by all of the Ohio public pension plans.

STRS Ohio members are encouraged to continue reading their newsletters and watching the STRS Ohio Web site (www.strsoh.org) for updates about this legislative initiative and other activities at the Statehouse.
RETIREMENT, INVESTMENT TRANSACTIONS APPROVED The Retirement Board approved the following retirements and investment transactions:

- 136 active members were approved for service retirement, 193 inactive retirements were approved.

- In December, fixed-income purchases totaled $690 million, domestic equity purchases totaled $427 million and real estate purchases totaled $173 million.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

STAFF COMPLETES REVIEW OF IFS AUDIT As reported to the Retirement Board and STRS Ohio members last month, Independent Fiduciary Services, Inc. (IFS) presented the results of its fiduciary performance audits of STRS Ohio and the Ohio Police & Fire Pension Fund at the December 2006 meeting of the Ohio Retirement Study Council (ORSC). In July 2004, the ORSC chose IRS to conduct the audits. This undertaking was the result of some members' concerns about STRS Ohio that led to language in Sub. Senate Bill 133 requiring each of the five Ohio public pension plans to undergo a fiduciary performance audit every 10 years.

The detailed 338-page report on STRS Ohio that the ORSC received includes 85 recommendations. Since receiving that report in mid-December, STRS Ohio staff have been reviewing the document and compiling responses to each recommendation. A portion of the Retirement Board's Retreat on Jan. 31 includes reviewing all the recommendations and staff responses with the board. Board members received copies of the audit last month.

Topics covered in the audit include: investment management structure and costs, asset allocation, investment accounting, board governance, and STRS Ohio's organizational structure and resources, as well as statutory provisions and administrative rules that govern the system's operation. In the executive summary that accompanied the report, IFS noted "...the results of this review demonstrate that STRS is generally in line with best practices with regard to much of its overall governance, administration and management of its investment program." Further, the report noted that "...STRS governance policies and rules are impressively comprehensive and they cover all of the significant aspects of governance a sophisticated public pension fund requires."

As part of the audits, the ORSC had requested that IFS include a thorough analysis of current state statute that requires the financial institutions that provide custodial services to all the pension plans have a presence in Ohio and, further, that the Treasurer of State has the responsibility to select, contract with, manage and terminate these custodial relationships rather than the pension plans themselves. As a result, IFS includes a number of recommendations in STRS Ohio's report calling for a change in these laws. STRS Ohio believes that changes to these statutes could result in a cost savings and thus be advantageous to our members. However, these statutes apply to all the systems and further consideration of any of IFS' recommendations should involve the systems, the Treasurer's Office and the ORSC/Legislature.

The STRS Ohio report also includes 14 recommendations that directly address the pension oversight responsibilities of the ORSC, including existing reporting requirements. Again, because the recommendations are not specifically directed to STRS Ohio, but rather to the function and operation of the ORSC, these recommendations should be addressed by the ORSC/Legislature.

Following review with the Retirement Board, the complete report and staff response to the recommendations will be posted on the STRS Ohio Web site.

SUBSTITUTE HOUSE BILL 71 EFFECTIVE MARCH 29, 2007 Substitute House Bill 71, which was passed by the General Assembly and signed by Gov. Taft at the end of 2006, permits members of STRS Ohio, Ohio Public Employees Retirement System (OPERS), School Employees Retirement System (SERS) and Highway Patrol Retirement System (HPRS) to purchase up to five years of credit for service with the Ohio National Guard or a reserve component of the United States armed forces. (Ohio Police & Fire members may already purchase this credit.) The cost is 100% of the additional liability to the system resulting from the purchase. The total maximum service credit a member may purchase for both active military service and Ohio National Guard or reserve duty is five years. Few STRS Ohio members are expected to purchase service under this new provision since members who are teaching full-time and in the National Guard or reserves during the same year already receive one year of service credit for teaching.

Members most likely to qualify for this service are those individuals who were members of the Ohio National Guard or reserves before becoming members of the system, such as during their college years. For service that does qualify, the member may purchase service equal to the number of days actually served each year divided by 365 days. In a typical year, individuals serve about 40 days with the Ohio National Guard, meaning about 0.11 service credit could be purchased for each year the guard service did not occur in the same year as full-time teaching or other Ohio public service.

GENERAL ASSEMBLY PASSES HOUSE BILL 272 The 126th General Assembly passed House Bill 272 sponsored by Rep. Michelle Schneider. One component of H.B. 272 allows, but does not require, STRS Ohio to establish programs such as a voluntary employees' beneficiary association (VEBA) and/or medical savings accounts (MSA). The vehicles, under the Internal Revenue Code, allow an individual to accumulate funds for the purpose of paying for medical expenses. If implemented, these programs would have no impact on the funding solvency or the tax treatment of the current STRS Ohio Health Care Program. STRS Ohio staff will evaluate the associated costs and practical value of this enabling legislation compared to what is currently available to members through their employers or private companies.