February Board News from STRS

From STRS, February 16, 2007
[News] February 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 February report follows.

FEBRUARY BOARD NEWS

BOARD REVIEWS HEALTH CARE VALUATION REPORT FROM ACTUARY A significant portion of the State Teachers Retirement Board January Retreat, as well as its meeting on Feb. 16, 2007, focused on the results of the Jan. 1, 2007, actuarial valuation of the STRS Ohio Health Care Program presented by Buck Consultants, the system's actuary. Included in this discussion was a review of Governmental Accounting Standards Board
(GASB) Statement 43 -- which is already generating discussion in state capitols across the country and in the national media.

GASB 43 mandates that public pension plans, as well as local governments, must start reporting their estimated financial liability associated with providing retiree health care coverage in their financial statements, just like they currently do for pension benefits. In other words, STRS Ohio will report what percentage of teacher payroll is needed to fully fund health care for current and future retirees on a full-reserve basis (i.e., a 30-year funding period).

Fortunately, the State Teachers Retirement Board has been assessing these liabilities for more than 10 years through annual valuation reports, such as the one presented in February, and sharing these results with STRS Ohio's membership. Through these reports, STRS Ohio is able to determine the solvency of the Health Care Stabilization Fund. Data from these reports has shown that the funded status of the health care program is considerably higher than most other public pension plans in the United States, due to more than $5.4 billion in past allocations made to the health care fund by the Retirement Board and changes in plan design and eligibility. As noted at the board's retreat by the actuaries, "STRS Ohio has been significantly more proactive than other public sector entities in addressing the health care program funding issues. Most public sector health care plans are 0% funded."

Based on the contribution rate increases contained in the proposed STRS Ohio health care legislation, the annual required contribution for health care, or ARC as it is sometimes called, is slightly more than 4%. This is how the total contribution increase of up to 5%, split equally among STRS Ohio members and their employers, was determined.

However, one component of GASB 43 may cause some confusion in the coming months. If a retiree health care program is not fully funded, which is the case with STRS Ohio's program, GASB 43 requires that a lower assumed investment return rate for the existing health care funds be used. STRS Ohio has been using an 8% rate (the same rate it assumes for its pension fund). However, based on the current funding status of the health care fund, STRS Ohio must now lower that rate to 5.5%. This, in turn, lowers the funded status to 28%.

Consequently, in STRS Ohio's next financial statement, the ARC for health care liabilities will be listed as 6.55% rather than about 5%. But if the legislation passes and an annual contribution of 5% of payroll is ultimately contributed to the health care fund, GASB 43 allows the investment return rate to return to 8%. In short, based on the January 2007 valuation of the health care fund, the proposed 5% contribution increase is still adequate to fund the health care program on a full-reserve basis. (See the chart data below.)

Perhaps the best way to understand why different numbers are being discussed is to remember these two points:

- If STRS Ohio can fully fund the ARC (which it could do if the legislative initiative is successful), the ARC is lower because it is based on an 8% investment return rate. (See the first January 2007 entry in the chart data below.)

- If STRS Ohio is only able to partially fund the ARC (if the total 5% isn't received), the ARC is higher because it will be based on a 5.5% investment return rate. (See the second January 2007 entry in the chart data below.)

CHART DATA -- HEALTH CARE FUND VALUATION RESULTS

JANUARY 2006 (8%) Funded Status (ratio of assets to accrued liability) -- 36.7% Annual Required Contribution (ARC) -- 4.58% Fund Solvent Until* (with continuation of 1% employer contribution) --
2021

JANUARY 2007 (8%) Funded Status (ratio of assets to accrued liability) -- 41.4% Annual Required Contribution (ARC) -- 4.13% Fund Solvent Until* (with continuation of 1% employer contribution) --
2025

JANUARY 2007 (5.5%) Funded Status (ratio of assets to accrued liability) -- 28.1% Annual Required Contribution (ARC) -- 6.55% Fund Solvent Until* (with continuation of 1% employer contribution) --
2021

*Solvency calculation includes projected Medicare Part D subsidies.

(This information is also available on the STRS Ohio Web site in a chart format at the following URL: http://www.strsoh.org/boardnews/bn_current.html#chart)

Updates about the legislation will be included in future newsletters and posted on the STRS Ohio Web site at www.strsoh.org.

CALENDAR-YEAR INVESTMENT PERFORMANCE EXCEEDS TOTAL FUND BENCHMARK RETURNS STRS Ohio's investment returns for calendar year 2006 were 16.9%, exceeding the total fund benchmark return of 15.8% by 1.1%. All asset classes beat their benchmarks during the Jan. 1-Dec. 31, 2006, time period. In reviewing the pension fund's performance during the February board meeting, Russell Investment Group (the board's investment consultant) noted that total fund returns have now exceeded the total fund benchmark return over the past one-, three-, five- and 10-year periods. Russell also noted that the investment risk STRS Ohio is assuming through the active management of its funds remains low, while the diversification levels of the total fund remain high.

BOARD APPROVES CHANGES TO ITS TRAVEL POLICY As part of its annual review of its governance policies, the Retirement Board voted to approve several changes to its policy covering board member travel and expenses. These changes include decreasing the amount of money that may be spent on out-of-state meetings. The current policy allows for an expenditure of up to a maximum of $6,000 for each board member, excluding tuition or registration fees. The new policy would include tuition and registration fees in the $6,000 limit. Changes to reimbursements for meal expenses were also approved. Currently, the policy provides a maximum reimbursement of $60 per day. The new policy allows board members to be reimbursed up to $50 per day for meal expenses as follows: not to exceed $10 for breakfast, $15 for lunch and $25 for dinner. To be reimbursed for meal expenses, an itemized receipt must be provided; also, itemized receipts must be provided for any expenditures exceeding $15.

In compliance with Section 3307.041 of the Ohio Revised Code, all changes to the board's travel and expense policy must now be reviewed by the Ohio Ethics Commission and the Ohio Retirement Study Council. Assuming they concur with the changes, the board will then be able to formally adopt the changes.

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

- 126 active members were approved for service retirement, 40 inactive retirements were approved.

- In January, fixed-income purchases totaled $1.084 billion, domestic equity purchases totaled $810 million and real estate purchases totaled $67 million.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

STRS OHIO STAFF MEMBERS DISCUSS ISSUES IN WASHINGTON AND OHIO Executive Director Damon Asbury attended the annual legislative conferences of the National Council on Teacher Retirement, National Association of State Retirement Administrators and the National Council on Public Employee Retirement Systems with Terri Bierdeman and Marla Bump of STRS Ohio's Governmental Relations Department. Social Security, continued scrutiny of defined benefit plans and health care were prominent agenda items. Washington pension lobbyists and Capitol Hill staff members are forecasting a lot of debate ahead in the 110th Congress leading up to the 2008 presidential election. With Congress implementing the pay-as-you-go budget limits, it will be difficult to pass any significant legislation with revenue implications.

In addition to the conferences, the executive directors and governmental relations staffs of STRS Ohio, SERS and OPERS met with 13 of the Ohio congressional offices. Social Security and health care reform were the primary topics of discussion.

On Feb. 14, representatives of Health Care Advocates for STRS and STRS Ohio staff met with Treasurer of State Richard Cordray and his staff to discuss the health care legislative initiative. The meeting went well and Treasurer Cordray quickly understood the problem and the proposal. He did not voice a position, but assured everyone he would carefully review the proposal.

PURCHASED CREDIT REPORT SENT TO ORSC Last September, the Ohio Retirement Study Council directed its consulting actuary, Milliman, to compile additional information about the funding impact of purchased credit on both pension and health care benefits for the retirement systems. Each of the retirement systems submitted data to Milliman about additional pension liabilities created by purchased service credit. For STRS Ohio, slightly more than 7,000 members purchased some type of credit during the 2004-05 fiscal year. Buck Consultants calculated that the purchases created additional pension liability of about $176 million and additional health care liability of about $36 million for a total of $212 million. Members paid $49 million, or 23%, of the added liability.

TWO KEY REPORTS NOW AVAILABLE ON THE STRS OHIO WEB SITE The 2006 Comprehensive Annual Financial Report was published last month and has been submitted to the Government Finance Officers Association for consideration of its Certificate of Excellence in Financial Reporting. Copies are available to members and other interested parties upon request. The complete report can also be viewed and printed from the STRS Ohio Web site.

The Web site also includes a posting of the results of the fiduciary performance audit covering STRS Ohio that was completed by Independent Fiduciary Services, Inc., in December 2006, along with the staff analysis and recommendations approved by the board during its retreat.
---
The STRS Ohio news e-mail list is designed solely to provide timely and accurate news and information about legislation, benefits and other issues affecting the STRS Ohio membership.

To view past news e-mails, go to http://www.strsoh.org/past_news_e-mails/main.html.

If you wish to comment on a topic, please either e-mail contactus@strsoh.org or call the Member Services Center toll-free at 1-888-227-7877.