STRS: March Board News

From STRS, March 16, 2007
Subject: March 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 March report follows.

MARCH BOARD NEWS

RETIREMENT BOARD APPROVES 30-YEAR FUNDING REPORT At the State Teachers Retirement Board's March 2007 meeting, the board approved a report showing that STRS Ohio is on track to return to a 30-year funding period for its pension fund within two-to-three years, assuming there are no net actuarial losses. This report will now go to the Ohio Retirement Study Council (ORSC), which, by law, must receive a plan from any of the five Ohio public pension plans whenever the amortization period for their unfunded actuarial accrued liability exceeds 30 years. (ORSC is the legislative oversight body for Ohio's five public pension plans.) This report is posted on the STRS Ohio Web site
(http://www.strsoh.org/pdfs/ORSC_03_07.pdf).

In November 2006, the State Teachers Retirement Board adopted a report from its actuary, Buck Consultants, detailing the actuarial funding status for pension benefits as of June 30, 2006. In reviewing the actuarial gains and losses for the fiscal year, it was reported that an actuarial gain of $958 million had been experienced and the funding period had dropped to 47.2 years from 55.5 years. The funding period should continue to decline toward 30 years.

ACTUAL EXPERIENCE COMPARED TO ASSUMPTIONS IS RARELY IN SYNC As part of these projections, STRS Ohio expects that in the next two years some actuarial assumptions will be met or exceeded; others will fall short. For example, for the past three fiscal years, payroll growth has not been at the expected level. As a result, STRS Ohio recognized a total of $1.1 billion in losses for that particular assumption.

On the other hand, investment returns have far exceeded the actuarial assumption of 8% for the past three years; the compound rate of return has been more than 14.5%. For STRS Ohio, this means that last year it had a market-related investment return gain of $1.49 billion, plus more than $4.3 billion of additional investment gains that were "deferred" to 2007, 2008 and 2009 because of smoothing.

Because the market value of investments can literally change daily (e.g., U.S. stocks traded on the national exchanges), there is a tremendous amount of volatility in this assumption. Public retirement systems across the country, including STRS Ohio, use an approved accounting and actuarial technique called "smoothing" to spread this volatility over a longer period of time when recording investment returns as part of the annual actuarial valuation process. It makes investment returns more of a "trend" rather than a "spike." This smoothing results in a market-related value of investments. Most public pension plans smooth investment gains and losses over three-to-five years; STRS Ohio has used four-year smoothing since 1997.

As noted earlier, STRS Ohio assumes that the value of investment assets will increase 8% each year. Anything more than 8% is a gain, and anything less than 8% is a loss. With four-year smoothing, each year's gains or losses are recognized evenly over the current and subsequent three years: 25% per year. The calculation is done every year, so it just rolls forward.

A REVIEW OF ALL ASSUMPTIONS IS PLANNED IN 2008 Public pension systems typically review all their actuarial assumptions every five years; STRS Ohio is slated for such a review in 2008. This ensures that the board will have an ample amount of experience in each area with which to make future assumptions. In addition to payroll growth and investment returns, the board will also look at such areas as retirement trends, benefit recipients' mortality and annual teacher salary increases.

There is no actuarial assumption specifically regarding the number of active members in the future per se. A member's contributions, plus the employer's contribution and investment earnings, are expected to fund that member's benefit in retirement. The percentage increase or decrease in payroll growth reflects both annual salary increases for teachers and the number of members. If membership is not increasing, payroll growth is less likely to increase 4.5%, which affects the amount of time it takes to pay off the system's unfunded liability.

There is likewise no assumption about the number of retirees in the future. As noted above, the value of each retiree's benefit is accrued throughout that individual's career, so the expense is recognized every year -- even though the benefits are not being paid in cash. However, there are assumptions about how many members will retire at various points in their career (e.g., 30 years, 35 years, age 55 and 25 years, age 60 and five years, etc.). As noted above, this is one of the assumptions that will be reviewed in 2008.

CONTROLLING FUTURE LIABILITIES IS IMPORTANT The actuarial funding for STRS Ohio pension benefits is improving, primarily due to investment income. The Retirement Board members also took a prudent step to control future liabilities in February 2006, when they reached consensus that they would consider pension benefit improvements only when the funding period is less than 30 years and the funding ratio exceeds 85%. In other words, "13th checks," compound cost-of-living increases or enhanced pension benefit formulas cannot be considered at this time.

Further, if the contribution increase being sought through the health care legislation can be obtained, the current 1% of employer contributions going toward health care can start flowing back into the pension fund, further accelerating the speed at which the pension fund's unfunded liabilities are reduced.

TAI HAYDEN UNOPPOSED FOR RETIREMENT BOARD ELECTION In November 2006, Taiyia (Tai) L. Hayden was selected by the current board members to fill the contributing member seat vacated by Michael Billirakis in September. The term for this seat runs through Aug. 31, 2007. However, Hayden was the only STRS Ohio contributing member to file enough completed petitions for the election for this seat by the deadline of Feb. 23, 2007. Therefore, according to Ohio statute, no election needs to be held since she is unopposed and she will continue in this seat through Aug. 31, 2011. Hayden is currently a kindergarten teacher with the Columbus Public Schools.

STRS OHIO TO RECEIVE PORTION OF SETTLEMENT WITH AOL/TIME-WARNER On March
7, 2007, Ohio Attorney General Marc Dann announced that AOL/Time-Warner agreed to terms with the five Ohio retirement systems and the Ohio Bureau of Workers' Compensation (BWC) to settle a securities fraud opt out case. BWC and the state pension funds will share a gross settlement of $175 million and a net amount of $144 million after reductions for attorney fees and expenses. STRS Ohio should receive about $66.5 million, pending final negotiation of the settlement. This is approximately $62 million more than what STRS Ohio would have received if it had not opted out of the federal class action suit and instead remained part of the class. The securities fraud case alleged that AOL inflated its stock price before merging with Time-Warner in January 2001. The suit sought recovery of funds lost by the pension systems and BWC when the price of AOL/Time-Warner stock fell dramatically in July 2002.

HEALTH CARE STRATEGIC PLAN REVISED In May 2005, the Retirement Board adopted a comprehensive Health Care Strategic Plan for 2007-2009. This plan outlined steps the board and staff would take to: help control medical and prescription drug costs; encourage members to take an active role in managing their health; and engage members in discussions regarding how to fund health care coverage in the future. The Health Care Advocates for STRS provided extensive input during the development of the plan. At the board's March 2007 meeting, revisions to the plan were adopted to reflect the progress board and staff have made on many of the strategic plan's components, including work on the legislative proposal to fully fund the health care program on a 30-year basis. Future issues of the STRS Ohio newsletters, as well as the STRS Ohio Web site, will provide details about the changes to the Strategic Plan.

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

- 132 active members were approved for service retirement; 58 inactive retirements were approved.

- In February, fixed-income purchases totaled $548 million, domestic equity purchases totaled $572 million, and real estate purchases totaled $36.8 million.

ADDITIONAL ITEM REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

STRS OHIO RETAINS TOP CREDIT RATING Standard & Poor's (S&P) affirmed STRS Ohio's "AAA" issuer credit rating in February. This rating is S&P's highest possible rating for an organization's ability to pay its financial obligations. STRS Ohio has maintained the AAA standard since first requesting a rating in 1999.
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