STRS Board Minutes: 4/18, 4/19/07: Finance, Investment, HC

FINANCE: Bob Slater

2007-08 budget comprised of 4 components: operating expenditures, capital expenditures, Legacy replacement project and State of Ohio requirements. Total organization budget is made up of 5 major department budgets: Admin., Exec., Finance, Member Benefits and Investments. Each dept. budget was prepared and reviewed by Exec. Direc, Deputy Exec. Direc. and the controller after which, addt'l reductions were made to the total organization budget. ((For ques. on these titles and budgets: ask STRS. Send questions to Joyce Baldwin , email listed above.))

Expenditures in the investment division accounts for 6.4% of the 8.5% overall increase over this year's budget. Also, the staff expects to spend $6.4 million on the Vitech project replacing obsolete Legacy pension management sytem. State of Ohio charges from the Attorney Gen., ORSC and the Treasurer are projected at $437,600.

The operating budget included a 4% inc. in wages and salaries for merit and promotional increases awarded based on indiv. associate's performance. The budget recommends 9 new positions, 6 of them in the Investment Dept., 2 in Members' Benefits and 1 in Internal Audit.

Increases in investment expenditures are due mostly to:

1. change in Retirement Board made to the Investment Performance Incentive Program in 2006 increasing next year's operating budget by $3.85 million. The maximum incentive payments are only awarded when relative performance exceeds market returns.
2. Cost of investment research services. Previosly, a portion of commission dollars (soft dollars) on security transactions were used to pay for some investment research services. Paying for investment services with cash instead of soft dollars is considered a 'best practice' in the investment industry and adds transparency to the cost of investment services. STRS has been transitioning these services to the operating budget over the past several years .

Significant decreases are reflected in non management associate's awards, Retirement Board expenses, other consulting services, supplies, materials, phone and printing.

Childcare: The center will be cost-neutral during the 2007-08 fiscal year.

Staff was asked to consider the Board's summary of requests and make addt'l adjustments to the budget. The proposed budget was sent to the ORSC on 4/23 in accordance with ORC. The Board will be asked to approve the budget in June. (6/14: STRS Board Meeting)

Board's Summary of Requests:

1. Brooks: asks to reduce salary and wages based on positions throughout year. Future discussion on why alternative investments are at 3% vs. higher with other pension plans.
2. Leone: asks staff to provide further info including positions description and salaries for the 9 new positions.
3. Board directed staff to continue to look at areas where the budget could be reduced.

INVESTMENTS: Steve Mitchell

Total fund return for fiscal 2007 year to date is a strong 14.6% with strength being seen in all asset classes. Some pullback is expected from the strong equity returns thus staff has positioned the fund underweighted in overall equities.. In addition, liquidity reserves remain significantly overweighted (to protect funds.)

Board conducted its annual review of the Investment staff's Incentive Performance Based Incentive Program for 2008 with 2 changes:
1. add a purpose to indicate that the total compensation (base salary and incentive bonus) target for Investment Dept. associates needs to remain current with private market levels at the 25th %
2. add job positions to Appendix A to keep the document current

Brooks moved and Meuser seconded a motion to approve the Performance Based Incentive Program for 2008. All approved except Leone and Chapman who voted no.

HEALTH CARE: Greg Nickell , Direc HC services: Comparison of Retiree HC Programs: Included are the 5 Ohio Pension Systems, CA (CalPERS), Colorado PERA, Illinois TRIP, Kentucky TRS, Massachusetts TRS, Texas TRS and Michigan Public SERS.

Ohio Systems: Majority are Medicare enrollees. The 3 largest Ohio systems are collectively engaged in the pharmacy benefit manager request for proposal and represent 92% of the retirees on Ohio Retirement Systems (ORS). The costs of the ORS HC programs are similar: for ex., the average spent on RX drugs in 37% of gross costs.

Medicare Part B in SERS is allocated under pension funding.

HC funding for the ORS plans: STRS is in the best position to create long term funding with its HC legislation initiative. SERS has .03 for every HC dollar needed to fund the benefit and its annual required contribution
(ARC) is nearly 28%. OPERS reported it is funding its HC benefit by only about 17%. OPERS has significantly higher per month costs because its enrollees share less of the cost. SERS costs are much lower because of the large number of Medicare retirees.

Puckett asked if there would be a separate fund for Medicare Part B if HC legislation is passed. Knoesel said that is one option because the $29.90 reimbursement for Part B are required by statute.

Nickell went on stating most of the retirement systems offer Indemnity Plans like STRS Ohio and have 3 tier RX plans to encourage generics. Leone asked why we were at the top of the costs for mail order benfits. Nickell said copays are part of cost sharing. Leone asked why Tier II drugs are so high. Ans: The Board sets the copays. Leone said the Board did not know other systems Tier costs when it sent the copays. Knoesel said RX drug costs are reflected in premiums. If copays are lower, premiums have to be raised. Dr. Leone asked where Caremark is in this. Nickell said staff negotiates with overall costs with Caremark.

Nickell continued saying most states do not have out of pocket maximum protection for RX's. STRS does have maximum out of pocket protection for enrollees as part of the plan design.

Zero premiums in KY and MI : Both states offer a Medicare Advantage program which STRS is investigating. These plans generally have restricted networks and fewer covered drugs.

OPERS is targeting solvency range of 15-25 yrs using a plan design indexing and established an inflation protector provision. When HC inflation exceeds wage inflation, up to 5% of that difference can be passed to enrollees. Worse case scenario is someone could have 100% subsidy today and in 10 yrs have a 50% subsidy.

The Board requested more info:
1. how RX drug copays are set
2. subsidies for premiums provided by other systems'
3. examples of how OPERS subsidies will work in future.

Framework for 2008 HC: Knoesel

1. manage STRS HC keeping in mind the new guiding principle approved in
3/07" Maintain or improve the solvency of the HCSF (Health Care Stabilization Fund) in working toward a 30 yr funding period.

2. consider only plan design enhancements that maintain the annual required contribution at or below 5% (contributions based on HC legis.) for the HC program.

3. continue the 2004 member premium contribution strategy in 2008.

4. facilitate understanding of the legislative initiative by sustaining current plan design while legis. is under way

5. continue current benefit structure until program costs require using principal from the STRS HC Fund projected between 2009 and 2011 if legis. is not successful.

Plan design changes to reduce premiums or deduc. have little impact for retirees. For ex., if deduc. for the Plus Plan increased to $1000 from $500, enrollees would see a $5 reduc. in premiums. per month because many enrolles never reach their deductible.

Johnson asked how negotiations are going for the PBM. Knoesel is optimistic and hopes to have a recommendation to the Board in June.

Options will be voted on by the Board in June which were presented in May. Premiums provided in August for Board's consideration.

Nickell stated the passage of HB272 allows systems to create medical savings programs and 8 core elements are necessary for a program to provide relief of significance to members for future HC costs.:
1. non employer entities such as STRS allowed to administer.
2. accounts avail. to retirees
3. members can participate regardless of employer/employee HC programs
4. participating member contrib. and withdrawals are tax deduc.
5. STRS should offer clear advan. t participating members over current programs avail in marketplace
6. program should gain broad based participation
7. accounts expected to become significant future resource for paying HC costs in retirement
8. clear enabling IRS ruling when required

5 Major Components that allow indiv or employer to fund some type of account:

1. FSA allows employee to defer a portion of salary to be used for qualified medical expenses during a year. If not used, it is lost. ((Add up what you know you will spend in a year for HC, RX. Say it is $3000. STRS would deduct that amount from your ck in 26 equal payments or approx. $116 each ck. If you have surgery and can present bills for your deduc. $500 and your $1500 out of pocket for the year, you can get that amount at any time during the year even if it is in Jan. to pay for these costs. But, the monthly deductions of $116 will continue throughout the year. It is like setting aside an amount for your HC and making payments for a year but you can withdraw any or the entire amount as bills come due. We use this thru John's work to pay for out of pocket costs vs. coming up with the entire amount at once. You should only do this for known costs as if you miscalculate you forfeit the amount. The amount you have withdrawn is NOT taxed and NOT part of your reported taxable salary to the IRS. Just FYI should your spouse have this plan offered at work)).

2. Health Reimbursements Arrangements (HRA) limited to employer contributions and are not portable.

3. Archer Medical Savings Accounts (MSA) tied to high deduc. plans with RX plan. Employer must have 50 or fewer employees.

4. HSA (Health savings Acconts) must be tied to high deduc. plan with RX plan. If STRS would offer this, the RX plan would be subject to a $1500 deduc. BEFORE any copays are offered.

The plan would have to be split between retirees and actives.

5. Retiree Medical (Savings) Accounts (RMA; RMSA) establ thru voluntary employee beneficiary assoc. (VEBA) or a Section 115 trust account. OPERS has set up this account. Indiv. can make contributions but recent IRS rulings suggest they will not be tax deduc.

STRS can only offer HSA or RMA. No recommendation is being made at this time as these plans do not offer all essential elements for success nor broad appeal for widespread enrollment.

Meuser asked about OP&F and DROP plan (Deferred Retirement Option Plan). STRS decided that a Partial Lump Sum Option Plan (PLOP) better suited STRS members and has been implemented at STRS due to structure differences as OP&F has a higher mulitplier at the beginning of the career which benefits their members.

Other issues and speakers were reported after the 4/07 Meeting.