From STRS: June Board News Details Retirement Board Actions and Discussions

"In other action, the board authorized the executive director to negotiate an agreement with either Express Scripts or Catalyst Rx to serve as the pharmacy benefits manager (PBM) for the STRS Ohio-sponsored Aetna, Medical Mutual and Paramount health care plans. If an acceptable contract is developed and approved by the Retirement Board, the chosen vendor will serve as the PBM from Jan. 1, 2008, through Dec. 31, 2010. Currently, Caremark is the PBM for these plans."

From STRS, June 15, 2007
Subject: [News] June 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 June report follows.

JUNE BOARD NEWS

RETIREMENT BOARD CHAIR, VICE CHAIR NAMED During its June 2007 meeting, the State Teachers Retirement Board elected Mary Ann Quilter Cervantes as its vice chair for the coming year. She was elected in 2005 to a contributing member seat on the board. According to Board Policies, Jeffrey Chapman, who is currently serving as vice chair, automatically moves into the position of chair. Chapman and Cervantes will assume these leadership positions on Sept. 1, 2007.

RETIREMENT BOARD ADOPTS ANNUAL INVESTMENT PLAN The Retirement Board adopted an Annual Investment Plan for fiscal year
2008 (July 1, 2007-June 30, 2008) following a presentation by members of the system's Investment Department. This plan outlines the staff's investment strategy for the system's various asset classes (fixed income, domestic and international equities, real estate and alternative investments).

After looking at a number of factors, STRS Ohio staff is predicting that the U.S. economy will experience growth during the second half of fiscal year 2008, helped in part by solid consumer spending, an improved international trade situation and a rebound in business spending due to increases in capital equipment expenditures. In addition, inflation will ease slightly in fiscal 2008. Energy costs could remain elevated during the fiscal year, but are not likely to increase dramatically from current levels.

STRS Ohio expects its total fund return to be approximately 7% in fiscal year 2008, which is below the actuarial assumed rate of return of 8%. Given the excellent market returns in each of the last four fiscal years, staff noted that this should not be considered a "bad" year. The equity markets (domestic and international), of which STRS Ohio targets 67% of its investment fund allocation, are unlikely to be extremely positive or negative in fiscal year 2008. Real estate, which comprises about 10% of the portfolio, should record "above normal" returns.

Due in large part to the returns of the past four fiscal years, the period to amortize STRS Ohio's unfunded actuarial accrued liability should improve and be close to 30 years as of June 30, 2007, in spite of expected unfavorable experience with other economic and demographic assumptions. While the projected market return for fiscal year 2008 is only about 7%, the four-year smoothed market-related return used by the actuary should exceed that number, which will further improve the system's funding status.

SEVERAL HEALTH CARE PROGRAM CHANGES APPROVED FOR CALENDAR YEAR 2008 During its June meeting, the Retirement Board continued its discussion about health care program costs and potential changes for calendar year
2008. The board approved the following changes to prescription drug coverage:
• Add coverage for over-the-counter Prilosec at retail for a 28-day supply for a $5 copayment; increase copayments for all other tiers (generic and brand-name) of proton pump inhibitors, such as omeprazole, Nexium, Protonix and Prevacid, to $25/$50/$75 at retail and $65/$125/$190 through mail-service. This change applies only to this class of medications for enrollees in the Aetna and Medical Mutual Plus and Basic Plans and the Paramount health care plans. To obtain the over-the-counter Prilosec 28-day supply for a $5 copayment, enrollees will need a prescription from their physician. NO OTHER PRESCRIPTION DRUG COPAYMENTS WILL BE CHANGED FOR 2008.

• Offer a voluntary pill-splitting program for specified drugs. Program enrollees are prescribed double-strength medications that they split in half to get the lower strength. In return, they pay only half the current copayment amount. This change also applies to enrollees in the Aetna and Medical Mutual Plus and Basic Plans and the Paramount health care plans. Enrollees wishing to participate in this program will need to discuss it with their physician and obtain a prescription specifying the double-strength dosage and pill splitting.

• Increase the Basic Plan's prescription drug maximum annual benefit to $10,000 from $5,000. With this change, a plan enrollee would pay 100% of the full cost of Tier 2 and Tier 3 drugs only after STRS Ohio has paid $10,000 in retail and mail-service prescription costs. The Basic Plan is available through Aetna and Medical Mutual.

In other action, the board authorized the executive director to negotiate an agreement with either Express Scripts or Catalyst Rx to serve as the pharmacy benefits manager (PBM) for the STRS Ohio-sponsored Aetna, Medical Mutual and Paramount health care plans. If an acceptable contract is developed and approved by the Retirement Board, the chosen vendor will serve as the PBM from Jan. 1, 2008, through Dec. 31, 2010. Currently, Caremark is the PBM for these plans.

This recommendation came out of a collaborative project between STRS Ohio, the Ohio Public Employees Retirement System (OPERS) and School Employees Retirement System (SERS). Last fall, the three systems joined together to leverage their collective purchasing power to explore and implement innovative, cost-effective approaches to stretch their respective health care dollars as much as possible. The first venture together was to solicit bids for a PBM that could serve all three systems' health care programs. Currently, the systems cover 350,000 retired public employees and their family members. The board of OPERS and SERS will consider their staffs' recommendations at their respective meetings during the week of June 18, 2007.

In evaluating PBM candidates, the systems were not only looking for the best unit price or discounts on prescription drugs, but also vendors' ability to help support and manage drug use over time. OPERS, SERS and STRS Ohio also sought a vendor that could support the growth in covered lives that may occur in the future from other public sector employers joining the group. Finally, customer service responsibilities will continue to be based in Ohio; experience in meeting the unique needs of older, retired populations has also been preserved.

The Retirement Board will be asked to approve the final PBM selection in August or September.

FISCAL YEAR 2008 BUDGETS ADOPTED The Retirement Board approved the proposed system budgets for fiscal year 2008 (July 1, 2007-June 30, 2008) following discussions held in April and May. In the past, operating budgets were developed to cover all anticipated projects and costs without the need to request midyear increases. As a result, actual spending recorded at each year's end has generally been significantly below budgeted amounts. However, in May the board asked that the proposed budget be adjusted to get closer to actual spending for the current fiscal year, particularly with respect to historical patterns of staff turnover and vacancies. The approved operating budget for fiscal year 2008 now totals $95,998,000, which reflects a 7.2% increase over the current year's operating budget. The approved capital budget for next year totals $2,100,900. Additionally, the system expects to spend $6,387,700 on the project that is under way to replace STRS Ohio's obsolete pension management computer system.

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

• 420 active members were approved for service retirement; 307 inactive retirements were approved.

• In May, fixed-income purchases totaled $690 million, domestic equity purchases totaled $864 million and real estate purchases totaled $55 million.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

HOUSE BILL 240 AFFECTS REEMPLOYMENT OF STATE PENSION SYSTEM RETIREES House Bill 240, sponsored by Rep. Bruce Goodwin (R-Defiance), makes changes to the state's statutes governing public reemployment of state pension system retirees. The bill was introduced on May 29 and applies to OPERS, OP&F, SERS and STRS Ohio. As it pertains to STRS Ohio, there is no restriction on reemployment with the same employer or the opportunity to return to work. Only management and administrative positions are affected by the bill, which imposes a limit on reemployment salaries to no more than 60% of the final average salary (FAS). The reemployment position would terminate at the end of a year, but could be renewed by the employer. The primary involvement for STRS Ohio is verification of the FAS. There is no impact on the funding STRS Ohio receives for reemployment. Staff is working with the other systems and the sponsor to clarify the role of the systems. The bill has been referred to the House Financial Institutions, Real Estate and Securities Committee.

HEALTH CARE LEGISLATION BACK ON TRACK STRS Ohio has received a commitment from Rep. Scott Oelslager (R-Canton) to reintroduce STRS Ohio's health care legislation before the end of June. This legislation is designed to create a dedicated revenue stream for STRS Ohio's Health Care Program through phased-in contribution increases from active members and employers. STRS Ohio staff and the Health Care Advocates have already begun mapping out a number of activities and meetings for this summer to engage members, legislators and employers in dialogue about this important proposal.