STRS report on September Board actions and discussions

From STRS, September 21, 2007

Subject: [News] September 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 September report follows.

SEPTEMBER BOARD NEWS

HEALTH CARE FUNDING LEGISLATION INTRODUCED

On Sept. 18, 2007, Rep. Scott Oelslager (R-North Canton) reintroduced the STRS Ohio-proposed health care legislation. House Bill 315 is co-sponsored by Reps. Matthew Barrett (D-Amherst), Barbara Boyd (D-Cleveland Hts.), Edna Brown (D-Toledo), Kathleen Chandler (D-Kent), Steve Dyer (D-Green), Clyde Evans (R-Rio Grande), William Healy
(D-Canton), Jim Hughes (R-Columbus), Matt Lundy (D-Elyria), Mark Okey
(D-Carrollton), William Seitz (R-Cincinnati), Matt Szollosi (D-Oregon), Brian Williams (D-Akron) and Kenny Yuko (D-Richmond Heights).

This bill carries with it the support of the Health Care Advocates for STRS (HCA) -- a coalition of major management, professional and retiree organizations representing Ohio's public K-12 and higher education teachers. This member-driven initiative 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 for current and future retired educators. These increases would be phased in over a five-year period, in .5% increments.

Rep. Oelslager previously introduced this legislation in mid-December
2006. However, no action was taken on it before the General Assembly adjourned. STRS Ohio is grateful to Rep. Oelslager and the 14 bill co-sponsors for their willingness to take this significant step to further the discussion about this critical issue.

As with any proposal that comes before the General Assembly, passage will require the efforts of many to make legislators aware of how crucial the increased contributions are to the viability of the STRS Ohio Health Care Program. This fall, members can contact their legislators, asking that they support hearings and continued discussion about this proposal. Members are encouraged to continue to watch for e-mail updates, visit the STRS Ohio Web site (http://www.strsoh.org) and read STRS Ohio newsletters to keep abreast of the bill's progress.

Training of additional "Health Care Champions" is also continuing. A workshop is scheduled in the greater Cleveland/Akron/Canton area for Sept. 27; plans call for sessions in the Toledo area, the Dayton/Cincinnati area and a second one in central Ohio. Many Health Care Champions have already made contacts with their legislators; others are sharing information about the initiative with their teaching colleagues or fellow retirees.

RETIREMENT BOARD CONTINUES DISCUSSION ON DRAFT DIVESTMENT POLICY

At its August 2007 meeting, the State Teachers Retirement Board reviewed a draft policy developed by STRS Ohio staff regarding the divestment of investments in Iran and Sudan. The Retirement Board continued its discussion of this draft policy at its September 2007 meeting and received input on the policy from its investment consultant, Russell Investment Group, as well as from fiduciary counsel. The draft policy is limited to STRS Ohio's actively managed international portfolios in equities and fixed income. As written, STRS Ohio would not divest of a restricted security in Iran or Sudan unless a comparable substitute of equal risk and return, including transaction costs, is available.

Both the investment consultant and the fiduciary counsel concluded that the draft policy presented to the board protects the board's fiduciary responsibilities to the membership. This is in contrast to the provisions of Substitute House Bill 151 and Senate Bill 161 that mandate divestment by all five Ohio public pension plans. The Retirement Board has previously passed a motion opposing any legislatively mandated divestment of investments in Iran and Sudan, citing that such divestment is inconsistent with the board's fiduciary duties. Staff will respond at the October 2007 meeting to the board's request for more information about the proposed divestment process.

BOARD ENGAGES IN DISCUSSION ABOUT PURCHASED SERVICE CREDIT

Purchased service credit is a subsidized element of the pension plan design of Ohio's five public systems. This is because most members who purchase service credit are paying only a portion of the additional liability created by the purchase. For example, STRS Ohio members paid about 28% of the additional pension liability created by the purchase of credit and nothing toward the additional health care liability for purchases made between July 1, 2004, and June 30, 2005. The remaining
72% of the pension liability was absorbed by the system, with 100% of the additional health care liability absorbed by the Health Care Stabilization Fund.

As a result, the Ohio Retirement Study Council (ORSC), which is the legislative oversight body for the five systems, has had an ongoing discussion of the purchasable service provisions of each system. At its most recent meeting in September 2007, ORSC staff recommended that Ohio law be changed to require members purchasing service in any of the systems to pay 100% of the additional liability created by the purchase. The ORSC members approved the staff's recommendation; however, no legislation has been proposed to make this change.

At the September Retirement Board meeting, STRS Ohio staff provided an overview of the issue and STRS Ohio's purchase service provisions and posed several key questions for the board's consideration. These are:

• What portion of liability created by the service credit purchase should be funded by the member purchasing the service?

• Should eligibility for purchased service be restricted to certain time constraints to limit the financial exposure to the system?

• What is the appropriate transitioning or grandfathering period for any change?

• Should purchased service count toward health care eligibility or the premium calculation?

The board agreed to continue the discussion at its October 2007 meeting.

RETIREMENT, INVESTMENT TRANSACTIONS APPROVED

The Retirement Board approved the following retirements and investment transactions:

• 817 active members were approved for service retirement; 195 inactive retirements were approved.

• In August, fixed-income purchases totaled $862 million; domestic equity purchases totaled $3 billion and real estate purchases totaled $278 million.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

ORSC RECOMMENDS AGAINST PASSAGE OF HOUSE BILL 152

At its September 2007 meeting, the Ohio Retirement Study Council (ORSC) voted to accept its staff's recommendation against the passage of House Bill 152. This legislation, sponsored by Rep. Chris Widener, would require all boards of education to offer defined contribution plans available from private vendors to all new employees and those with less than five years of service credit. H.B. 152 was assigned to the House Financial Institutions, Real Estate and Securities (FIRES) Committee, which is chaired by Widener. The committee took testimony on the bill in the spring prior to the Legislature breaking for the summer; additional hearings are anticipated now that the legislators have returned, but they have not been announced.

The State Teachers Retirement Board has already voiced its opposition to the bill through action taken at the June 2007 board meeting. The board's position was shared with the FIRES Committee during a hearing held before the summer recess.