[News] October Board News Details Retirement Board Actions and Discussions

From STRS, October 19, 2007

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 October report follows.

OCTOBER BOARD NEWS

STRS OHIO PENSION FUND STATUS IMPROVES At its October meeting, the State Teachers Retirement Board received its first look at the annual actuarial valuation report of STRS Ohio's pension fund from its actuary, Buck Consultants. This report provides a "snapshot" of the actuarial position of the retirement fund as of July 1, 2007. Double-digit investment returns during the past four years have had a significant impact on both the funding period and the funded ratio for the pension fund. The funding period as of July 1, 2007, has been reduced to 26.1 years from 47.2 years; the funded ratio has increased to 83.0% from 76.1%.

In the report presented to the Retirement Board, STRS Ohio's actuarial gains and losses for fiscal year 2007 (July 1, 2006-June 30, 2007) were compiled. The actuary looks at the system's experience in several areas, including investment returns, payroll growth, salary increases, retiree mortality, and the number of retirements and other "separations" from the system, such as account withdrawals -- all of which can either reduce or increase the system's liabilities from one year to the next.

For fiscal year 2007, STRS Ohio experienced a net actuarial gain. As noted above, the major contributing factor was an investment gain of more than $5.8 billion. STRS Ohio assumes that the value of investment assets will increase 8% each year. Anything more than 8% is a gain; anything less than 8% is a loss. 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. STRS Ohio uses an approved accounting and actuarial technique called "smoothing" to spread this volatility over a four-year period when recording investment returns as part of the annual actuarial valuation process. It makes investment returns more of a "trend" rather than a "spike." 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. This results in a market-related value of investments.

When there are very large gains or losses over an extended period, "smoothed" returns can result in a market-related value of assets that differs significantly from the market value. When this occurs, which is the case for fiscal year 2007, STRS Ohio takes the additional step of putting some limits on this smoothing calculation so that the market-related value of assets is not less than 91% or more than 109% of the market value of assets. This adjustment accelerated the recognition of $1.6 billion in asset gains and a final market-related value for investments of $70.7 billion as of July 1, 2007. Even with this adjustment, STRS Ohio still has more than $6 billion of additional gains that have been "deferred" to future years.

Employer payrolls for teachers fell below the 4.5% actuarial assumption for the fourth year in a row, increasing by 2.26% in fiscal year 2007. This resulted in a $313 million actuarial loss. In addition, variations in retirement patterns from the current actuarial assumption generated a $330 million actuarial loss.

Taking all the actuarial gains and losses into consideration, the retirement fund recorded a net actuarial gain of more than $5.2 billion. Overall, the system's accrued liabilities dropped to about $14.5 billion from $19.4 billion and both the pension system's funding period and funding ratio improved.

The funding period is the number of years required to pay off the unfunded accrued liability of the system. As noted above, the funding period dropped to 26.1 years with this year's actuarial gains. The system's funded ratio -- the market-related (smoothed) value of assets compared to liabilities -- increased to 83%. This means that STRS Ohio currently has on hand 83% of the assets needed to pay all benefits accrued by STRS Ohio members to date -- even though the liabilities are not payable all at once.

As noted in other Retirement Board meetings, a public pension plan's actual experience each year is rarely identical with all actuarial assumptions. Public pension plans typically review all their actuarial assumptions every five years to determine if any adjustments are necessary; STRS Ohio was currently scheduled to conduct a five-year review in 2008. However, at the October meeting it was the consensus of the board to have a comprehensive review of four years of experience conducted in time to discuss at the board's annual planning retreat in late January to see if any adjustments need to be made.

RETIREMENT BOARD ADOPTS IRAN AND SUDAN DIVESTMENT POLICY AND PROGRAM After several months of discussion, the Retirement Board adopted a policy at its October meeting regarding divestment of investments in Iran and Sudan. This policy is consistent with the board's fiduciary duty to act solely in the best interests of the active and retired members. It establishes a voluntary process for divestment of active, direct holdings in STRS Ohio's international portfolios in certain non-U.S. publicly traded companies doing business in Iran and Sudan. Divestment will occur only when substitute investments with similar quality, return and safety can be identified. The Retirement Board had previously passed a motion stating its opposition to any legislatively mandated divestment of investments in Iran and Sudan, such as contained in Substitute House Bill 151. That bill was referred to the House Rules and Reference Committee after the directors of the five Ohio public pension plans agreed to explore developing their own policies. (For a vote in the House of Representatives to occur, the committee would have to vote to place the bill back on the House calendar.) STRS Ohio, as well as the other public systems, will report regularly to the Ohio Retirement Study Council (the legislative oversight body for Ohio's public pension systems) on their actions now that a policy has been adopted.

CONTRACTS WITH AETNA AND MEDICAL MUTUAL EXTENDED THROUGH 2009 Aetna and Medical Mutual currently administer the PPO and indemnity health care plans that more than 108,000 STRS Ohio retirees and their dependents are enrolled in as participants in STRS Ohio's Health Care Program. The current contracts with these two companies end on Dec. 31,
2008. At the October meeting, the Retirement Board voted to extend the respective contracts through Dec. 31, 2009. This will enable STRS Ohio to explore working with the Ohio Public Employees Retirement System (OPERS) and the School Employees Retirement System (SERS) on conducting a group purchasing project for health care plan services. Such an arrangement would allow the participating systems to leverage their collective purchasing power to stretch their respective health care dollars as much as possible.

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

- 417 active members were approved for service retirement; 91 inactive retirements were approved.

- In September, fixed-income purchases totaled $793.7 million, domestic equity purchases totaled $3.3 billion, and real estate purchases totaled $80 million.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

ONE RETIREMENT BOARD SEAT UP FOR ELECTION IN MAY 2008 In spring 2008, an election for one contributing member seat on the State Teachers Retirement Board will be held. The seat is currently held by John Lazares. The election will be for the term that begins on Sept. 1, 2008, and concludes on Aug. 31, 2012.

The process for electing an individual to this seat on the Retirement Board begins this fall. In November, election notices will be sent to all schools, providing information about obtaining petitions. This information will also be posted on the STRS Ohio Web site http://www.strsoh.org). Petition forms can be obtained from STRS Ohio by calling toll-free 1-888-227-7877. The deadline for return of petitions is Feb. 29, 2008.

HEALTH CARE CHAMPIONS TRAINING CONTINUES With the introduction of House Bill 315 in September, interest in the health care funding initiative has increased significantly. The work of the more than 120 "Health Care Champions" who are engaged in "grassroots" activities on behalf of this bill is having a positive impact. Based on the success of the two training sessions held in Columbus and Hudson, STRS Ohio and the Health Care Advocates for STRS have scheduled three additional sessions for active and retired STRS Ohio members: Wednesday, Nov. 7, at STRS Ohio; Thursday, Nov. 8, at the Toledo Federation of Teachers; and Tuesday, Nov. 13, at the Warren County Educational Service Center. Many Health Care Champions have already made contacts with their legislators; others are sharing information about the initiative with their teaching colleagues, fellow retirees and school board members.

ORSC MEMBERS VOTE TO SUPPORT HOUSE BILL 270 At the Ohio Retirement Study Council (ORSC) meeting on Oct. 10, council members voted unanimously to support H.B. 270 with amendments. Sponsored by Rep. Michelle Schneider, the bill, as introduced, requires forfeiture of employer-paid pension benefits for retirees who return to the same employer in the same or comparable job within 180 days after retirement. ORSC staff members recommended forfeiture of the entire pension while the retiree is reemployed if a two-month waiting period is violated. They also recommended the systems (OPERS, SERS and STRS Ohio) consider offering a DROP (Deferred Retirement Option Plan) to their members. The ORSC unanimously rejected H.B. 240, the other pending reemployment restriction bill.

MEMBER BENEFITS STAFF TO HOLD STATEWIDE HEALTH CARE MEETINGS IN NOVEMBER To help guide retired members through the health care open-enrollment process, Member Benefits' staff is holding Health Care Program Highlights for 2008 on multiple dates throughout Ohio this fall. During the meetings, associates from Member Education and Health Care Services will review 2008 health care premiums, plan coverage changes and cost-saving measures, as well as discuss the transition to STRS Ohio's new pharmacy benefits manager, Express Scripts. Attendees will be given the opportunity to ask questions. Representatives from all heath care plans and Express Scripts will participate in the meetings. Members may register for the meetings by calling the Member Services Center toll-free phone number or by using the STRS Ohio Web site.