November 2007 report from STRS

From STRS, November 16, 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 November report follows.

NOVEMBER BOARD NEWS

ANNUAL ACTUARIAL VALUATION REPORT ACCEPTED During its November 2007 meeting, the Retirement Board voted to accept the annual actuarial valuation report of the STRS Ohio pension fund for July 1, 2007, prepared by its actuary, Buck Consultants. The report shows that STRS Ohio made significant advances in the two primary measures of funding progress. The funded ratio -- which is the market-related (smoothed) value of assets compared to liabilities -- increased to 83% from 76.1%. The funding period -- which is the number of years required to pay off the unfunded accrued liability of the system -- declined to 26.1 years from 47.2 years. The improvements in the pension fund's status are due primarily to the double-digit investment returns experienced during the past four years. During the meeting, the board also voted to maintain the 5% annual interest rate on money purchase benefits and reemployed retiree annuities for the 2007-2008 fiscal year (July 1, 2007-June 30, 2008).

BOARD CHOOSES ACTUARIAL FIRM With the recent conclusion of its current contract with Buck Consultants, STRS Ohio issued a request for proposals (RFPs) in October for an actuarial consultant. Of the seven firms who responded, four were chosen to make presentations to an Ad Hoc Actuarial Search Committee composed of the following Retirement Board members: Craig Brooks, Thomas Johnson, Steven Puckett and Conni Ramser. At the November Retirement Board meeting, the ad hoc committee recommended that the board authorize the executive director to negotiate a contract with PricewaterhouseCoopers (PWC) for the period Dec. 1, 2007, through March 31, 2013. In making its recommendation, the committee noted that this firm offers expertise in a number of areas, including pension liability analysis and health care plan design. Further, the firm's software is compatible with STRS Ohio's programs, thus facilitating the transfer and analysis of data between PWC and STRS Ohio's chief actuary. The board concurred with the committee's recommendation and approved a motion authorizing the executive director to negotiate, and subsequent to review by the board of a contract summary, execute a contract with PWC.

BOARD POLICIES DISCUSSION CONTINUES At the October 2007 Retirement Board meeting, considerable discussion focused on existing board policies and several changes were discussed and then tabled for future review. At the November board meeting, the board again turned its attention to the proposed changes. As part of the discussion, Executive Director Damon Asbury stated that the issues of agreeing on the appropriate role of the board and the appropriate role of the staff in governing and administering STRS Ohio has been a recurring point of contention. He noted that the board is struggling with its interpretation of the current board policies and perceived direction they provide and the limitations they place on the executive director; the senior staff has become unsure of what the board's expectations are for their role in the administration and operation of the system.

Reading from prepared remarks at the meeting, Asbury said, in part, "For a number of years, this system has operated under a set of board policies that are designed to reflect the board's values, perspectives and goals and set the parameters under which the executive director can make decisions. The Retirement Board establishes the "Ends" or strategic goals and delegates authority to the executive director to accomplish these goals. This delegation includes giving the executive director the authority to conduct the day-to-day operations of STRS Ohio, contingent on subsequent board approval. This authority is framed within the boundaries of certain board policies, law, prudence and ethics. Further, the board is responsible for evaluating the executive director based on the fulfillment of these board policies."

Asbury pointed out that there are many limitations and checks and balances on the retirement system's operations. He said, "The board should also consider that, in addition to the checks and balances placed on the staff in policy, STRS Ohio is regulated by a comprehensive statutory structure. Ohio Revised Code Section 3307.04 provides that all acts taken pursuant to the board's delegation of authority to staff are taken subject to subsequent board approval. The ORC further provides that the system must employ an internal auditor. Additionally, the Auditor of State, or a firm appointed by the Auditor, is required to conduct an annual audit of the system's financial statements. The Ohio Attorney General is your statutory legal adviser and is given the express authority to sue board members if they breach their fiduciary duty. In addition to the other oversight they provide, the Ohio Ethics Commission and the Ohio Retirement Study Council have roles in the drafting and adoption of STRS Ohio's travel and ethics policies. The ORSC also annually reviews the proposed operating and capital budgets; in addition, Sub. Senate Bill 133 requires STRS Ohio to undergo a fiduciary audit every five years under the direction of the ORSC. By law, the Treasurer of State serves as custodian of STRS Ohio assets, and STRS Ohio's administrative rules are submitted to the Joint Committee on Agency Rule Review. In short, the staff does not act with unfettered authority. Numerous oversight and regulatory bodies ensure that STRS Ohio is operated prudently."

At the conclusion of his remarks, Asbury respectfully suggested that the board address any proposed changes to board policies at the January Planning Retreat (which is a public meeting), where they could be discussed within the broader context of a discussion of board governance and delegation to the executive director.

Following considerable discussion at the board table, the board approved the following additions to board policies:

....• In the event that retirees are employed at STRS Ohio, the executive director will ensure that said new employees begin their employment at STRS Ohio without the transfer of sick leave from a prior employer.

....• The awarding of severance checks, severance payments or severance benefits to STRS Ohio employees will not occur absent a formal approval by the State Teachers Retirement Board, by majority vote, in public session.

Other proposed changes and additions were deferred for further discussion at either the December board meeting or the Planning Retreat. The retreat will also include a more in-depth discussion of the severance policy.

INTERNATIONAL INVESTMENT PROGRAM RECEIVES HIGH MARKS Russell Investment Group, the board's investment consultant, presented a review of STRS Ohio's international investment program during the November meeting. Russell's evaluation of the STRS Ohio international investment team and the portfolios was compared to the "best in breed" of external investment managers.

STRS Ohio's international equity investments total nearly $20 billion, with about half of those assets managed internally. Among its key findings, Russell noted STRS Ohio's internal management of these funds is very cost effective relative to external management and that staff is well educated and experienced. The review also concluded that the international investment program is well diversified with appropriate goals and risk targets. As one way to enhance the overall program, Russell encouraged more information sharing and interaction between internal and external managers.

RETIREMENT, INVESTMENT TRANSACTIONS APPROVED The Retirement Board approved the following retirements and investment transactions:
....• 217 active members were approved for service retirement; 85 inactive retirements were approved.

....• In October, fixed-income purchases totaled $1.2 billion, domestic equity purchases totaled $2.1 billion and real estate purchases totaled $159 million.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

STRS OHIO INVESTMENT PERFORMANCE RANKS WELL AMONG PEERS At the Nov. 14, 2007, Ohio Retirement Study Council meeting, Evaluation Associates presented its semiannual Investment Performance Review of Ohio's five public pension plans as of June 30, 2007. STRS Ohio had the highest absolute return of the Ohio funds for the one-, three- and five-year periods. STRS Ohio also had the highest relative outperformance over the five years, was tied with SERS for the highest one-year relative return, and placed second for the three-year period. STRS Ohio's 10-year return exceeded the actuarial return by .58% (the highest of any fund); STRS Ohio also outperformed its benchmark by .39% over the 10-year period (also the highest of any fund). STRS Ohio ranked above the median among plans within the Mellon All Public Plan Universe for the one-, three- and five-year periods.

PUBLIC SECTOR HEALTH CARE ROUNDTABLE MEETS The Public Sector Health Care Roundtable, of which STRS Ohio is a charter member, held its third annual conference in late October. The big question on everyone's mind is how and when true health care reform will take place nationally. The consensus of those closely connected to the debate is that it won't likely be a "Big Bang" change wrought by the appearance of a visionary leader showing up to overhaul the entire system, regardless of who is elected the next president. More feasible is continued incremental reform. The challenge is to get good incremental reform, defined as providing available, affordable and adequate health care. The Roundtable board will be meeting in early winter to set policy for health care issues with an eye toward 2009. Medicare solvency will likely be the primary focus.

GPO/WEP HEARING HELD IN WASHINGTON On Nov. 7, 2007, the Senate Finance Subcommittee on Social Security, Pensions and Family Policy held a hearing on the impacts of the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP). While one of the witnesses, Lawrence Thompson of the Urban Institute, promoted mandatory coverage of state and local employees as the way to pay for reform of GPO and WEP, there didn't seem to be any momentum on the committee for the idea. The Coalition to Preserve Retirement Security presented written testimony in opposition to mandatory coverage. The consensus agreement of all the witnesses and Chairman John Kerry was the existing formula is irrational, unfair and doesn't work. However, fixing it due to the cost is still a major challenge. Sen. Kerry indicated the Senate will be taking up a series of tax issues this winter and that may be a place to address some of the arbitrary inequities of GPO and WEP.