Report from STRS on February Board meeting

From STRS, February 15, 2008
Subject: [News] February 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 February report follows.

FEBRUARY BOARD NEWS

HEALTH CARE VALUATION REPORT CONFIRMS NEED FOR HOUSE BILL 315

The February 2008 meeting of the State Teachers Retirement Board included the annual actuarial valuation report of the system's Health Care Stabilization Fund from the board's actuarial consultant, PricewaterhouseCoopers (PwC). Health care costs for the STRS Ohio Health Care Program are paid out of this fund. Currently, monies for the fund come from premiums charged to STRS Ohio retirees and their dependents who are enrolled in the program, 1% of payroll from employer contributions and investment earnings on these funds.

The valuation report tells the Retirement Board the solvency period of the fund, and what percentage of contributions would be needed to fund the health care program on a full-reserve basis.

This year's report again confirmed what the Retirement Board and staff have been sharing with members for several years: The funded status of the health care program, which has about $4 billion as of Jan. 1, 2008, is considerably higher than most other public pension systems in the United States. However, projections continue to show that the principal in the fund will begin to be tapped in just a few years.

The report also showed that House Bill 315, which calls for a 5% increase in combined member and employer contributions (phased in over a five-year period), will adequately address this funding challenge. Based on current figures and assumptions made in the valuation, this ongoing, dedicated revenue stream would cover the cost of current health care liabilities, as well as future liabilities, and move the Health Care Stabilization Fund toward a fully funded basis. However, as noted above, the time period that this level of contribution increase is a viable solution is limited. Once the principal in the health care fund begins being drawn down, the annual required contribution starts to increase.

In presenting the health care actuarial valuation for Jan. 1, 2008, the Retirement Board was reminded by PwC that the Governmental Accounting Standards Board (GASB) requires a retiree health care program to use a different assumed investment return rate for its health care monies if the program is not fully funded. So, rather than STRS Ohio using an 8% rate (the same rate it assumes for its pension fund), it must lower that rate to 5.5% based on the current funding status of the health care fund when calculating liabilities.

Consequently, PwC reported that the annual required contribution (ARC) for health care liabilities -- with a 5.5% rate -- is 5.92%. But, if H.B. 315 passes and an annual contribution of 5% of payroll is ultimately contributed to the health care fund, GASB allows the investment return rate to return to 8%. As the accompanying chart shows, the ARC drops to about 4%, confirming that the proposed 5% contribution increase is still adequate.

In short:

• If STRS Ohio can fully fund the ARC (which it could do if H.B. 315 passes), the ARC is lower because it is based on an 8% investment return rate.

• If STRS Ohio is only able to partially fund the ARC (if 5% isn't allocated to the health care fund), the ARC is higher because it is based on a 5.5% investment return rate.

CHART DATA -- HEALTH CARE FUND VALUATION RESULTS

JANUARY 2007 (5.5%) Funded Status (ratio of assets to accrued liability) -- 28% Annual Required Contribution (ARC) -- 6.55% Fund Solvent Until (with continuation of 1% employer contribution) --
2021

JANUARY 2008 (5.5%) Funded Status (ratio of assets to accrued liability) -- 33% Annual Required Contribution (ARC) -- 5.92% Fund Solvent Until (with continuation of 1% employer contribution) --
2022

JANUARY 2008 (8% with passage of H.B. 315) Funded Status (ratio of assets to accrued liability) -- 46% Annual Required Contribution (ARC) -- 3.92% Fund Solvent Until (with continuation of 1% employer contribution) -- 2026

(This information is also available on the STRS Ohio Web site in a chart format at the following URL: http://www.strsoh.org/boardnews/bn_current.html#chart)

NEXT STEPS OUTLINED FOR HOUSE BILL 315 INITIATIVE

During a Special Health Care Committee meeting on Feb. 14, 2008, Retirement Board members and representatives from the Health Care Advocates for STRS (HCA) received an update on House Bill 315. Looking to the future, the committee discussed that it is not unusual for a bill to take several years to pass, especially if it entails both cost and less than unanimous support. It was agreed that both STRS Ohio and the HCA would continue to do the following:

• Encourage dialogue among all major stakeholders;

• Keep STRS Ohio members and retirees engaged and working actively on behalf of the bill;

• Educate school boards about the issue;

• Contact candidates who are running for seats in the General Assembly and inform them about the importance of this issue to STRS Ohio retirees and members; and, most importantly,

• Stay the course.

RETIREMENT, INVESTMENT TRANSACTIONS APPROVED

The Retirement Board approved the following retirements and investment transactions:

• 134 active members were approved for service retirement, 90 inactive retirements were approved.

• In January, fixed-income purchases totaled $862 million, domestic equity purchases totaled $4.36 billion and real estate purchases totaled $141 million.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR DAMON ASBURY

STRS OHIO ACTIVELY INVOLVED IN WASHINGTON-BASED DISCUSSIONS

The Public Sector Healthcare Roundtable board of directors met in Washington, D.C., recently to develop its strategic plan for 2008 and 2009. STRS Ohio is a charter member of this group. Health care is expected to be at the top of the agenda for the next president, barring a violent setback in Iraq that would increase the pressure for the foreign policy agenda, or a more serious turn for the economy.

The Roundtable's legislative focus for 2008 will be on health care information technology, generics and comparative effectiveness. Within those three broad categories will be a push for electronic medical records, electronic prescribing of prescription drugs, more money allocated to comparative effectiveness databases and eliminating restrictions on bringing generics to market. By midyear the focus will fine-tune attention to the directions laid out by the two presidential contenders in preparation for hitting the ground running in January
2009.

In regard to the Sudan Divestment Law passed by Congress at the end of 2007 and signed by the president on Dec. 31, 2007, several organizations in which STRS Ohio holds membership, including NCTR and NASRA, have reached out to the Securities and Exchange Commission concerning companies in which divestment may be required. The federal statute does not require divestment. It does require any legislation passed by individual states to comply with the standards set forth in the federal law.

Finally, two new organizations in Washington, the National Institute on Retirement Security and the National Public Pension Coalition, are joining forces to advance the debate in favor of defined benefit plans. There continues to be a push around the country to scale back or eliminate defined benefit plans in the private sector. The push is moving to the public sector -- much of it fueled by growing envy by private sector employees who no longer have a defined benefit. That growing dissatisfaction from taxpayers, combined with political philosophy that private is better and cheaper, puts all public sector benefits at risk. These two organizations will work at the national level and in individual states to proactively promote the value of the defined benefit model before any attempts are made to scale back benefits.

STRS OHIO RETAINS TOP CREDIT RATING

Standard & Poor's (S&P) has affirmed STRS Ohio's "AAA" issuer credit rating. This rating is S&P's highest possible rating for an organization's ability to pay its financial obligations. STRS Ohio has maintained the AAA standard since first requesting a rating in 1999.