August Board News from STRS

From STRS, August 15, 2008

Subject: News] August 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 August report follows.

AUGUST BOARD NEWS

LAZARES HONORED FOR BOARD SERVICE
During its August meeting, the State Teachers Retirement Board passed a resolution recognizing the dedicated service of John Lazares, whose four-year term on the board ends on Aug. 31. The resolution noted that his fair and thoughtful approach in analyzing issues and his openness to new ideas made him a valued contributor to board discussions; further, during his board tenure, he never wavered in his focus on the issues of most importance to members.

OPERATING EXPENDITURES COME IN BELOW BUDGET
Final figures for fiscal year 2008 (July 1, 2007-June 30, 2008) show that total operating expenditures for STRS Ohio were $4.6 million less than budgeted. Less-than-expected expenditures for associate salaries and related fringe benefits, custodial banking fees and outsourced computer programming fees contributed to the majority of the savings. Operating expenditures for fiscal year 2008 totaled about $91.4 million.

RETIREMENT BOARD REVIEWS FISCAL YEAR 2008 RETURNS AND ACCOMPANYING PBI PAYMENTS
Each year, eligible associates in STRS Ohio's Investment Department participate in a Performance-Based Incentive (PBI) program. This program enables these associates to receive an additional percentage of their base salary through a PBI payment, depending on both total investment fund performance and their individual goals over the previous fiscal year. STRS Ohio associates internally manage a significant portion of the system's investment assets - about 80% - versus using outside money managers. Third-party studies have shown that this practice is extremely cost-effective for STRS Ohio. Just as an example, internal management saved STRS Ohio about $100 million in fees in calendar year 2007 alone.

During its August meeting, the Retirement Board reviewed the investment fund's performance for fiscal year 2008 (July 1, 2007-June 30, 2008). As shown below, the total fund return was -5.44% versus the benchmark return of -5.79%. All asset classes exceeded their benchmarks in fiscal year 2008 except domestic equities. The net value added after deducting all direct investment costs (including earned PBI payments and external manager costs) was 24 basis points or an estimated $215 million for the year and more than $2.5 billion during the five-year period from July 1, 2003. This represents the additional value brought to the fund through active management by STRS Ohio associates and external managers, above and beyond the passive indexing of system assets.

When investing in the capital markets, negative absolute return years are expected. However, over the long term, the positive returns should offset the negative ones. As an example, STRS Ohio's total fund annual compound return over the past five fiscal years is approximately 11.4%. Looking longer term, the total fund annual compound return over the past 15 fiscal years is 8.5%, compared to the current board goal of 8%.

In calculating this year's PBI payments, two program criteria came into play. Under the PBI program, eligible associates have as one of their goals that the STRS Ohio total fund return will exceed its benchmark by 40 net basis points. Since this was not achieved in fiscal year 2008, no associate will earn a maximum payment. In addition, all PBI payments earned are reduced by 20% as the total fund had a negative absolute return. This reduction totals $1.5 million. At its meeting in September, the Retirement Board will be asked to approve a PBI payment of $6 million for 87 Investment Department associates. This payment will be $3.4 million less than the budgeted amount of $9.4 million and $2.2 million less than the amount paid for fiscal year 2007 performance.

The information below can be viewed as a chart at the following link: http://www.strsoh.org/boardnews/bn_current.html#chart

STRS OHIO INVESTMENT RESULTS (FISCAL YEAR 2008)

LIQUIDITY RESERVES
STRS Ohio Return: +3.97%
Benchmark Return: +2.90%
Relative Return: +1.07%

FIXED INCOME
STRS Ohio Return: +6.82%
Benchmark Return: +6.22%
Relative Return: +0.60%

DOMESTIC EQUITIES
STRS Ohio Return: -15.60%
Benchmark Return: -12.69%
Relative Return: -2.91%

INTERNATIONAL
STRS Ohio Return: -9.10%
Benchmark Return: -10.00%
Relative Return: +0.90%

REAL ESTATE
STRS Ohio Return: +18.92%
Benchmark Return: +5.50%
Relative Return: +13.42%

ALTERNATIVE INVESTMENTS
STRS Ohio Return: +9.34%
Benchmark Return: +9.34%*
Relative Return: 0.00%

TOTAL FUND
STRS Ohio Return: -5.44%
Benchmark Return: -5.79%
Relative Return: +0.35%

Less Costs to Arrive at Net of Fees: -0.11% Total Fund, Net of Fees: +0.24%

*No benchmark exists for this asset category; actual returns are used.

APPOINTMENT MADE TO MEDICAL REVIEW BOARD
Dr. Albert J. Kolibash Jr. was appointed to STRS Ohio's Medical Review Board. He currently serves as associate professor of Internal Medicine and director of Cardiovascular Fellowship Training in the Division of Cardiovascular Medicine at The Ohio State University.

RETIREMENTS APPROVED
The Retirement Board approved 2,570 active members and 175 inactive members for service retirement benefits.

ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR MICHAEL J. NEHF

OPERS SEEKS CHANGES TO SERVICE CREDIT PURCHASE COSTS House Bill 600 was recently introduced by Rep. Lynn Wachtmann (R-Napoleon). This bill would increase the cost of common types of purchasable service credit with the Ohio Public Employees Retirement System (OPERS) to 100% of the liability created by the purchase. The bill changes the cost calculation for the following categories:

• Service by an elected official

• Periods of waived service

• Pregnancy leaves of absence

• Comparable public service

• Leaves of absence

The bill does not change the cost calculation for restoration of previously withdrawn service or credit purchased for military service. H.B. 600 also restricts the ability of a survivor to purchase credit following a member's death. A surviving spouse of a member who dies one year after the effective date of the legislation would only be able to complete a purchase that the member had initiated before death. If passed as introduced, the changes proposed in H.B. 600 would be effective Jan. 1, 2010. In addition, current cost calculations would be grandfathered for all purchases that were initiated before Jan. 1, 2010. Members would be able to initiate a payroll deduction before Jan. 1, 2010, and maintain the lower cost calculation as long as the payroll deduction remains active.

The legislation, pertaining solely to OPERS at this time, follows a report to the Ohio Retirement Study Council (ORSC) in 2007 by its consulting actuary, Milliman, Inc., that the five retirement systems were subsidizing service credit purchases by as much as 80%, which ultimately had a significant impact on the respective unfunded actuarial liabilities. It is likely that the ORSC staff will recommend including STRS Ohio in H.B. 600 when the council reviews the legislation; however, the bill is not expected to move until after the November general election.

HEALTH CARE REMAINS A TOPIC IN OHIO AND WASHINGTON Rep. Scott Oelslager (R-North Canton) continues his interested party meetings on House Bill 315. Two meetings with the sponsor, STRS Ohio staff, and representatives of the Health Care Advocates, the Ohio School Boards Association and the Ohio Association of School Business Officials have been held this summer and another is scheduled this August. Rep. Oelslager's goal is to find areas of common agreement and identify stumbling blocks to move this health care funding legislation forward.

At the federal level, passage of legislation to block a scheduled cut in Medicare fees paid to doctors also includes language to encourage doctors to write electronic prescriptions. Initially, physicians who make the change to e-prescribing will receive higher Medicare payments beginning in 2009. In later years, doctors who fail to adopt the change will see their Medicare payments reduced. One challenge at present is that only 31% of independent drugstores have the capability to receive electronic prescriptions. Seventy percent of all pharmacies can receive digital prescriptions. Currently, only about 40,000 U.S. doctors prepare their prescriptions digitally. By 2012 doctors will be required to e-prescribe.