Report from STRS on October Board Actions and Discussions

From STRS, October 17, 2008
Subject: [News] October 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 October report follows.

OCTOBER BOARD NEWS

LONG-TERM MARKET OUTLOOK DISCUSSED AT OCTOBER RETIREMENT BOARD MEETING With marketplace issues and the overall global economy continuing to dominate the news, the State Teachers Retirement Board devoted a significant amount of time at its October 2008 meeting to discussing the impacts of these events on the pension fund.

The overall decline in the markets has continued to reduce the current value of STRS Ohio's investment assets. As of Sept. 30, 2008, preliminary results show the value of investments at about $62.9 billion, down from about $70.3 billion on June 30, 2008.

However, it was noted that this is not a time for panic. While the investment environment reflects the current worldwide banking and credit crisis, governments and central banks worldwide are coordinating efforts to address the problems. At this time, all indicators seem to confirm that the country is in a recession. Economic growth in the United States is expected to be slower through the end of this calendar year and the beginning of 2009. As a result, the STRS Ohio Investment staff has adjusted the economic forecast contained in its Annual Investment Plan for 2009; however, the overall investment strategy contained in the plan will remain largely intact. STRS Ohio will attempt to maintain its neutral equity weighting or be slightly above the neutral weighting of 67%
(domestic and international stocks) within the investment portfolio.

It may take at least three to six months before the impact of the steps taken in Washington and globally to stabilize the economy begin to be seen. Consequently, it may take awhile before the markets respond positively, but history has shown that recovery will eventually occur.

During this period, the Retirement Board will conduct its regularly scheduled asset allocation study to determine if the current allocation levels for different asset classes within the fund continue to be appropriate. The board will also receive the results of a review of STRS Ohio's domestic equities program that is currently under way by Russell Investments, the board's investment consultant.

During the discussion, it was noted that the amount of investment assets alone does not determine the solvency of the pension fund. The annual actuarial valuation (see story below) provides an opportunity for the board and staff to discuss all the variables that affect pension funding - both positively and negatively. Board and staff will continue to monitor what is happening in the markets and assess both the short- and long-term impacts. Further, STRS Ohio will continue to be prudent as an organization in managing its expenditures to make sure every dollar spent is spent wisely.
RETIREMENT BOARD GETS FIRST LOOK AT ANNUAL ACTUARIAL VALUATION OF PENSION FUND At its October 2008 meeting, the Retirement Board received its first look at the annual actuarial valuation report of STRS Ohio's pension fund from its actuary, PricewaterhouseCoopers (PwC). This preliminary report provides a "snapshot" of the actuarial position of the retirement fund as of July 1, 2008. It currently shows an increase in the funding period to 28.3 years from 26.1 years, and a decrease in the funded ratio to 80.1% from 83.0%. However, these numbers may change before the final adoption of the actuarial report by the board in November because PwC is recommending changes to some of the assumptions that are used in valuation calculations. These changes are being recommended based on the results of a five-year experience review PwC is also conducting this fall.

In developing the actuarial valuation for July 1, 2008, STRS Ohio's actuarial gains and losses for fiscal year 2008 (July 1, 2007-June 30, 2008) 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 2008, STRS Ohio experienced a net actuarial loss. Investment losses were a contributing factor. STRS Ohio assumes that the value of investment assets will increase 8% each year. Anything more than 8% is an actuarial gain; anything less than 8% is an actuarial 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. So, for the July 1, 2008, valuation, a portion of the investment losses recorded in fiscal year 2008 were included, as well as some of the investment gains experienced in the three prior fiscal years, resulting in a 7% rate of return for actuarial purposes.

Employer payrolls for teachers increased less than the 4.5% actuarial assumption for the fifth year in a row, only increasing by 2.6% in fiscal year 2008. In addition, retirement patterns continue to shift, with more members working 35 or more years before retiring. Both of these factors also contributed to the net actuarial loss.

Taking all the actuarial gains and losses into consideration, the funding period increased to 28.3 years. The funding period is the number of years required to pay off the unfunded accrued liability of the system at current contribution rates. The system's funded ratio - the market-related (smoothed) value of assets compared to liabilities - decreased to 80.1%.

A public pension plan's actual experience each year is rarely identical with all actuarial assumptions. As a result, public pension plans typically review all their actuarial assumptions every five years to determine if any adjustments are necessary.

At the October meeting, PwC reported preliminary results of its five-year study, noting that final results will be presented at the November meeting. Possible changes in assumptions could include changing mortality tables to reflect the fact that members are living longer, and making adjustments to the payroll growth and salary increase assumptions.

Any assumption changes that the board approves at the November board meeting will be applied to the July 1, 2008, actuarial valuation and could lengthen the funding period and slightly reduce the funded ratio.

CURRENT REIMBURSEMENT FOR MEDICARE PART B UNCHANGED FOR 2009 The dollar amount of reimbursement eligible STRS Ohio benefit recipients receive for their Medicare Part B premium will not change in 2009. The maximum amount of reimbursement from STRS Ohio remains at $52.83 per month for the 30-year retiree; the minimum amount of reimbursement is $29.90 per month. In September, the Centers for Medicare and Medicaid Services announced that there would be no increase in the Medicare Part B monthly premium of $96.40 for 2009.

RETIREMENTS APPROVED The Retirement Board approved 295 active members and 104 inactive members for service retirement benefits.

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

MEETINGS ON HOUSE BILL 315 CONTINUE Interested party meetings on House Bill 315 are now held twice a month. The sponsor, Rep. Scott Oelslager, is trying to bring the school boards, business officials and the employees to a point of agreement and negotiation in order to move the bill next session. Rep. Oelslager has asked for all parties, and especially employers, to come to the next meeting with funding alternatives. STRS Ohio continues to provide background information and documentation on the STRS Ohio health care plan, benefits and funding. One more meeting is scheduled before the election. The outcome of the General Assembly elections will factor into next year's legislative plans.

OHIO ETHICS COMMISSION TO PROVIDE PRESENTATION TO STRS OHIO ASSOCIATES David Freel, Ohio Ethics Commission executive director, and Susan Willeke, Ohio Ethics Commission educational coordinator, will present a 60-minute presentation to STRS Ohio associates on Oct. 29. The session will provide timely information regarding the Ohio Ethics Commission and about restrictions in the Ohio Ethics Law and related statutes that pertain to all public sector employees and private sector parties who are regulated or do business with public offices. This presentation will help ensure STRS Ohio associates understand how to identify and avoid potential conflicts of interest.