December Board news from STRS

From STRS, December 15, 2008
Subject: [News] December Board News Details Retirement Board Actions and Discussions

Last 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 December report follows.

DECEMBER BOARD NEWS

NEW BOARD MEMBER SEATED Gov. Ted Strickland has named Regina F. Burch as his appointee to the State Teachers Retirement Board. Burch is an associate professor at Capital University Law School in Columbus. She holds a bachelor's degree from Harvard College, a master's degree from the Sloan School of Management at Massachusetts Institute of Technology, and a juris doctor degree from the Hastings College of Law at the University of California. Her term on the board will run through Sept. 28, 2012.

2008 ANNUAL FINANCIAL STATEMENT AUDIT COMPLETED Clifton Gunderson completed its audit of the STRS Ohio financial statements for the fiscal year ended June 30, 2008. In reporting the results of the audit to the Retirement Board at its Dec. 11, 2008, meeting, the auditors noted that the system's financial statements were fairly stated in accordance with generally accepted accounting principles. During its audit, Clifton Gunderson also considered internal controls over financial reporting and tested compliance with certain laws and regulations. Its report indicated that no material weaknesses in internal controls or instances of statutory noncompliance were found. As a result, STRS Ohio received a "clean" audit known as an unqualified opinion, which is the highest level of opinion that an organization can receive.

STRS Ohio's financial statements are included in the Comprehensive Annual Financial Report, which can be accessed through the STRS Ohio Web site at www.strsoh.org, beginning Dec. 29. Copies of the report can also be requested by calling STRS Ohio's Member Services Center toll-free at 1-888-227-7877. Included in this report is a detailed look at STRS Ohio's investment activities, plus financial, actuarial and statistical information for fiscal year 2008 (July 1,
2007-June 30, 2008).

BOARD VOICES FORMAL OPPOSITION TO MANDATORY DEFINED CONTRIBUTION PLAN ENROLLMENT FOR PUBLIC EMPLOYEES Reacting to House Bill 645, which was introduced during the final weeks of the
127th Ohio General Assembly, Retirement Board members voted unanimously to oppose this bill and any future legislation that would impose mandatory enrollment in a defined contribution plan for public employees. House Bill 645, which was introduced by Rep. Larry Wolpert (R-Hilliard), requires all newly hired members of the state's five pension plans (including STRS Ohio) to participate in defined contribution plans. While the bill has been assigned to the House Financial Institutions, Real Estate and Securities Committee, the committee has sent notice that no further hearings for the year are anticipated. The sponsor, Rep. Wolpert, is also leaving the Legislature at the end of the year due to term limits. For the bill to be considered, it would need to be reintroduced in the next General Assembly. The five retirement system directors have also sent a joint letter to Rep. Wolpert and House leadership , stating their opposition to the bill.

RETIREMENT BOARD CONTINUES DISCUSSION ABOUT PBI PROGRAM At its December meeting, the Retirement Board agreed to accept a report from its Staff Benefits Committee that met earlier on Dec. 8, 2008, to discuss the Performance-Based Incentive (PBI) Program for eligible Investment associates. Under the PBI Program, these associates are able 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. During the committee's meeting, various options were discussed, including suspending the PBI Program to maintaining it as it currently exists. The committee determined that it needed additional information on program design and eligible participants before making any recommendations to the board. Another committee meeting will be held in early January 2009.

During the December Retirement Board meeting, board members also voted to ask the Staff Benefits Committee to discuss a wage freeze for STRS Ohio associates in light of current economic conditions.

OPERATING BUDGET SAVINGS SHARED WITH BOARD As of December 2008, STRS Ohio staff anticipates that the operating expenditures for this fiscal year will be at least $6.3 million less than budgeted. Of this amount, $2.1 million will be the result of direct staff actions, including: reductions in salaries and fringe benefits due to limiting new hires, and limiting January 2009 promotions, merit increases and market salary adjustments; and reduced planned expenditures for various professional and technical services, travel outside Ohio, and conference, training and miscellaneous staff expenses.

BOARD DEVOTES DEC. 12 MEETING TO HEALTH CARE DISCUSSION Work on a strategic plan for the STRS Ohio Health Care Program began with a daylong education session for board members on Friday, Dec. 12. This education session was the first part of a four-step process that will continue through implementation of any new initiatives for the health care program in calendar year 2010. The agenda included presentations comparing the current program to the marketplace; current funding status of the program; and factors that can affect the long-term solvency of the Health Care Stabilization Fund, which is the fund that supports the health care program.

Major points made during the day's discussion included the following:

- STRS Ohio pays nearly $1.5 million per day in health care costs.

- Total health care administrative expenses and fees account for less than 5% of total health care expenditures.

- Non-Medicare enrollees account for only one-third of the enrollment, yet represent half of the total claim costs.

- Because of the significant difference in how much STRS Ohio pays in claims for non-Medicare enrollees versus Medicare enrollees (since STRS Ohio is the secondary payer for this latter group), and because of escalating costs and increasing use of prescription drugs, future strategies to control health care program costs will likely vary for Medicare and non-Medicare enrollees and for medical versus drug coverage.

- The recent volatility in the investment markets has reduced the Health Care Stabilization Fund, plus created an additional loss of principal due to the need to tap into the fund to cover health care expenses that normally would be covered by investment returns on the principal in a good market. Unlike the pension fund, the Health Care Stabilization Fund has a much shorter time horizon, which complicates the ability to recoup previous market losses.

- The four factors that can affect the solvency of the Health Care Stabilization fund are funding, eligibility, premium subsidies and benefits. However, without a significant increase in funding through additional member and/or employer contributions (such as those contained in House Bill 315), fundamental changes will need to be made to sustain the health care program for the long term.

The next steps in the strategic planning process call for the board to begin exploring plan options while continuing to pursue passage of health care funding legislation.

RETIREMENTS APPROVED The Retirement Board approved 89 active members and 73 inactive members for service retirement benefits.

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

SECURE SITE PASSWORDS EXCEED 100,000 During November, a milestone was reached when the 100,000th member requested a password for access to the secure member section of the STRS Ohio Web site. Within the secure section, members can access their personal employment and salary information and estimate future retirement benefits based on their current account information. Benefit recipients are able to view beneficiary and payment information.