January Board News from STRS

From STRS, January 20, 2009

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 January report follows.

JANUARY BOARD NEWS

RETIREMENT BOARD APPROVES CHANGES TO PBI PROGRAM At its January 2009 meeting, the State Teachers Retirement Board voted to suspend the current Performance-Based Incentive (PBI) Program for eligible Investment Department associates as of Feb. 1, 2009. With this suspension, calculations for any earned PBIs for this fiscal year will generally be based upon the performance results for the first seven months of the fiscal year (July 1, 2008-Jan. 31, 2009). The awards paid will be limited to 7/12 of these results, thus recognizing the plan's existence for only a portion of the fiscal year. With this suspension of the PBI Program, the estimated PBI payments for this fiscal year would be about $3.3 million. Payments are calculated on the performance of various portfolios and asset classes against their respective benchmarks for multiple-year periods, total fund performance and absolute return.

The Retirement Board also agreed that a new PBI Program would be implemented on July 1, 2009, for fiscal year 2010. The current program calls for the earned award for any eligible associate to be reduced by 20% if the total STRS Ohio investment fund does not earn a positive absolute return. The new program for fiscal year 2010 further states that if the total fund return is between -5% and -20%, the reduction would increase from 20% up to a maximum of 60% on a linear basis. For returns below -20%, the reduction remains at 60%.

While the new PBI Program reduces the amount of payment when there are significant market downturns, it also will enhance earned PBIs when the absolute and relative performances are high. Each associate's earned award will be increased by 8% if the total fund's absolute return exceeds +8.5% and the net relative return exceeds 60 basis points, but less than 100 basis points. Earned awards will be increased by 12% if the total fund's absolute return exceeds +8.5% and the net relative return equals 100 basis points or more.

Finally, the Retirement Board agreed that if the market value of STRS Ohio's investment assets exceeds $65 billion on June 30, 2009, the new PBI Program will be instituted retroactive to Feb. 1, 2009. As of Dec. 31, 2008, preliminary results show STRS Ohio's investment assets totaling about $52.5 billion.

At its February 2009 meeting, the board will be presented with the PBI Program for fiscal year 2010. In addition to the above-noted items, it will also include language reflecting a cap on Investment associate compensation, as well as a reduction in the number of individuals eligible for the PBI Program.

2008 SURVEY SHOWS HIGH MARKS FROM MEMBERS The 2008 membership surveys show that most STRS Ohio members -- active and retired -- have positive impressions of STRS Ohio, overall. Positive impressions extend to member services, pension benefits, the Retirement Board and communications.

These results were contained in a presentation made to the Retirement Board by Dr. Marty Saperstein of the Columbus-based firm, Saperstein Associates, during the board's January 2009 meeting. The annual telephone surveys were conducted by Saperstein Associates from Nov. 10-20 and involved 602 randomly selected participants (302 active members and 300 retired members).

In summarizing the results, Saperstein also noted the following:

- In addition to having positive impressions about STRS Ohio overall, most members also agree that the system is strong and stable, well managed, and has earned the trust and confidence of its members.

- Health care remains a source of concern. Members would value more information about health care and want the Retirement Board to consider this issue a top priority. Majority support also continues for the legislative proposal to create an ongoing, dedicated revenue stream for the STRS Ohio Health Care Program.

- The faltering economy is forcing more actives to teach longer; one out of three expects to retire with at least 35 years of service credit.

- Retirees also are being affected by the recession. More than half of all retirees at all income levels feel less secure financially than a year ago. These retirees most often spoke of their personal investment losses and a poor economy.

- Nine out of 10 retirees have at least one additional source of income; seven out of 10 have at least two additional sources of income. On average, STRS Ohio provides about 58% of retirees' income.

Additional details about the survey results will be included in the next edition of the STRS Ohio newsletters.

ASSET ALLOCATION STUDY CONTINUES During its January meeting, the Retirement Board and staff continued with the Asset Allocation Study that began in November 2008. The current target allocation for STRS Ohio's investment assets is 42% domestic equities, 25% international equities, 20% fixed income, 9.5% real estate and 3.5% alternatives (which for STRS Ohio are primarily private equity and venture capital investments). John Osborn, from the board's investment consultant, Russell Investment Group, presented an option that would call for gradually allocating more assets to investments in such areas as hedge funds, commodities and infrastructure. The long-term goal would be to earn equity-like returns (net of fees) with these new investments, while lessening losses during equity bear markets. The Asset Allocation Study discussion will continue at the February board meeting.

RETIREMENTS APPROVED The Retirement Board approved 128 active members and 97 inactive members for service retirement benefits.

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

FOCUS ON HEALTH CARE LEGISLATION WILL CONTINUE WITH NEW GENERAL ASSEMBLY Rep. Scott Oelslager will reintroduce STRS Ohio's health care funding legislation. However, several procedural matters have to be dealt with in the House of Representatives, including committee assignments and the adoption of House rules, so it is likely the health care bill will be introduced sometime in February or shortly thereafter. At this time, STRS Ohio does not anticipate any major changes to the bill going forward from the language contained in House Bill 315.

COUNCIL OF INSTITUTIONAL INVESTORS DISTRIBUTES CORPORATE GOVERNANCE REFORM ADVOCACY LETTER Council staff in December delivered a corporate governance reform advocacy letter to 99 members of Congress, including the leadership of both parties as well as members of key House and Senate committees dealing with financial markets. Signed by 48 representatives of 44 Council general member funds, including STRS Ohio, the letter emphasized the need for vigorous oversight and investor protection, as well as better tools for shareholders to hold managers and boards accountable and address unforeseen future risks. The letter specifically calls for eight corporate governance improvements to be included in any potential broad financial market reform legislation.

STRS OHIO CONTINUES TO DOMINATE HIGHER EDUCATION MARKET Since July 1, 2008, 980 newly hired faculty at Ohio public colleges and universities have had the option to select a privately run alternative retirement plan (ARP) in place of participating in STRS Ohio. During this time, only 271 (28%) chose to opt out to an ARP; the remaining 709 (72%) chose membership in STRS Ohio.

E-MAIL NEWS SERVICE CONTINUES TO GROW January 2009 marks the first month that the number of STRS Ohio members who are registered for the e-mail news service exceeds 50,000. This service provides an easy way for members to stay current on important issues between the publication of member newsletters.

BOARD RETREAT DATES ANNOUNCED The Retirement Board will hold its annual retreat at STRS Ohio from Jan. 28-30. The meeting is open to the public.