[News] February Board News Details Retirement Board Actions and Discussions
From STRS, February 24, 2009
Last week, the State Teachers Retirement Board held its monthly meeting.Following the regularly scheduled meetings, a report titled "Board News" isposted on the STRS Ohio Web site, as well as mailed to a number of members andeducation organization representatives who have requested it. As a member ofSTRS Ohio with an e-mail address on file, you will also receive this report eachmonth. The February report follows.
FEBRUARY BOARD NEWS
CONTINUED DETERIORATION OF THE GLOBAL MARKETS TRIGGERS LONG-TERM CONTINGENCYPLANNING PROCESS
The current impact of the downturn in global financial markets on STRS Ohio'spension and health care funds dominated the agenda at the Retirement Board'smeeting in February 2009. As noted by STRS Ohio staff during the meeting, thedownturn is much deeper and faster than most economists and investmentprofessionals were projecting even a few months ago. The impact on individuals'personal savings, as well as on institutional investors and pension funds acrossthe country, has been exponential. At STRS Ohio, the preliminary market value ofinvestment assets stands at $49.7 billion as of Jan. 31, 2009; the rate ofreturn for the fiscal year to date (July 1, 2008-Jan. 31, 2009) is -27.7%. Thevalue of the investment assets reflects a drop of $20.7 billion from the closeof fiscal year 2008 on June 30, when assets totaled about $70.4 billion.Unfortunately, most indicators suggest that the eventual market recovery has notyet begun, and when it does, it will be long and gradual.
As part of its discussions with the board in February, staff reiterated thatcurrent retirees' pensions are safe; there are no short-term problems regardingthe cash flow needed to pay current pension benefits when they are due.
However, the next actuarial valuation of pension benefits in October 2009 islikely to show that the reduced level of assets, along with the normallyexpected rate of growth, may not be sufficient to amortize the unfundedliability over a reasonable period of time.
To determine a pension fund's solvency, two common measurements are used:funding period and funded ratio. The funding period is the number of yearsrequired to pay off the pension fund's unfunded actuarial accrued liabilities.(In layman's terms, this would be similar to a home mortgage.) The funded ratiois the market-related (smoothed) value of assets compared to liabilities. In short, it is the percentage of assets STRS Ohio has on hand to pay all benefitsaccrued by STRS Ohio members to date -- even though the liabilities are notpayable all at once.
At the end of fiscal year 2008, STRS Ohio's pension fund had a funding period of28.3 years and a funded ratio of 80.1%. However, the Retirement Board alsoundertook a five-year actuarial experience review that was completed in October2008. This led the board to adopt changes to some actuarial assumptions,including payroll growth and retiree life expectancy. These changes to reflectexpected future experience resulted in the final actuarial valuation for thepension fund showing a funding period of 41.2 years and a funded ratio of 79% asof June 30, 2008.
At the end of fiscal year 2008, defined benefit assets were $66.8 billion, andSTRS Ohio expected to pay future benefits over 41 years by achieving an 8%annual rate of return. However, with assets currently under $50 billion, assumedinvestment returns of 8% going forward leave a shortfall.
HEALTH CARE PROGRAM FUNDING ALSO AFFECTED BY MARKET ISSUESSTRS
Ohio's Health Care Stabilization Fund has been similarly impacted by themarket downturn. Health care costs for the STRS Ohio Health Care Program arepaid out of this fund. Currently, monies for the fund come from premiums chargedto STRS Ohio retirees and their dependents who are enrolled in the program, 1%of payroll from employer contributions and investment earnings on these funds.Each year, the Retirement Board also receives an actuarial valuation report onthis fund. This report tells the board the solvency period of the fund, and thepercentage of contributions (known as annual required contributions or ARC)needed to fund the health care program on a long-term basis.
During calendar year 2008, the health care fund was impacted by investmentlosses, as well as losses generated by changes in actuarial assumptions from thefive-year experience review noted previously. The results of the most recentvaluation, which the board received at the February meeting, showed that thehealth care fund as of Jan. 1, 2009, stood at $2.69 billion, reflecting areduction of $1.34 billion from its starting value of slightly more than $4billion one year earlier. In only one year, the projected life of the STRS OhioHealth Care Program was shortened to nine years from 13 and is now projected tolast until 2018. Further, the annual required contribution (ARC) is now 5.01%(assuming an investment return of 8%), slightly exceeding the 5% contributionincrease that is being requested in the health care legislation proposed by theRetirement Board and supported by the Health Care Advocates for STRS.
STRS Ohio is still seeking an ongoing, dedicated revenue stream for the HealthCare Stabilization Fund. However, for a contribution increase to succeed inmeeting the program's financial needs, the ARC must be lowered. Currently, thefunding shortfall is being covered by withdrawing principal from the Health CareStabilization Fund. Reliance on the principal rapidly depletes the health carefund, leaving only the 1% employer contribution, enrollee premiums and MedicarePart D subsidy to sustain the fund. With the current 1% employer contributionand no program changes, the ARC will increase further in 2010 and every yearthereafter.
Therefore, at the February meeting, staff proposed that, in addition to seekinga contribution increase, the board must also begin looking at long-term changesto coverage, premium subsidies and eligibility for the health care program dueto its deteriorated financial situation. The initial goal is program changesthat achieve a minimum of $83 million in program cuts. This would return the ARCbelow 5% and preserve the principal balance in the health care fund in calendaryear 2010. If additional contributions to the fund are not found, even moresignificant changes will need to occur in future years. By beginning thediscussion now, STRS Ohio can give its members some lead time for retirementplanning.
CONTINGENCY PLANNING PROCESS WILL BEGIN IN MARCHIn recognition of the difficult economic times and its current and potentialimpact on STRS Ohio, the board will implement a Long-Term Fiduciary andFinancial Contingency Planning Process that it approved during the January 2009planning retreat. This process provides a framework for the board to evaluateoptions to restore prudent funding levels for the pension fund over the longterm, as well as ensure the continuation of the health care program.
The contingency planning process provides the transparency and structure thatwill allow the Retirement Board and staff to objectively evaluate the pros andcons of possible changes to plan design or future benefits. The firstdiscussions will be held at the March 2009 board meeting.
BOARD APPROVES STAFF'S RECOMMENDATIONS FOR REDUCING OPERATING EXPENDITURES
At the February meeting, STRS Ohio Executive Director Michael J. Nehf presentedseveral recommendations designed primarily to reduce STRS Ohio's operatingexpenditures. The changes, which were approved by the board, include:
- Implementation of an associate head-count freeze at the current number of 605associates, effective immediately;
- Implementation of a salary freeze for all associates effective immediatelythrough June 30, 2010; and
- Implementation of a standard 40-hour workweek across the organization,effective Jan. 1, 2010. With the latter change, there will be no additionalcompensation provided to associates currently working 37.5 hours per week.The board also ratified the Friday following Thanksgiving as an STRS Ohio paidholiday in accordance with past practice over the last 30 years. With thischange, STRS Ohio's combined total for holidays/floating holidays/personal daysis still comparable to its sister pension systems, the State of Ohio and theTreasurer's Office. Finally, the funding structure of the current associateLong-Term Disability Plan will be changed to partial self-funding, effectiveApril 1, 2009. Estimated savings to STRS Ohio will be approximately $120,000over the next three years.
RETIREMENTS APPROVEDThe Retirement Board approved 111 active members and 106 inactive members forservice retirement benefits.
Last week, the State Teachers Retirement Board held its monthly meeting.Following the regularly scheduled meetings, a report titled "Board News" isposted on the STRS Ohio Web site, as well as mailed to a number of members andeducation organization representatives who have requested it. As a member ofSTRS Ohio with an e-mail address on file, you will also receive this report eachmonth. The February report follows.
FEBRUARY BOARD NEWS
CONTINUED DETERIORATION OF THE GLOBAL MARKETS TRIGGERS LONG-TERM CONTINGENCYPLANNING PROCESS
The current impact of the downturn in global financial markets on STRS Ohio'spension and health care funds dominated the agenda at the Retirement Board'smeeting in February 2009. As noted by STRS Ohio staff during the meeting, thedownturn is much deeper and faster than most economists and investmentprofessionals were projecting even a few months ago. The impact on individuals'personal savings, as well as on institutional investors and pension funds acrossthe country, has been exponential. At STRS Ohio, the preliminary market value ofinvestment assets stands at $49.7 billion as of Jan. 31, 2009; the rate ofreturn for the fiscal year to date (July 1, 2008-Jan. 31, 2009) is -27.7%. Thevalue of the investment assets reflects a drop of $20.7 billion from the closeof fiscal year 2008 on June 30, when assets totaled about $70.4 billion.Unfortunately, most indicators suggest that the eventual market recovery has notyet begun, and when it does, it will be long and gradual.
As part of its discussions with the board in February, staff reiterated thatcurrent retirees' pensions are safe; there are no short-term problems regardingthe cash flow needed to pay current pension benefits when they are due.
However, the next actuarial valuation of pension benefits in October 2009 islikely to show that the reduced level of assets, along with the normallyexpected rate of growth, may not be sufficient to amortize the unfundedliability over a reasonable period of time.
To determine a pension fund's solvency, two common measurements are used:funding period and funded ratio. The funding period is the number of yearsrequired to pay off the pension fund's unfunded actuarial accrued liabilities.(In layman's terms, this would be similar to a home mortgage.) The funded ratiois the market-related (smoothed) value of assets compared to liabilities. In short, it is the percentage of assets STRS Ohio has on hand to pay all benefitsaccrued by STRS Ohio members to date -- even though the liabilities are notpayable all at once.
At the end of fiscal year 2008, STRS Ohio's pension fund had a funding period of28.3 years and a funded ratio of 80.1%. However, the Retirement Board alsoundertook a five-year actuarial experience review that was completed in October2008. This led the board to adopt changes to some actuarial assumptions,including payroll growth and retiree life expectancy. These changes to reflectexpected future experience resulted in the final actuarial valuation for thepension fund showing a funding period of 41.2 years and a funded ratio of 79% asof June 30, 2008.
At the end of fiscal year 2008, defined benefit assets were $66.8 billion, andSTRS Ohio expected to pay future benefits over 41 years by achieving an 8%annual rate of return. However, with assets currently under $50 billion, assumedinvestment returns of 8% going forward leave a shortfall.
HEALTH CARE PROGRAM FUNDING ALSO AFFECTED BY MARKET ISSUESSTRS
Ohio's Health Care Stabilization Fund has been similarly impacted by themarket downturn. Health care costs for the STRS Ohio Health Care Program arepaid out of this fund. Currently, monies for the fund come from premiums chargedto STRS Ohio retirees and their dependents who are enrolled in the program, 1%of payroll from employer contributions and investment earnings on these funds.Each year, the Retirement Board also receives an actuarial valuation report onthis fund. This report tells the board the solvency period of the fund, and thepercentage of contributions (known as annual required contributions or ARC)needed to fund the health care program on a long-term basis.
During calendar year 2008, the health care fund was impacted by investmentlosses, as well as losses generated by changes in actuarial assumptions from thefive-year experience review noted previously. The results of the most recentvaluation, which the board received at the February meeting, showed that thehealth care fund as of Jan. 1, 2009, stood at $2.69 billion, reflecting areduction of $1.34 billion from its starting value of slightly more than $4billion one year earlier. In only one year, the projected life of the STRS OhioHealth Care Program was shortened to nine years from 13 and is now projected tolast until 2018. Further, the annual required contribution (ARC) is now 5.01%(assuming an investment return of 8%), slightly exceeding the 5% contributionincrease that is being requested in the health care legislation proposed by theRetirement Board and supported by the Health Care Advocates for STRS.
STRS Ohio is still seeking an ongoing, dedicated revenue stream for the HealthCare Stabilization Fund. However, for a contribution increase to succeed inmeeting the program's financial needs, the ARC must be lowered. Currently, thefunding shortfall is being covered by withdrawing principal from the Health CareStabilization Fund. Reliance on the principal rapidly depletes the health carefund, leaving only the 1% employer contribution, enrollee premiums and MedicarePart D subsidy to sustain the fund. With the current 1% employer contributionand no program changes, the ARC will increase further in 2010 and every yearthereafter.
Therefore, at the February meeting, staff proposed that, in addition to seekinga contribution increase, the board must also begin looking at long-term changesto coverage, premium subsidies and eligibility for the health care program dueto its deteriorated financial situation. The initial goal is program changesthat achieve a minimum of $83 million in program cuts. This would return the ARCbelow 5% and preserve the principal balance in the health care fund in calendaryear 2010. If additional contributions to the fund are not found, even moresignificant changes will need to occur in future years. By beginning thediscussion now, STRS Ohio can give its members some lead time for retirementplanning.
CONTINGENCY PLANNING PROCESS WILL BEGIN IN MARCHIn recognition of the difficult economic times and its current and potentialimpact on STRS Ohio, the board will implement a Long-Term Fiduciary andFinancial Contingency Planning Process that it approved during the January 2009planning retreat. This process provides a framework for the board to evaluateoptions to restore prudent funding levels for the pension fund over the longterm, as well as ensure the continuation of the health care program.
The contingency planning process provides the transparency and structure thatwill allow the Retirement Board and staff to objectively evaluate the pros andcons of possible changes to plan design or future benefits. The firstdiscussions will be held at the March 2009 board meeting.
BOARD APPROVES STAFF'S RECOMMENDATIONS FOR REDUCING OPERATING EXPENDITURES
At the February meeting, STRS Ohio Executive Director Michael J. Nehf presentedseveral recommendations designed primarily to reduce STRS Ohio's operatingexpenditures. The changes, which were approved by the board, include:
- Implementation of an associate head-count freeze at the current number of 605associates, effective immediately;
- Implementation of a salary freeze for all associates effective immediatelythrough June 30, 2010; and
- Implementation of a standard 40-hour workweek across the organization,effective Jan. 1, 2010. With the latter change, there will be no additionalcompensation provided to associates currently working 37.5 hours per week.The board also ratified the Friday following Thanksgiving as an STRS Ohio paidholiday in accordance with past practice over the last 30 years. With thischange, STRS Ohio's combined total for holidays/floating holidays/personal daysis still comparable to its sister pension systems, the State of Ohio and theTreasurer's Office. Finally, the funding structure of the current associateLong-Term Disability Plan will be changed to partial self-funding, effectiveApril 1, 2009. Estimated savings to STRS Ohio will be approximately $120,000over the next three years.
RETIREMENTS APPROVEDThe Retirement Board approved 111 active members and 106 inactive members forservice retirement benefits.
posted by Kathie Bracy at 6:06 PM
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