Report from STRS on March Board meeting

From STRS, March 23, 2009
Subject: [News] March 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 March report follows.

MARCH BOARD NEWS

RETIREMENT BOARD BEGINS CONTINGENCY PLANNING PROCESS During its March meeting, the State Teachers Retirement Board began its long-term contingency planning process in response to the significant impact market losses have had on both the system's pension and health care funds.

As noted by staff during the board's discussion, the downturn in the global financial markets has been deeper and faster than projected even a few months ago -- and it has had an impact on public pension plans across the country.

At STRS Ohio, there are no short-term problems regarding the ability to pay current pension benefits when they are due. In fact, the value of a defined benefit pension plan to STRS Ohio's members has never been more apparent, as the devastating effect of the markets on defined contribution plan options (e.g., 401(k) plans) is seen everyday.

However, looking long term, the reduced level of investment assets, combined with future expected investment earnings and member and employer contributions, leave a shortfall in the funding of STRS Ohio benefits. Staff projects that the system's unfunded liability will increase to approximately $38 billion on July 1, 2009, from $18.2 billion on July 1, 2008, assuming the market loss is 25% for this fiscal year. This will result in a funded ratio (percentage of assets on hand to pay all benefits accrued by STRS Ohio members to date) of 58% and a funding period of infinity. This means that, unless changes are made, the system would eventually be unable to pay members' earned benefits.

As the Asset Allocation Study for STRS Ohio's investment portfolio nears completion, it is clear that the current expected long-term rate of return of 8% cannot be raised. As a result, the Retirement Board needs to look at options, other than higher investment returns, to strengthen the solvency of the pension fund. These options could include changes to contributions, the minimum retirement age, early retirement factors, the cost to purchase service credit, the retirement formula, the cost-of-living adjustment (COLA), or how final average salary is calculated. While it was noted that no singular change by itself could move the pension fund from infinity, combinations of changes would have an impact. It was also noted that most changes would require legislation.

The objective of the Retirement Board's planning process is to preserve the defined benefit plan and ensure the continuation of the STRS Ohio Health Care Program. As a result, the board asked the staff to begin bringing options to the board for its review at the April meeting, noting that everything is on the table. These options will take into consideration both pension and health care funding. Staff will also consider the "timing" of changes (immediate versus phased-in) and subsequent impact.

There was also agreement that input from the Health Care Advocates for STRS, as well as from individual members, would be encouraged during the board's deliberations in the coming months. Staff will also share what other public pension plans are doing to address their funding shortfalls.

HEALTH CARE PROGRAM CHANGES RECEIVE INITIAL REVIEW As noted above, the deterioration of the global markets has also impacted the Health Care Stabilization Fund, which supports the STRS Ohio Health Care Program. The life of the health care program is now projected to last until 2018. STRS Ohio staff believes changes in such areas as eligibility, plan design and premium subsidies should be considered to stem the loss of principal in the health care fund until additional funding can be found to sustain the program on a long-term basis.

During its March meeting, the board took its first look at possible changes. Three of the changes could be implemented as early as July 1, 2009, with others beginning on Jan. 1, 2010. The proposed changes for 2009 are:

- Eliminate postage-paid envelopes for mail-order prescriptions; members may still order refills online or by phone.

- Provide approximately 200 generic medications through Express Scripts' mail-order service, up to a 90-day supply, for a $9 copayment, versus the current $25 copayment. (This program would be similar to those offered at retail chain pharmacies.) This could save health care program enrollees about $500,000 each year.

- Require approximately 3,600 individuals who use high-cost specialty medications to treat complex and chronic diseases to receive them from CuraScript, a subsidiary of Express Scripts.

The board will continue its discussion at its April meeting

BOARD APPROVES ADDITIONAL CHANGE TO PBI PROGRAM For several months, the Retirement Board has been reviewing the Performance-Based Incentive (PBI) Program that it offers to eligible associates in its Investment Department. During this period, much of the discussion has focused on whether current compensation levels for these STRS Ohio associates (which are targeted at the bottom 25th percentile of the private market) should be maintained during this period of significant loss in the value of STRS Ohio's investment assets, which stood at $46.4 billion as of Feb. 28, 2009.

At its March meeting, the board approved an additional change to the PBI Program for fiscal year 2010, which begins on July 1, 2009. This change states that if STRS Ohio's total investment fund earns a positive absolute return, but the total market value of investment assets is less than $65 billion at June 30, 2010, then each PBI payment will be reduced by three percentage points for every $1 billion (and fraction thereof) of the shortfall from $65 billion.

At its April 2009 meeting, the board will be presented with the final fiscal year 2010 PBI Program document for approval.

BOARD BEGINS SEARCH FOR NEW INVESTMENT CONSULTANT At its March meeting, the process and timeline for choosing a new investment consultant to the board was approved. The board's current consultant, Russell Investment Group, informed the board in September 2008 that it did not plan on extending its current relationship with the board beyond the June 30, 2009, expiration date of its contract. Russell did agree to a contract extension through Dec. 31, 2009, in October to allow for completion of several significant investment projects and to give the board adequate time to conduct a search for a new consultant. The search timeline calls for requests for proposals to be issued in March 2009, with selection of a new investment consultant by the board in October 2009.

The firm or firms chosen will serve as a consultant to the board in three key areas: financial assets (equities and fixed income, as well as overall asset allocation), real estate assets and alternative investments.

RETIREMENTS APPROVED The Retirement Board approved 116 active members and 124 inactive members for service retirement benefits.