Report from STRS: April Board meeting

From STRS, April 27, 2009
Subject: [News] April 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 April report follows.

APRIL BOARD NEWS

PROPOSED OPERATING BUDGET FOR FISCAL YEAR 2010 REFLECTS 11% DECREASE
At its April 23, 2009, meeting the State Teachers Retirement Board received its first look at the proposed system budgets for fiscal year 2010 (July 1, 2009-June 30, 2010). The proposed operating budget totals $87,920,000, which represents a $10.9 million, or 11% decrease, over the current year budget and is the lowest operating budget in four years. It also represents a 2.5% reduction (almost $2.3 million) from projected expenditures for this current year. The proposed capital budget for fiscal 2010 totals $1,418,900. Additionally, the system expects to spend $2,755,000 on the project that is under way to replace STRS Ohio's obsolete pension management computer system.

Contributing significantly to the reduced operating expenditures are: (1) the current associate head count freeze; (2) associate salary freeze effective through June 30, 2010, and (3) lower Performance-Based Incentive (PBI) Program payments to eligible Investment Department associates due to the suspension of this year's PBI program beyond Jan. 31, 2009. (These PBI payments are not usually voted on by the board until September, which is why estimated payments are included in next year's budget.) Current restrictions on out-of-state travel for STRS Ohio associates also contributed to the decline, as did significant reductions in expenditures for outside professional and technical services.

The Retirement Board will be asked to approve the budgets at its June meeting.

LONG-TERM CONTINGENCY PLANNING DISCUSSION CONTINUES
When the Retirement Board and staff began looking at options for addressing future liabilities of the pension fund in March, it was noted that "everything was on the table" and that no singular change by itself could improve the funding of the pension fund significantly -- but combinations of changes could have an impact. Board members reviewed examples of how a combination of changes would affect the pension and health care funds during the April meeting.

Sample scenarios included an overall 4% increase in contributions, raising the minimum retirement age to 60, calculating final average salary based on five years versus the current three, reducing the cost-of-living adjustment for retirees to 2% along with delaying its start until the retiree is age 65, and putting a flat 2.2% formula in place for all years of service. The staff noted that these are not the only options the board may consider and not all these scenarios may be included in a final package. Future discussions may also take into account possible "grandfathering" for members close to retirement, as well as the possibility of phasing-in plan design and/or contribution increases. The sample options presented to the board were designed to give some sense of the cumulative effect various combinations of changes can have on reducing the liabilities of the pension fund and also possibly allow additional contributions to go toward the STRS Ohio Health Care Program. The board asked for a number of additional variations to be looked at during subsequent meetings.

ALL FIVE OHIO PUBLIC PENSION SYSTEMS NOW ENGAGED IN LONG-TERM FUNDING DISCUSSIONS
At the April Ohio Retirement Study Council (ORSC) meeting, the Council heard a review of the semiannual investment performance of the five retirement systems through Dec. 31, 2008. (ORSC is the legislative oversight body for the Ohio systems.) Paul Morgan, senior consultant and director of capital markets for Evaluation Associates, recommended to ORSC members that, due to the low investment returns over the past 10 years (which includes the down market period of 2001-2003), coupled with the economic outlook, all five systems should reevaluate their investment, funding and benefit policies. In response to this, ORSC Chair Todd Book and the Council passed a motion to have ORSC staff work with the Ohio Public Employees Retirement System, School Employees Retirement System and Highway Patrol Retirement System in the same manner they are currently working with the Ohio Police & Fire Pension Fund and STRS Ohio. The goal is to develop proposals that would reduce the systems' respective funding periods for meeting their long-term obligations. With all Ohio systems now engaged in conversation with the ORSC staff, it is possible that any future proposed pension legislation could include changes for all five pension systems.

VALUE OF INVESTMENT ASSETS IMPROVES IN MARCH
The preliminary value of STRS Ohio's investment assets increased slightly in March -- to about $47.6 billion from $46.3 billion at the end of February -- due to a positive return for the month. While it is difficult to predict if the worst is over in the markets, there are some positive signs. Credit markets are slowly beginning to function, interest rates are low, energy prices are low, and inflation is very benign. The U.S. stock market has risen 25% from its low point on March 6, 2009.

The steep decline in both U.S. and international stock markets has caused some STRS Ohio members to suggest that the pension fund should move the majority of its assets to more "conservative" investments until the stock markets recover. However, it is difficult, if not impossible, to time the markets. And, just missing a few days of market upturns can have a significant impact on an investment fund, as illustrated in the accompanying chart. (This chart can be viewed at: http://www.strsoh.org/boardnews/bn_current.html#Investments)

As the Retirement Board nears the completion of its current Asset Allocation Study, Russell Investments, the board's investment consultant, is recommending some modifications to the overall asset allocation. However, achieving the needed 8% return over the long-term on the investment fund requires that a diversified portfolio be maintained, with more than half of the funds being invested in domestic and international stocks. The board is expected to vote on the recommendations contained in the Asset Allocation Study at its May 2009 meeting.

BOARD APPROVES HEALTH CARE PROGRAM CHANGES FOR 2009 AND 2010
During April's meeting, STRS Ohio staff and the board continued to review proposed changes to the STRS Ohio Health Care Program 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. Following the staff's presentation, the board approved several changes.

The first group of changes will begin this calendar year (2009) and focus on the Express Scripts prescription drug program used by enrollees in the Aetna, Medical Mutual and Paramount health care plans. These changes are:

- Eliminate pre-addressed, postage-paid envelopes for mail-order prescriptions and replace with pre-addressed-only envelopes.

- Require exclusive use of CuraScript (a subsidiary of Express Scripts) for purchasing specialty medications. More than 8,400 enrollees already use CuraScript; however, 3,600 individuals will be required to move their specialty medication prescriptions they receive from a retail pharmacy to CuraScript.

- Provide approximately 230 generic medications through mail order, up to a 90-day supply, for a $9 copayment versus the current $25 copayment. (This program will be similar to those offered at retail chain pharmacies.)

For calendar year 2010, the Retirement Board approved the following:

- Continue STRS Ohio's participation in the Medicare Part D subsidy program. This means that individuals who are participating in STRS Ohio's Health Care Program do not need to enroll in a separate Medicare Part D prescription drug plan.

- Continue the Health Care Assistance Program with the same coverage level, eligibility requirements and $0 monthly premium.

- Continue the 2009 premium reimbursement amounts for Medicare Part B in 2010. 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.

Finally, the board also approved several modifications to the Express Scripts prescription drug plan for calendar year 2010, as follows:

- Provide a single drug plan for the Aetna and Medical Mutual Plus and Basic Plans, as well as Paramount health care plans, that includes a $150 deductible (generics are excluded); a $3,000 out-of-pocket maximum; and changes Tier 3 drugs (non-forumulary brand-name drugs) to 50% coinsurance, with a maximum of $100 for retail and $200 for mail order. The retail and mail-order copayments for Tier 1 and Tier 2 drugs will remain the same.

- Implement step therapies to new users of applicable drugs in six drug classes.

- Create a Tier 4 level of coverage, where program enrollees will pay the full cost of the drugs, but at the lower, negotiated discount rates generated by the contract between Express Scripts and STRS Ohio. Drugs in this category will include non-sedating antihistamines (e.g., Allegra and Clarinex); erectile dysfunction drugs; and drugs that are for cosmetic purposes, promote hair growth or treat male pattern baldness, depigment skin and for smoking cessation.

Additional details about changes for 2009 and 2010 will be provided to STRS Ohio members in future newsletters, on the STRS Ohio Web site and special mailings.

RETIREMENTS APPROVED
The Retirement Board approved 99 active members and 91 inactive members for service retirement benefits.