Report on March 2012 STRS Board Meeting

From STRS, March 26, 2012

March Board News

Retirement Board Reviews Pension Reform Plan Design Changes

As previously reported in Board News, the pension reform proposal passed by the State Teachers Retirement Board in January 2011 no longer meets the 30-year funding period required by the Ohio Legislature. At its March 22, 2012, meeting, the Retirement Board discussed various revisions to the current proposal, aimed at reaching the 30-year amortization goal.

Earlier this month STRS Ohio staff presented several scenarios to reduce the system's liabilities and funding period. The Retirement Board asked for further study — including a potential cap on the cost-of-living adjustment (COLA) that is paid in retirement, and/or a one-year COLA suspension. Staff was also asked to consider ways to smooth the transition to new retirement eligibility rules that will include a longer teaching career and an age requirement to qualify for retirement.

All of the plan design scenarios reviewed at the March 22 meeting that meet the 30-year funding requirement include changes to the COLA beyond the reduction to 2% that is contained in the January 2011 board proposal. Among the plan design changes the board has considered, the COLA has by far the greatest financial impact because it not only affects current retirees, but also future retirees. Additional considerations include member contribution phase-in, age and service eligibility and giving the board authority to adjust plan design in the future.

The board directed staff to continue modeling plan design changes for review at the April board meeting and to meet with the Healthcare and Pension Advocates for STRS (HPA), a group representing various constituent groups with interest in STRS Ohio, to provide feedback on the board's plan design alternatives that were discussed. Earlier this year, Ohio Senate leaders told STRS Ohio that any legislative action on pension reform would require broad constituent support.

Staff Uses Member Survey Results to Develop Proposal for Changes to the STRS Ohio Health Care Program for 2013

Member Benefits staff presented the Retirement Board with recommendations for several changes for the STRS Ohio Health Care Program in 2013 that are responsive to member and retiree input received in the December 2011 annual member survey. In the survey, members and retirees were asked to consider and rate several changes that could be implemented to extend the life of the Health Care Stabilization Fund. Among the top responses rated as having the "most merit" by both active members and retirees were: increasing retirees' premiums, deductibles, copayments or coinsurance; and active members working longer before being eligible for health care.

In December 2011, the Retirement Board approved a strategic framework to guide the development of a long-term strategic plan for the STRS Ohio Health Care Program. A key element of that framework is to extend the projected solvency of the program to 65 or more years by 2025. The projected savings from the changes outlined below would make significant progress toward that goal.

With the member survey and board's strategic framework in mind, staff recommended the following changes for plan year 2013 and asked the board to vote on these items at its April meeting:

• Reducing the subsidy multiplier by 0.1%, to 2.3% per year of service — a retiree with 30 years or more of service would receive a subsidy in 2013 of 69% of the total cost of the plan. The 2012 subsidy for a retiree with 30 years of service is 72%.

• Increasing annual non-Medicare deductible and out-of-pocket limits — would set new amounts for the Medical Mutual Basic Plan, the Medical Mutual Plus Plan and the STRS Ohio Prescription Drug Program:

– Basic Plan deductible would increase to $1,750 from $1,500, and the out-of-pocket maximum would increase to $2,900 from $2,500.

– Plus Plan deductible would increase to $1,000 from $500, and the out-of-pocket maximum would increase to $2,100 from $1,500.

– Prescription Drug Program deductible and out-of-pocket maximum would be indexed to standard Medicare coverage levels.

• Increasing physician copayments under the Aetna Medicare Plan (PPO) — would increase physician office copayment to $20 from $15 and would implement a $40 out-of-network physician copayment in Ohio.

• Adding urgent care and emergency room copayment per occurrence to the Basic and Plus Plans — $35 for urgent care and $50 for emergency room copayment per occurrence, then subject to deductible and coinsurance (emergency room copayments waived if admitted). This is consistent with the Aetna Medicare Plan (PPO).

• Combining Tier 3 and Tier 4 drugs as non-preferred brand-name drugs with 100% coinsurance. In addition, 120 drugs would move to Tier 3 from Tier 2. This change would encourage the use of generic drugs.

• Revising proton pump inhibitor (PPI) program — would discontinue the $5 over-the-counter (OTC) Prilosec program due to the increase in availability of generics and would cover generics/OTC drugs at standard copayment levels.

• Moving the non-Medicare enrollees to a narrower retail pharmacy network beginning June 1, 2012 — this would impact fewer than 250 enrollees who would need to change their pharmacy.

The recommended plan changes are projected to save about $31 million annually.

Pension Trustee Advisors updates ORSC, Meets with STRS Ohio

On March 14, Flick Fornia of Pension Trustee Advisors (PTA), made a presentation on pension reform to the Ohio Retirement Study Council (ORSC) that largely supported defined benefit plans. At the ORSC's request, PTA is conducting a review of the pension reform plans that the five Ohio retirement systems have proposed. In his presentation to the Council, Fornia covered general issues, rather than items specific to any one system's plan.

Fornia provided case studies of plan designs from systems in other states along with steps some of those systems took to improve solvency. He said that Ohio's retirement eligibility rules and the typical benefit with 30 years of service are consistent with other states that don't participate in Social Security. Fornia told the Council that the defined benefit model is the predominant model among the typical statewide systems. He cited economic efficiency, the ability to better manage longevity risk, the effectiveness of portfolio diversification and the strength of professional asset management as advantages of defined benefit plans. Disadvantages included the chance that large unfunded liabilities can occur and that often times, the employer is responsible for additional contributions necessary to meet the pension promise.

Fornia later met with STRS Ohio staff to ask more in-depth questions about the board's proposed pension reform plan. Members of the senior management team provided answers and will continue to research any outstanding questions. PTA is expected to complete its study of the pension systems and provide a report to the ORSC in June or July.

Tim Myers Unopposed for Retirement Board Election

In 2008, Tim Myers was elected to a contributing member seat on the Retirement Board with a term that runs through Aug. 31, 2012. Myers was the only STRS Ohio contributing member to file enough completed petitions for the 2012 election for this seat by the deadline of Feb. 24, 2012. Therefore, according to Ohio statute, no election needs to be held since he is unopposed and he will continue in this seat through Aug. 31, 2016. Myers currently provides computer training for middle school students at Elida Local Schools.

Retirements Approved

The Retirement Board approved 218 active members and 126 inactive members for retirement.