Saturday, June 16, 2012

Report on June 2012 STRS board meeting

From STRS, June 15, 2012

June Board News

Retirement Board Chair, Vice Chair Named
During its June meeting, the State Teachers Retirement Board elected Dale Price (Toledo Public Schools, Lucas County) as its vice chair for the coming year. According to Board Policies, Mark Hill (Worthington City Schools, Franklin County), who is currently serving as vice chair, automatically moves into the position of chair. Hill and Price will assume their new responsibilities on Sept. 1, 2012.

Retirement Board Accepts the Annual Investment Plan
The Retirement Board voted to accept the Investment Plan for fiscal year 2013 (July 1, 2012– June 30, 2013). The plan details staff's investment strategy for each asset class comprising the system's investment fund.

STRS Ohio staff expects only modest growth in the capital markets during fiscal year 2013. With the threat of global debt problems having a harmful effect on the markets, STRS Ohio will continue to closely monitor markets to assess the risk levels. Investment associates expect interest rates to remain low throughout the fiscal year. Staff will also begin to implement the recently completed STRS Ohio asset-liability study — consistent with the phased-in target weights. The new asset mix for the system's total fund will be a slightly higher risk-return portfolio with a decrease in broad U.S. equity holdings and modest increases in the international equity, private equity and opportunistic/diversified portfolios. Staff will also continue to monitor the progress of pension reform legislation. If reform changes are not promptly implemented, a more conservative portfolio would be recommended to meet the system's liquidity needs to pay benefits, as the asset-liability study noted.

A memo to the board reported that market volatility in late May/early June has somewhat changed market values, interest rates and expected returns in the Investment Plan. Staff will evaluate the need to issue an addendum to the annual Investment Plan once market levels are set on June 30, 2012.

In early July 2012, the Fiscal 2013 Investment Plan will be posted on
the STRS Ohio website. A copy of the plan can also be requested by calling STRS Ohio's Member Services Center toll-free at 1-888-227-7877.

Fiscal Year 2013 Budgets Adopted
The Retirement Board adopted the proposed budgets for fiscal year 2013 (July 1, 2012–June 30, 2013). The operating budget totals $90,513,400, which represents an increase of less than 1% over this year's operating budget. STRS Ohio's operating budgets have remained relatively flat for the past three fiscal years. The capital budget for fiscal year 2013 totals $1,845,700.

Throughout the fiscal year, the Retirement Board reviews each month's expenditures and year-to-date expenditure totals as part of its regular meetings. The information is also posted on STRS Ohio's website for members to view.

Retirement Board Approves Health Care Premiums for 2013
The Retirement Board approved the 2013 premiums for all plans offered through the STRS Ohio Health Care Program.
A complete list of these premiums is posted on the system's website, or can be obtained by calling STRS Ohio's Member Services Center toll-free at 1-888-227-7877. Additional information about the 2013 Health Care Program will be provided in upcoming newsletters and on the STRS Ohio website. In late October, all current enrollees will also receive personalized health care plan information in preparation for the fall open-enrollment period, which extends from Nov. 1–Nov. 20, 2012.

In determining premiums, annual health care cost trend rates, as well as the claims experience of plan enrollees, are taken into consideration. Plan changes approved by the board in April offset the increased costs associated with trend for most enrollees. Most benefit recipients, however, will see an increase in premiums due to reductions in the years of service subsidy approved in 2011.

Callan Associates Addresses STRS Ohio's Performance-Based Incentive Plan
The Retirement Board's investment consultant, Callan Associates, provided input on STRS Ohio's recently revised Performance-Based Incentive (PBI) Program for eligible Investment associates. Callan noted that for STRS Ohio to meet its long-term obligations, the fund must take on market risk and invest in securities rather than simply in cash. Callan added that STRS Ohio has to pay internal or external managers to invest these funds, and that STRS Ohio currently manages about 75%–80% of its assets internally. Callan's 2011 Investment Management Fee Survey indicates STRS Ohio's investment expenses are $117 million lower than what the average fund sponsor would spend to manage the same assets. In addition, a CEM Benchmarking study for 2010 estimates that STRS Ohio would spend about $100 million more than its current investment expenses if the fund chose to manage all of its assets with external investment managers.

In April, the Retirement Board adopted a revised PBI Program that will take effect in fiscal year 2013 for eligible Investment associates. Associates who are eligible for the PBI Program have a compensation plan comprised of a base-pay component and a variable or "at risk" component that is paid only when certain performance levels are achieved. The new PBI Program:

• Revises the current 100% "cutback" provision when total fund returns for a given year are negative, with a graduated reduction dependent on the level of negative returns; and

• Implements an additional cutback provision when the smoothed actuarial return is below 7.75%; and

• Removes the reduction to incentives paid if the total asset level is below $65 billion at the end of a fiscal year; and

• Eliminates the incentive enhancement factor that provided a larger incentive when returns exceeded certain thresholds.
The board and staff are expected to continue to study compensation for Investment associates during the upcoming fiscal year.

Retirements Approved
The Retirement Board approved 935 active members and 101 inactive members for retirement.

Other STRS Ohio News

Pension Legislation Waiting for House Action
In May, the Ohio Senate passed legislation that would incorporate the recommendations from the State Teachers Retirement Board designed to strengthen the financial condition of the pension fund. Sponsored by Senate President Tom Niehaus (R-New Richmond) and Senate Minority Leader Eric Kearney (D-Cincinnati), Sub. Senate Bill 342 moved quickly once introduced and passed the Senate on May 16 by a vote of 31–2.

The next step in the process for the bill to become law is for the Ohio House of Representatives to either commence hearings on Sub. S.B. 342 or restart hearings on House Bill 69. H.B. 69 was introduced by Rep. Lynn Wachtmann (R-Napoleon) in early 2011 and was heard fairly extensively in a subcommittee of the House Health and Aging Committee just after introduction. In the interim, the Ohio Retirement Study Council (ORSC) hired a consultant to review the recommendations submitted to the legislature by the five retirement systems. The report is scheduled to be submitted to the ORSC in July. The House is not expected to act on legislation before the consultant issues a report.

Updated Retirement Benefit Calculator Available on STRS Ohio Website
STRS Ohio updated a valuable tool for members to use when planning for retirement. The retirement benefit calculator on STRS Ohio's website can now calculate retirement projections for Aug. 1, 2015, and later — based on the board-approved pension reform proposal reflected in Sub. S.B. 342. In addition to calculating the 2.2% multiplier and five-year FAS, the calculator allows members to measure how they will be affected if they choose to retire during an early retirement window with the newly proposed reduction factors.
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