April 15, 2005

Retirement Board Makes Decision Regarding Medicare Part D for 2006
For several months, the State Teachers Retirement Board has been reviewing the prescription drug options contained in Medicare Part D. At its April meeting, the Retirement Board voted unanimously to file for the 28% subsidy for annual prescription drug expenses incurred in 2006 by STRS Ohio Health Care Program participants who are enrolled in Medicare. One factor in the decision was the significant amount of savings this option represents for the health care program. The 28% subsidy should result in at least a $33 million savings to the Health Care Stabilization Fund, which extends the solvency of the fund, thus benefiting both current and future retirees.

The board also noted that this option provides the least amount of disruption to STRS Ohio members. STRS Ohio members can continue to participate in the prescription drug programs they currently have during calendar year 2006. The board noted this period of stability was particularly advantageous to members during the first year of the Medicare Part D Program, which could face some rough spots in implementation. Next year, the board will reexamine the Medicare Part D Program to determine the best way to integrate it into the STRS Ohio Health Care Program.

To be eligible for the 28% subsidy from Medicare, STRS Ohio will need to increase the value of the prescription drug benefits contained in the Basic Plans offered by Aetna and Medical Mutual in 2006. In May, staff will present these changes to the board for its approval.

This summer and during the fall health care open-enrollment period, additional information about Medicare Part D will be provided to enrollees in the STRS Ohio Health Care Program.

Board Begins Review of STRS Ohio Health Care Strategic Plan for 2007–2009
In April, STRS Ohio staff presented the draft STRS Ohio Health Care Strategic Plan for 2007–2009. The plan is built on the Guiding Principles and Goals for the STRS Ohio Health Care Program adopted in March by the Retirement Board. The plan contains seven objectives and 17 strategies that address:

The board will continue its discussion on the plan at its May meeting.

Interest Rate for Defined Contribution Allocation Choice Set
One of the options STRS Ohio members participating in the Defined Contribution or Combined Plan have for their contribution allocation is the STRS Total Guaranteed Return Choice. This option provides a guaranteed interest rate on contributions and transfers made in a given year. In exchange for this protection against any possible negative returns, participants must “lock in” their contributions and transfers made during the year until the end of a five-year term. The interest rate is paid on the contributions and transfers until the end of the five-year term. For the STRS Total Guaranteed Return Choice 2010, which begins on July 1, 2005, the Retirement Board approved an interest rate of 5.5%.

The board also approved changing the benchmark for the STRS Large-Cap Core Choice allocation option to the Russell 1000 Index from the current index, the Russell Top 200 Index.

As of March 2005, there are 13,575 participants in the Defined Contribution and Combined Plans. Total assets in the plan stand at about $147 million.

Investment Consultant Provides Favorable Review of Real Estate Program
Russell Investment Group, the Retirement Board’s investment consultant, provided the results of its performance review of STRS Ohio’s real estate portfolio during the April meeting. The review covered performance for the period ending Dec. 31, 2004. Russell noted that STRS Ohio’s real estate portfolio, which is managed internally by STRS Ohio associates, outperformed its benchmark over the past one-, three-, five- and 10-year periods and is the best performing asset class over the long term.

Retirement, Investment Transactions Approved
The Retirement Board approved the following retirements and investment transactions:

Additional Items Reported at the Meeting by Executive Director Damon Asbury

ORSC Receives 30-Year Funding Report and Budgets
Executive Director Damon Asbury presented two reports to the Ohio Retirement Study Council (ORSC) at its April 13 meeting. (The ORSC is the legislative oversight committee for the five public pension systems in Ohio.)

The first report, in compliance with Am. Sub. S.B. 133, covered the proposed STRS Ohio 2005–2006 budgets. During the presentation, it was noted that the Retirement Board’s goal with the budgets is to operate in all areas as “lean” as possible without jeopardizing member benefits or services, adversely impacting investment operations, or failing to meet fiduciary and legal requirements. It was also noted that 2005–2006 is the third consecutive year for an operating budget decrease and that the proposed spending plan is the lowest in five years for STRS Ohio.

The second presentation addressed STRS Ohio’s funding status. As specified in Section 3307.512, Revised Code, STRS Ohio must present a report to the ORSC in any year when the amortization period for the pension unfunded liability exceeds 30 years. This report included details of previous actions taken by the Retirement Board to address the unfunded liability while continuing some support for health care benefits. Reducing the funding period quickly is particularly challenging for STRS Ohio compared to other retirement systems because STRS Ohio members typically have longer service, higher earnings and less turnover. It was reported that the Retirement Board has authorized a comprehensive asset/liability study to identify the optimal mix of investment allocations to meet future liabilities. Further, the system will be evaluating the actuarial liability incurred for purchased service credit, as well as monitoring retirement trends as part of an analysis of the overall cost or benefit to the system of the enhanced 35-year benefit formula.

During the presentation, it was noted that the Retirement Board is working with the Health Care Advocates for STRS and other system stakeholders to build consensus on any needed future changes to pension and health care funding.

A complete copy of the 30-year funding report is now posted on the STRS Ohio Web site.

Possible Changes in Store for the Ohio Congressional Delegation
A change to the Ohio congressional delegation roster is likely to take place in the not-too-distant future as a result of the March 17 announcement by President Bush nominating Cincinnati-area House Republican Rob Portman to the post of U.S. Trade Representative. Rep. Portman must gain Senate confirmation for the position. Assuming his confirmation, Gov. Taft will then schedule a special election for the voters in the district to elect a successor. It has been noted among the public pension community that the lawmaker’s departure will certainly be a loss of a good friend. Rep. Portman’s tenure in the House is marked most notably by his bipartisan efforts with Rep. Ben Cardin, D-MD, on pension issues and he is the past recipient of a distinguished service award from the Coalition to Preserve Retirement Security — the group opposed to mandatory Social Security coverage.

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