Feb. 18, 2005

Board Approves Change to Reemployed Retirees’ Lump-Sum Payments and Monthly Annuities
During its Benefits Committee meeting, the Retirement Board was presented an overview of Amended Substitute H.B. 449, which becomes effective April 11, 2005. The new law enables reemployed retirees to receive a lump-sum payment of member contributions and interest before age 65. The legislation also gives the Retirement Board the authority to set the amount of matching funds that is included in the reemployed retiree’s lump-sum payment or monthly annuity that is paid at age 65 or later. Currently, reemployed retirees receive a 100% match.

To bring equity between the funding of the reemployed retiree benefit and the active member benefit, staff recommended that reemployed retirees receive a 50% match on contributions plus interest when determining the payment of a lump-sum payment or monthly annuity benefit. The breakdown of the employer contribution on a reemployed benefit would be 5% to the reemployed benefit, 8% to the unfunded liability and 1% applied to health care. The board approved the staff’s recommendation, effective July 1, 2005. Contributions made through June 30, 2005, will still receive the 100% match plus interest. Contributions made July 1, 2005, or later will receive the 50% match plus interest.

Retirement Board Receives Health Care Program Actuarial Valuation
Kim Nicholl, principal and consulting actuary with Mellon Human Resources and Investor Solutions, presented the actuarial valuation of the STRS Ohio Health Care Program as of Jan. 1, 2005. The report noted that the Health Care Stabilization Fund is forecasted to remain solvent until 2018.

STRS Ohio Taking a Leadership Role in the Formation of a National Health Care Group
STRS Ohio staff are playing a pivotal role in the formation of the Public Sector Health Care Roundtable. The group’s purpose is to create a large consortium of public sector health care payers for the purpose of monitoring federal health care proposals and influencing federal policymakers about issues that directly impact public sector health care plans. More than 20 plan sponsors have expressed interest in the Roundtable.

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

• 30 disability retirements were granted.
• 90 active members were approved for service retirement; 32 inactive retirements were approved.
• In January, fixed-income purchases totaled $412 million; domestic equity purchases totaled $3.8 billion and real estate purchases totaled $52 million.

Additional items reported at the meeting by Executive Director Damon Asbury

Mandatory Coverage of State and Local Government Employees May Resurface
Given the high costs in the debate over Social Security reform, there is concern in the public pension community that lawmakers could look to uncovered state and local employees and employers as a new source of revenue — either to pay for the costs of moving to a personal accounts program or to eliminate some of Social Security’s projected shortfall.

President Bush has not addressed the issue of mandatory coverage for state and local workers since being elected president, although he was on record as opposing it while governor of Texas. In his State of the Union speech, however, he said he “will listen to anyone who has a good idea to offer.”

Most Democrats oppose President Bush’s plan to create personal investment accounts within Social Security and some are looking for a package of measures that would improve the program’s financing without changing its basic structure. One of those measures could be forcing coverage on the roughly five million state and local employees not now covered by the program. This would solve about one-tenth of Social Security’s $3.1 trillion, 75-year deficit — but would be a huge financial burden on state and local employees and taxpayers that could threaten the stability of public retirement systems.

As he has done in the past, Sen. George Voinovich (R-OH) is trying to get ahead of the curve on mandatory coverage in the Senate. Along with Sen. Diane Feinstein (D-CA), he is organizing an effort to keep mandatory coverage out of any Senate legislation. They have drafted a letter to be sent to the Senate Finance Committee — which passes judgment on all Social Security legislation and is expected to craft a reform bill of its own — urging the panel to ensure that “the interests of public employees are not undermined during the debate on Social Security reform.” The letter notes that mandatory coverage would “starve public pension [plans] of the continued flow of new participants needed to maintain solvency while doing nothing to improve the long term health of the program.”

Voinovich and Feinstein are working to get other senators to sign on to the letter and, at a Feb. 9 meeting in the Capitol, Voinovich asked members of the Coalition to Preserve Retirement Security (of which STRS Ohio is a member) and other public employer and employee groups to contact their senators in the coming days and urge them to sign.

Board Planning Retreat Results in Thorough Review of Governance and Policy Issues as Well as Identification of Top Priorities
The Retirement Board Planning Retreat was held from Jan. 26-28. One of the first orders of business was to review board policies and governance procedures to ensure they reflect the new 11-member board composition, as well as changes contained in last fall’s pension legislation. The first draft of these changes was reviewed with the board at its February meeting.

At the retreat, the board also authorized the executive director to issue an RFP (request for proposal) to conduct an asset/liability study with a target completion date of Aug. 31, 2005. In both 1996 and in 2000, the Retirement Board had asset allocation studies completed of the system. However, it has been 13 years since an asset/liability study has been conducted. Such a study will:

• Evaluate the ability of various investment portfolios to meet specified funding objectives (e.g., 30-year funding period);
• Anticipate cash flow requirements to meet system liabilities; and
• Determine an asset allocation policy that will achieve a good risk/return trade-off and meet the system’s long-term liabilities.

In short, the study will show the board the optimal asset mix and projected rate of return that will get the system to 30 years in a specified amount of time.

The results of this study will help frame any future board actions needed to ensure the adequacy of funding for pension benefits — which is one of the priorities the board identified for the coming months, along with health care. In addition, board and staff will continue reviewing STRS Ohio’s service to members — in relation to cost and value, as well as system operations and communications.

Securities Litigation Settlements Received by STRS Ohio
STRS Ohio has received a number of payments recently related to investment security lawsuits. Accounting records show a total of $3.6 million for litigation settlements since July 1, 2004. The most recent receipt was last month in settlement of a lawsuit alleging accounting irregularities by Dollar General Corporation. Other settlement payments received this fiscal year were related to lawsuits involving Bank of America, Nike, Providian Financial, DPL Inc., Oxford Health, Lucent Technologies and Southwest Gas Corporation.

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