June 17, 2005

Retirement Board Chair, Vice Chair Elected
During its June meeting, the State Teachers Retirement Board elected a chair and vice chair of the board for a one-year term that begins on Sept. 1, 2005. Robert Brown, who joined the board in September 2003, will serve as chair. Vice chair responsibilities will be taken over by Conni Ramser, who joined the board in August 2004.

Retirement Board Adopts Annual Investment Plan
The June agenda for the Retirement Board meeting included the adoption of the system’s Annual Investment Plan for fiscal year 2005–2006 (July 1, 2005–June 30, 2006). This plan outlines the staff’s investment strategy for the various asset classes (fixed income, domestic equities, real estate, international and alternative investments).

After assessing a number of economic factors, STRS Ohio staff is predicting that a mid-cycle slowdown in overall investment returns will emerge following what has been two years of robust growth. More moderate consumer and business spending is expected, as well as slower housing activity due to higher interest rates. Consequently, lower total fund returns (probably not above 8%) are expected in the coming fiscal year. A complete copy of the plan can be found on STRS Ohio’s Web site, www.strsoh.org, or obtained by calling the Member Services Center toll-free at 1-888-227-7877.

Retirement Board Begins Discussions About 2006 Health Care Premiums
This August, the Retirement Board will approve health care premiums for the plans offered through the STRS Ohio Health Care Program for calendar year 2006. In setting premiums, the board will consider a number of factors, including:

• Board-approved approach of providing the greatest premium subsidy to career teachers (currently 75% for the 30-year teacher);
• Expected trends in medical and pharmacy costs for 2006, which range from 16%–19%;
• Projected costs for 2006;
• Controlling the problem of adverse selection; and
• Impact on the solvency of the Health Care Stabilization Fund.

At the June meeting, the board was presented with several plan scenarios and the accompanying potential impact on member premiums. While no premiums were approved, the board did approve a reduction in copayments for generic prescription drugs purchased through the Caremark program for 2006. Currently, about 50% of members’ prescriptions are for these lower-cost drugs. To encourage even greater use, members enrolled in a Medical Mutual or Aetna Plus Plan or Basic Plan, or a Paramount HMO, will pay $10 per prescription for a 30-day supply purchased at retail in 2006 versus the current copayment of $15. Mail-service copayments for generic drugs will drop to $20 from $30 for a 90-day supply.

At its August meeting, the board will review the impact of various cost-sharing scenarios on the Health Care Stabilization Fund and retirees and then decide on the 2006 premiums.

Performance-Based Incentive Plan for Investment Staff Continued
Following the recommendation of Executive Director Damon Asbury, the board voted unanimously to extend the current Performance-Based Incentive (PBI) Plan for eligible Investment Department associates for fiscal year 2005–2006 (July 1, 2005–June 30, 2006). Currently, about 80% of STRS Ohio investments are managed internally; the balance is managed by external managers who are chosen and monitored by STRS Ohio staff. The PBI Plan helps STRS Ohio recruit and retain these investment staff, who are adding significant net value to the system. As an example, in fiscal year 2003–2004 (July 1, 2003–June 30, 2004), STRS Ohio’s internal staff and external managers earned $525 million above the total fund benchmark return, net of all investment costs. In return, eligible STRS Ohio investment associates received $3.2 million in PBI payments.

In approving the PBI Plan, the board pointed out that it could take additional action on the plan at any time during the coming year, particularly if the current compensation and benefits study that is being conducted for STRS Ohio results in the board wanting to make changes to the plan.

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

• 30 disability retirements were granted.
• 333 active members were approved for service retirement; 60 inactive retirements were approved.
• In May, fixed-income purchases totaled $353.8 million, domestic equity purchases totaled $404.9 million, and real estate purchases totaled $5.6 million.

Additional Items Reported at the Meeting by Executive Director Damon Asbury

Mandatory Social Security, GPO and WEP Discussions Continue in Washington
Social Security reform was the subject of a hearing June 9 in the House Ways and Means Subcommittee on Social Security. Chair Jim McCrery (R-LA) called for witnesses to discuss the impact of mandatory Social Security coverage of newly hired state and local employees, as well as the effects of the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP).

Terri Bierdeman, director of Governmental Relations, testified in opposition to mandatory Social Security as chair of the Coalition to Preserve Retirement Security and on behalf of STRS Ohio. Other witnesses included representatives from the National Conference on State Legislatures, Grand Fraternal Order of Police, Association of Texas Professional Educators, Federally Employed Women, and American Federation of State, County, and Municipal Employees.

While all these witnesses were adamant in their opposition to mandatory coverage, Rep. McCrery was noncommittal because of the burden of finding multiple sources of revenue to shore up Social Security. On reform or repeal of GPO and WEP, he did mention that to repeal these provisions for public employees, it would only be fair to repeal the corresponding dual entitlement restrictions for the private sector. The cost of this was estimated to reduce the solvency period of Social Security to 2025 from 2042.

In related news, House Republican leaders Bill Thomas, chair of Ways and Means, and John Boehner, chair of Education and the Workforce, have introduced a private pension reform bill that they say will be combined with Social Security and personal savings reform.

National Public Sector Health Care Roundtable Moves Forward
As a result of its most recent steering committee meeting, the Roundtable is much closer to launching in the near future. The informal group is ready to file “articles of incorporation” that will put in place the bylaws and first board of directors for the Roundtable. The primary mission of the group is to champion the interests of sponsors of government health care plans to ensure that federal health care policy supports the availability of affordable health care for all public employees and retirees. After raising some seed money this summer, the Roundtable will engage a Washington, D.C.-based firm to coordinate a membership drive.

The need for such a public sector voice was made clear during the debate on the federal Medicare prescription drug legislation. When the employer subsidy was being debated, it was not at all clear that public plan sponsors of health care such as STRS Ohio would be included. The Roundtable will serve as the “voice” for public sector health care in Washington.

Alternative Retirement Plan Changes May be Delayed
Senate Bill 133 expands eligibility for alternative retirement plans (ARPs) to all full-time higher education employees effective Aug. 1, 2005. This primarily affects OPERS and SERS because full-time faculty members were already eligible; the bill does allow STRS Ohio retirees who are reemployed in higher education to participate in an ARP. At its June meeting, the Ohio Retirement Study Council (ORSC) voted to recommend that the Legislature delay these changes for six months because there was not enough data for ORSC’s actuary to calculate a supplemental contribution rate to OPERS and SERS for ARP members. This recommendation is being taken to the Conference Committee to see if an amendment can be placed in the budget bill.

At this same ORSC meeting, the five Ohio public pension systems presented a preliminary report on the progress the systems have made on meeting the goals of Substitute Senate Bill 133 to increase participation among Ohio-qualified and minority/female-owned investment managers and brokers. The report for STRS Ohio showed that the system has increased the use of these investment managers and brokers during the nine-month period ended March 31, 2005, as compared to the previous 12-month period ended June 30, 2004. All of the systems will be presenting a final year-end report to the ORSC in September.