Nov. 21, 2003

Board Approves Actuarial Report
At its November meeting, the State Teachers Retirement Board approved the final annual valuation report from the board’s actuary, Mellon (formerly known as Buck Consultants). Last month, the board received the preliminary report, as well as the five-year experience review of the system covering July 1, 1998–June 30, 2003.

Based on the results of these studies, the Retirement Board adopted several changes to the system’s actuarial assumptions to reflect that career teachers are working longer before retiring, there are fewer disability retirements and members are living longer. The board also adjusted two significant economic assumptions by changing the average annual salary increase assumption for members to 5.5% from 5% and the actuarial assumed rate of return for investments to 8% from 7.75%. The board also preserved the 1% allocation of employer contributions to the Health Care Stabilization Fund for the 2003–2004 fiscal year (July 1, 2003–June 30, 2004).

With these changes, Mellon’s final report noted the following:

Health Care Costs Continue to be a Main Focus of the Retirement Board
On Nov. 19, the Retirement Board met with the Health Care Advocates for STRS to continue their discussions about health care funding. Based on those discussions, the Retirement Board approved a motion that authorized staff to:

STRS Ohio Receives “AAA Rating”
Standard & Poor’s notified STRS Ohio this week that it has assigned a “AAA” issuer credit rating to the system. This rating is Standard & Poor’s highest possible rating for reflecting an organization’s ability to pay its financial obligations.

Election Process Begins for Active Teacher Seat on Board
Notices will be sent to all STRS Ohio reporting employers and representatives of educational organizations next week announcing the election for an active teacher seat on the Retirement Board. The seat, which is currently held by Eugene Norris, is for a term running from Sept. 1, 2004–Aug. 31, 2008. The deadline for return of petitions is Feb. 27, 2004.

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

Additional Items Reported at the Meeting
Interim Executive Director Damon Asbury reviewed staff actions in response to proposed pension legislation moving through the Statehouse and a recent actuarial report presented to the Ohio Retirement Study Council.

All Five Systems United in Concern About Pension Legislation
Asbury reported that both board chair Mr. Norris and he have gone on record in testimony, through the media, and in our member and legislative communications as supporting changes that strengthen the functioning and monitoring of the retirement systems, and provide for open and transparent financial disclosure. However, we are adamantly opposed to two provisions contained in Sub. H.B. 227. The first provision affects the retirement boards’ investment authority and fiduciary responsibility to manage the retirement systems’ assets. Being referred to as a “buy Ohio” mandate, it requires all five Ohio public pension systems to execute 70% of all stock and bond trades with Ohio brokers. In addition, if outside money managers are used, 50% of all assets must be placed with Ohio money managers.

The second provision, which was added to the bill on Nov. 12, gives the Treasurer of the State the authority to hire and fire the executive director of each system.

In voicing their opposition to Sub. H.B. 227, all five systems’ have explained that these two provisions will result in exorbitant costs to the systems, impede trustees’ fiduciary duties, and threaten the tax status of the systems.

The five public systems have estimated that the investment mandates alone could cost the pension plans as much as $180 million, and that does not include transition costs. In Ohio, current statute already exists to direct boards to give consideration to Ohio brokers, “all things being equal.” Further, imposing pre-determined quotas could limit the ability of system trustees to act in a manner which is in the best interests of their members — which is essential if the systems are to remain qualified trusts under the Internal Revenue Code and thus defer taxation of the contributions and earnings until a benefit is paid.

Since the Legislature will not return until Dec. 2 and expects to finish up by Christmas, there is not time for the normal process of the two chambers reviewing each other’s bills. What may happen are behind-the-scene negotiations on a final compromise bill with votes on the floor to accept the compromise.

There has been a concerted effort on the part of all the systems to encourage members and advocate organizations to share their concerns about these bill provisions with the members of the House and Senate and Gov. Bob Taft. The executive directors are meeting with key senators and a joint letter from the board chairs has gone to leadership.

System Responds to ORSC Actuarial Report
At its November meeting, the Ohio Retirement Study Council (ORSC) heard a presentation from its actuary, Milliman USA, on three of the Ohio systems, including STRS Ohio. Milliman’s report had suggested that increasing the statutory limitations on employer and/or employee contributions or making changes to pension age and service requirements would be a way to reduce STRS Ohio’s funding period to the commonly used industry standard of 30 years by June 2004.

In response, Kim Nicholl (representing the Retirement Board’s actuary, Mellon) and Interim Executive Director Asbury explained why they believe the existing contribution rates are adequate for funding the current level of pension benefits. As has been discussed in the Retirement Board’s Actuarial Committee meetings, the past three-year economic period has contributed to an increase in our funding period to 42.3 years. However, to expect STRS Ohio, or any system for that matter, to return to the 30-year level in just one year’s time is not prudent.

Nicholl explained that the funded status of the system — the ratio of STRS Ohio assets to accrued liabilities — is a better barometer for determining the ability of a pension fund to meet its obligations, as not all of a plan’s obligations come due at once. Although the funding period will increase for several years before again entering a downward trend, STRS Ohio’s funded ratio consistently stays around 70%. Right now, STRS Ohio has on hand 75% of the assets needed to pay all benefits accrued to date.

In his remarks to the ORSC, Asbury stated that while pensions remain safe and secure, funding for health care is another issue. He reiterated that the Retirement Board looks forward to continuing its work with its membership, the Health Care Advocates for STRS and the Legislature in developing a plan for finding a dedicated revenue stream for health care funding.

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