Nov. 18, 2005

Pension and Health Care Funding Remains a Board Priority

Asset/Liability Study Adopted
At its November meeting, the Retirement Board voted to accept the Asset/Liability Study that began last spring under the direction of Russell Investment Group, the board’s investment consultant. The project team included representatives from Russell and Buck Consultants (the system’s actuary), STRS Ohio staff and several members of the Retirement Board.

As part of the study, the team looked at the system’s liabilities — both pension and health care. The initial project goal was to explore if any traditional asset allocation policy would materially improve the funded status of either the pension fund or the Health Care Stabilization Fund. However, it was determined that only an investment policy that entailed much higher levels of risk than were appropriate for the pension system (e.g., all stocks) could significantly impact the funds. As a result, the project team focused its attention on the system’s asset allocation policy and reviewed possible new asset classes.

After several months of study, it has been determined that moving more of the system’s investment assets to real estate and international equities could improve returns, as these have traditionally been strong performing asset classes for STRS Ohio. In addition, the allocation to alternative investments will be increased slightly. To accommodate these increases, the amount committed to domestic equities will be lessened. It is projected that the benchmark returns generated by this new asset allocation over the next nine years will be about 7.42%, compared to 7.28% if the current allocation was maintained. It is expected an additional .40% will be added to the total fund return through active management. This results in a total fund return of 7.82%. While the returns through 2014 are expected to be below long-term averages, the 20-year return rate should meet the Retirement Board’s assumed actuarial rate of 8%.

In presenting the results of the Asset/Liability Study to the Retirement Board, Russell Investment Group noted that no combination of major asset allocation changes, new asset classes or this fine-tuning of the current policy allocation will improve the system’s financial outlook significantly over the next nine years.

Annual Actuarial Valuation Report Accepted
During its November meeting, the State Teachers Retirement Board also accepted the annual actuarial valuation report of STRS Ohio’s pension fund from its actuary, Buck Consultants. In this report, STRS Ohio’s actuarial gains and losses for the past fiscal year (July 1, 2004–June 30, 2005) are documented, including their impact on the system’s total liabilities going forward. The actuary looks at the system’s experience in several areas, including investment gains or losses, payroll growth, salary increases, retiree mortality and the number of retirements and other separations from the system (such as account withdrawals) — all of which can either reduce or increase the system’s liabilities from one year to the next. Recent benefit improvements for both active members and retirees, as well as the allocation of a portion of employer contributions to STRS Ohio’s Health Care Stabilization Fund rather than to the pension fund over the past
20 years, also have contributed to the system’s current unfunded accrued liability of $20.1 billion.

During the 2004–2005 fiscal year, STRS Ohio experienced a total actuarial loss of $2.3 billion. One of the major factors contributing to this was a significant decline in payroll growth for teachers. Employer payrolls increased only 2.19% over the 2003–2004 fiscal year, well below the 4.5% actuarial assumption. In short, this means less employee and employer contributions than expected were received by STRS Ohio. This accounted for $470 million of the total actuarial loss. In addition, more educators retired with 30 years of service than projected, meaning STRS Ohio is now paying out more in retirement benefits going forward than anticipated for this point in time. This factor added $262 million to the actuarial loss.

STRS Ohio has experienced excellent investment returns over the past two fiscal years. However, this year’s actuarial valuation is still negatively impacted by investment losses incurred during the 2000–2002 period (due to four-year smoothing). Consequently, this year’s report reflects a $1.39 billion actuarial loss in investments. Investment gains generated in fiscal years 2004 and 2005 will have a more positive effect going forward.

As of July 1, 2005, STRS Ohio’s funding period — the number of years required to pay off the unfunded accrued liability — now stands at 55.5 years. This represents an increase from last year’s number of 42.2 years.

The system’s funded ratio — the market-related value of assets compared to liabilities — is 74%. This represents a slight decrease from last year’s figure of 75.9%. This means that STRS Ohio has on hand 74% of the assets needed to pay all benefits accrued by STRS Ohio members to date — even though the liabilities are not actually payable for many years.

The information contained in the actuarial valuation is one piece in a continuum of financial, investment and actuarial information that the Retirement Board continually reviews and considers as it addresses pension and health care issues. The findings contained in the recent Asset/Liability Study, the results of the annual valuation of the Health Care Stabilization Fund that will be presented in February 2006, and the additional review of the actuarial impact of changes to pension plan components also add valuable information to the discussions.

It is information such as this that has helped drive board initiatives, such as the current Health Care Member Education and Engagement Campaign. This project is designed to gauge member support for increasing employee and employer contributions to create a dedicated revenue stream for health care, plus restore to the pension fund some of the money that has been used for health care in the past.

Health Care Member Education and Engagement Campaign Continues
STRS Ohio and the Health Care Advocates for STRS (HCA) continue to work on the Health Care Member Education and Engagement Campaign. To date, more than 6,300 STRS Ohio members have completed a postcard survey that was included in a mailing to all active members. Another 800 individuals have attended regional meetings around the state to hear a presentation about the proposal.

STRS Ohio active members can still voice their opinion about the proposed member and employer contribution increase by returning their survey to STRS Ohio or by logging on to the STRS Ohio Web site, where they can view the presentation as well as complete an online survey.

Election Process Begins for Retirement Board Seats
Notices have been sent to all STRS Ohio reporting employers and representatives of educational organizations, announcing the upcoming election for two contributing member seats on the Retirement Board. Robert Brown and Conni Ramser currently hold the seats. The four-year term for these positions begins on Sept. 1, 2006, and ends on Aug. 31, 2010. Petition forms can be obtained from STRS Ohio by calling toll-free 1-888-285-2192. The deadline for the return of petitions is Feb. 24, 2006.

Additional Retirement Board Action Includes Change to Medicare Part B Reimbursement
During November’s meeting, the Retirement Board changed the Medicare Part B premium reimbursement for calendar year 2006. Under Ohio statute, STRS Ohio is required to pay a portion of the premium STRS Ohio benefit recipients must pay for Medicare Part B (medical) coverage. Since calendar year 2004, the reimbursement provided by STRS Ohio had been frozen at 2003 levels to help increase the solvency of the Health Care Stabilization Fund. However, the Medicare Part B premium has been increasing each year, so the member’s portion of the premium cost has been increasing.

The board voted to set the Medicare Part B premium reimbursement percentage at 2.349% per year of service credit up to 30 years for calendar year 2006 with the reimbursement cap returning to the 2003 level thereafter. As a result, a retiree with 30 years or more of service will receive a monthly reimbursement of $62.37 from STRS Ohio to use toward their total Medicare Part B premium of $88.50 versus the previous reimbursement of $52.83 in 2005. Reimbursement amounts are based on years of service, with the minimum monthly reimbursement from STRS Ohio remaining at $29.90 as required by Ohio law.

Also during the meeting, staff recommended changing the annual interest rate paid on member withdrawals to 2% for members with less than three years of service credit and to 3% for members with three or more years of service credit, effective Jan. 1, 2006, going forward. Current rates are 4% and 5%, respectively. These changes put STRS Ohio’s rates more in line with market interest rates that have declined significantly since the percentage rates for member withdrawals were last changed in 1998. A board vote to accept staff’s recommendation to change these rates was deferred to the December board meeting.

The board did vote to maintain the 5% annual interest rate on money purchase benefits and reemployed retiree annuities for the 2005–2006 fiscal year.

Finally, the report from the board’s actuary on the overall cost or benefit to STRS Ohio of providing the enhanced 35-year benefit, as well as the impact of other plan enhancements to active and retired members under Senate Bill 190, was delayed until January to give the actuary additional time to gather information.

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

• 26 disability retirements were granted.
• 191 active members were approved for service retirement; 44 inactive retirements were approved.
• In October, fixed-income purchases totaled $767 million, domestic equity purchases totaled $1.044 billion and real estate purchases totaled $40 million.

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