Board News

Oct. 17, 2003

Retirement Board Maintains 1% Employer Contribution Allocation to Health Care
The Actuarial Committee of the Retirement Board heard a preliminary report of the results of the July 1, 2003, actuarial valuation from the board’s actuary, Kim Nicholl of Mellon (formerly known as Buck Consultants). She also presented the five-year experience review of the system required by statute, covering the period July 1, 1998–June 30, 2003.

Based on the results of these studies, the Retirement Board adopted changes to the actuarial assumptions that reflect the fact 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). Maintaining this allocation keeps the system in line with the changes for health care that are designed to preserve the health care fund for a rolling 10-year period.

When the final actuarial report is released in November, the funding period for the system — the number of years needed to pay off the unfunded accrued liability — is expected to be 42.3 years.

Retirement Board Adopts Annual Plan, Revised Performance Compensation Plan and Revised Travel Policy

The Annual Plan guides the work of the board committees and staff through the year. The Retirement Board adopted its Annual Plan for 2003–2004, which includes near- and long-term goals for each of the board committees and the timeline for accomplishing each initiative.

The continuation of the Performance Incentive Plan for Investment associates ensures STRS Ohio will continue to realize the tremendous savings incurred by using internal staff to manage the majority of system investment assets rather than paying high fees to external money managers. The revised program adopted by the Retirement Board increases the maximum incentive award potential to more closely match the maximum incentive levels the Ohio Public Employees Retirement System (OPERS) offers to its investment staff. In addition, under the revised program, 20% of each eligible associate’s incentive award is now dependent on earning a positive absolute return of the total fund.

Going forward, the challenge is to provide a compensation package that allows the system to recruit and retain the top talent in the Investment Department that is necessary to earn investment returns that are better than average. In explaining the changes to the program, Interim Executive Director Dr. Damon Asbury noted that even with these changes:

Both STRS Ohio base pay and total compensation (base pay plus bonus) for investment associates is, on average, lower than OPERS.
Market analysis has shown that STRS Ohio investment associates can potentially earn an additional $10,000–$171,000 in base pay, depending on position, if recruited by commercial investment management firms.
Additional market analysis shows that these same associates can potentially earn an additional $7,000–$1 million in total compensation, depending on position, if recruited by commercial investment management firms.

Dr. Asbury noted that decisions need to be made over the remainder of this fiscal year and in connection with the ORSC-directed fiduciary performance audit regarding the system’s philosophy on where it should be compensation-wise in comparison to the market to recruit and retain skilled professionals. The Retirement Board concurred and included this as one of its long-term goals for its Investment Committee in the Board Annual Plan.

Revisions to board member education and travel policy reflect recommendations made by the ORSC. The board approved additional changes to the policy which include: making due diligence visits to investment consultants and real estate visits included in the annual reimbursement limits and maximum number of trip limits approved; setting per diem limits for meals and lodging; requiring completion of conference evaluation forms and reports at board meetings following attendance at conferences; and encouraging more cooperative training locally with other Ohio pension systems and also encouraging the use of video and teleconferencing to limit the need to travel.

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

34 disability retirements were granted.
319 active members were approved for service retirement; 140 inactive retirements were approved.
In September, fixed-income purchases totaled $752 million, domestic equity purchases totaled $669 million and real estate purchases totaled $8 million.

Additional Items Reported at the Meeting
Interim Executive Director Asbury reported on changes to several staff policies as well as other actions that have been taken, including the following:

A revised travel and expense policy for STRS Ohio associates was approved by senior management. The revisions reflect many of the changes incorporated into the Retirement Board’s travel policy, including specific per diem amounts for lodging and meals. Also, the use of STRS Ohio-issued credit cards for travel has been discontinued. Travelers will use their own personal credit card; then submit the appropriate documentation and receipts for reimbursement.
The assignment of STRS Ohio-owned vehicles to certain associates as part of their total compensation package has been discontinued, effective Dec. 1, 2003. This affects the executive director, four deputy executive directors and three additional associates. A small fleet of vans for use by STRS Ohio counselors and member education associates for travel to their off-site presentations and counseling sessions, as well as by Building Services and Mail Center staff, will be maintained. These vans will be used for business purposes only.
The tradition of STRS Ohio sharing costs with associates for special after-work family events, such as tickets for King’s Island or a Columbus Clippers game, is being discontinued. Going forward, these events will be cost neutral. The associate Activity Committee will try to negotiate group discounts, but associates will pay all actual costs.
Merit increases, retroactive to June 30, 2003, were approved for eligible STRS Ohio associates. The average salary increase is 3%.

At the start of each fiscal year, STRS Ohio traditionally awards annual merit raises to associates, based on their past year’s performance. This past July, it was decided to delay the awarding of these raises in light of the fact that the Retirement Board and STRS Ohio management were reviewing a number of compensation matters at that time.

In August, the Retirement Board approved a revised budget for fiscal year 2003-2004, which included funding for merit increases. The amount being awarded is less than what was allocated in the budget, due primarily to higher-than-expected attrition in associates as well as a reduction in the average percent increase provided. Consequently, at the end of this fiscal year on June 30, 2004, actual expenditures in the salaries and wages line item are expected to be under budget.

In explaining the merit increases to the Retirement Board, Dr. Asbury noted that this action may not be well received by some of STRS Ohio’s membership. However, he felt it was necessary and appropriate to maintain a solid work force, and the increases offered were in keeping with what salary surveys show is happening around the country as well as in the Columbus area. This merit increase is also in line with the system’s sister public pension systems in Ohio, whose merit increases this year ranged from an average of 2.5% to 3.3%.

Dr. Asbury noted that the recently released RFP (request for proposals) for ORSC’s independent fiduciary performance audit includes a comprehensive study of STRS Ohio benefits and compensation. The results of this audit should help ensure that the system holds a competitive position within the appropriate public and private sector markets.

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