Aug. 21, 2006

Retirement Board Approves Premiums for 2007 Health Care Program
At its Aug. 18 meeting, the State Teachers Retirement Board approved the premiums for calendar year 2007 for each of the health care plans offered through the STRS Ohio Health Care Program. The increases for benefit recipients are considerably lower than what had been forecast earlier this year due to plan design changes the board approved for 2007 in June. In addition, the financial impact of adverse selection on the health care fund was less than expected during 2005.

For example, premiums for the Medical Mutual Plus Plan will increase by about 10% for non-Medicare benefit recipients, while benefit recipients with Medicare will see about a 15% increase in premiums. Original forecasts had called for increases of 15% and 19%, respectively. Enrollees in Medical Mutual’s Basic Plan will see more modest increases. Non–Medicare benefit recipients will experience premium increases of around 6%, depending on their years of service. For benefit recipients with Medicare, the increases will range from 0% for a 30-year retiree to approximately 11% for a retired educator with only 15 years of service.

The amount of increase in monthly premiums varies among plans. The minimum monthly premium is $40. In September, all current enrollees in the STRS Ohio Health Care Program will receive a special newsletter that highlights premiums and benefit changes for 2007. These same individuals will receive personalized information in October that outlines their 2007 plan options, monthly premiums and coverage features. A complete list of premiums for all plans and each year of service will also be posted on the STRS Ohio Web site. This year’s health care open-enrollment period will run from Oct. 9–Nov. 22, 2006.

In developing premiums for 2007, the Retirement Board returned to its former contribution strategy of providing a premium subsidy of 2.5% per year of service, up to a 75% maximum, for benefit recipients, and requiring spouses and dependents to pay 100% of projected rates. This ensures that the solvency of the Health Care Stabilization Fund, which supports the health care program, continues until 2021. It also ensures that the current legislative initiative to increase member and employer contributions by a total of 5% — to be dedicated solely to the Health Care Stabilization Fund — will be adequate to fund the health care program on a full-reserve basis (i.e., a 30-year funding period).

The plan benefit changes approved by the board in June 2006 affect the Aetna and Medical Mutual Plus and Basic Plans, as well as the Paramount plans. About 94% of STRS Ohio retirees and their family members are enrolled in these plans. The changes will result in a savings in gross health care costs, estimated at this time to be $16.5 million. This number represents a savings for the Health Care Stabilization Fund through reduced claims payments and for individual plan enrollees, who as noted previously, are experiencing a lower increase in premiums than originally projected because of the changes. There are no changes in medical or prescription drug coverage for the Kaiser and AultCare plans offered through STRS Ohio for 2007.

Fiscal Year Investment Results Generate PBI Awards
The August meeting agenda included the Retirement Board’s review of the earned Performance-Based Incentive (PBI) Awards calculated for 84 eligible Investment associates, based on STRS Ohio investment returns for fiscal year 2006, a well as for the trailing three- and five-year periods.

For fiscal year 2006 (July 1, 2005–June 30, 2006), STRS Ohio investment returns were very favorable. The total fund returned 13.7%, with all asset classes beating their benchmark returns. Overall, the total fund exceeded the composite benchmark by 147 basis points. After all direct internal investment costs and external manager costs are subtracted from the gross active management return, the net value added by the STRS Ohio Investment associates is 137 basis points, or about $750 million for fiscal year 2006 and a total of $1.2 billion during the five-year period from July 1, 2001, through June 30, 2006. This represents the additional value brought to the fund through active management by STRS Ohio associates and external managers, above and beyond that which would result from passive indexing of system assets. In addition, it was reported to the board that the most recent CEM study showed that STRS Ohio saved more than $90 million (including PBI payments) during calendar year 2005 by the internal management of about 80% of its investment assets.

The Retirement Board voted to approve payment of the PBI Awards totaling $4.87 million.

Operating Expenditures Come in Below Budget
Final figures for the 2006 fiscal year (July 1, 2005–June 30, 2006) show that total operating expenditures for STRS Ohio were almost $4.9 million less than what was budgeted. Reductions were recorded in such areas as staff salaries and fringe benefits; professional and technical services; travel; and communications.

Work on Health Care Funding Legislative Initiative Continues
During a Special Health Care Committee meeting, an update on the legislative initiative that is being pursued to create a dedicated revenue stream was presented. The Legislative Services Commission has drafted a bill that STRS Ohio staff is currently reviewing. While there is no sponsor as yet for the bill, representatives from STRS Ohio and the Health Care Advocates for STRS (HCA) continue to meet with legislators about the proposal to increase member and employer contributions to support the STRS Ohio Health Care Program for current and future retirees. Almost uniformly, legislators have expressed appreciation for the work done to date by STRS Ohio and the HCA to address this issue. Legislators are impressed that a proposed solution to the health care problem has been developed.

As expected, questions are also being raised in these discussions, such as what the financial impact will be on school districts — both if the legislation succeeds or if it fails. STRS Ohio staff and HCA members noted some fine-tuning of some of the proposal’s specifics may need to occur as these discussions continue. The goal remains to get a bill introduced sometime after the November election.

During the meeting, the HCA also expressed its thanks to the Retirement Board for its unanimous vote that occurred earlier in the day to publicly reaffirm its support for the current legislative plan for retiree health care.

Board Directs Staff to Proceed With Changes to Reemployed Retiree Health Care
House Bill 272, which was introduced by Rep. Michelle Schneider (R–Madiera) in fall 2005, includes provisions that require reemployed retirees to obtain health care coverage from their employer — regardless if the employer is public or private. This proposed change was in reaction to a continuing trend by employers to shift reemployed retirees’ health care costs to the public pension plans. However, it is anticipated that these provisions will be removed from the bill later this year. As a result, the Retirement Board approved a motion directing staff to draft an administrative rule that will enable STRS Ohio to enact the same provisions as those contained in H.B. 272.

The rule will require all STRS Ohio service retirees, as well as survivor and disability benefit recipients, who are reemployed in a public or private position to receive primary health care coverage from their employer. STRS Ohio will provide only secondary coverage. In all cases, these provisions only apply if the employer provides coverage to other employees in comparable positions. Also, the effective date for those reemployed in public positions would be Jan. 1, 2009, to allow time for current contracts to be revised.

Based on retirees who are reemployed in full-time positions, STRS Ohio staff estimated the changes will generate a $2 million savings to the Health Care Stabilization Fund, since most reemployed retirees receive a 75% premium subsidy toward an STRS Ohio health care plan. However, since these individuals are healthier than the average enrollees in the program (based on claims experience), their migration from the program could result in a slight increase in future non-Medicare premiums. Staff noted the benefits of the net savings to the Health Care Stabilization Fund outweigh the negative impact on the health care premiums.

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

• 2,795 active members were approved for service retirement; 116 inactive retirements were approved.
• In June, fixed-income purchases totaled $206 million, domestic equity purchases totaled $2.3 billion, and real estate purchases totaled $22.6 million.
• In July, fixed-income purchases totaled $89.5 million, domestic equity purchases totaled $372 million, and real estate purchases totaled $36.7 million.

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