2005 STRS Ohio News E-mails

August Board News Details Retirement Board Actions and Discussion

Last week, the State Teachers Retirement Board held several committee meetings, as well as its monthly meeting. Following regularly scheduled board meetings, a report titled “Board News” is posted on the STRS Ohio Web site, as well as sent to a number of members and education organization representatives who have requested it. As a registrant on the STRS Ohio news e-mail list, you will also receive this report each month.

The August report follows.

STRS Ohio Board News — Aug. 19, 2005

Board Approves 2006 Health Care Premiums
At its Aug. 18 meeting, the State Teachers Retirement Board approved a package of health care premiums for calendar year 2006 that caps all premium increases at 3%. The minimum monthly premium remains at $40. This decision applies to the more than 104,500 individuals enrolled in the Aetna and Medical Mutual Plus Plans and Basic Plans, as well as the approximately 7,400 individuals enrolled in the AultCare, Kaiser Permanente and Paramount health care plans offered by STRS Ohio.

In approving the modest increases for the coming year, the Retirement Board will spend an additional $17 million to help retirees with their health care costs. This amount is about half of what STRS Ohio expects to receive in subsidy from the Medicare Part D Program.

When taking its action for 2006, the board cautioned that this increase does not match the current trend rates. If the board followed these trends in setting premiums, STRS Ohio members would see their premiums increase an average of 12%, with premiums for spouses increasing even more. However, such increases would further exacerbate the adverse selection problems the health care program is facing, as healthy enrollees continue to leave the STRS Ohio-sponsored plans for more affordable options in the marketplace.

By treating 2006 as a “transition year,” the Retirement Board will have time to analyze ways to control adverse selection in the future. During 2006, the board will also be able to evaluate the results of the first year of the Medicare Part D Program and its impact on the health care marketplace and prescription drug pricing.

Earlier this year, in April, the board voted to file for the 28% subsidy offered through Medicare Part D to plan sponsors such as STRS Ohio for prescription drug expenses incurred in 2006. The subsidy should total about $33 million. At this time, the board sees several advantages to STRS Ohio members in applying for the subsidy, rather than dropping prescription drug coverage from its current health care plans.

First of all, this approach is less disruptive to members enrolled in the STRS Ohio Health Care Program. This period of stability is particularly advantageous to members during the first year of the federal Medicare Part D Program, which will undoubtedly face some rough spots in implementation. Secondly, the monthly premium for participating in the Medicare Part D Program will be about $35 per month — which covers prescription drugs only. STRS Ohio Medicare recipients who remain in or enroll in a health care plan offered through STRS Ohio receive coverage for hospital/medical costs not covered by Medicare plus prescription drug coverage. For a benefit recipient with 30 years of service, the premium for this combined coverage will be $58 per month in 2006 for Aetna and Medical Mutual Plus Plan enrollees and $40 per month for Basic Plan enrollees.

The Medicare Part D subsidy that STRS Ohio receives during 2006 will be placed in the Health Care Stabilization Fund. As noted earlier, about $17 million of the subsidy will go toward offsetting the costs incurred by STRS Ohio by keeping premium increases for 2006 significantly below trend.

As work continues in 2006 to evaluate ways to curtail adverse selection and control increases in health care costs, the Retirement Board and the Health Care Advocates for STRS will be gauging member support for an increase in member and/or employer contributions that would provide a dedicated revenue stream for health care. Additional information about these discussions will be sent to all STRS Ohio members this fall.

If no additional funding is found, more cost-cutting decisions will have to be made by the board as early as 2007. The board will be faced with making up the difference between the 2006 expected premium increase of 12% and the actual 3% premium increase cap, plus the expected upward trend in costs for 2007. Higher premiums, changes in enrollment and/or plan design changes will be necessary.

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 2005, as well as for the trailing three- and five-year periods.

For fiscal 2005, STRS Ohio investment returns were quite favorable. The total fund returned 12.25%, exceeding the composite benchmark by 82 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 70 basis points, or about $350 million. 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, comparative studies done by CEM show that managing STRS Ohio investments internally results in cost savings for the system. Preliminary results for calendar year 2004 indicate that STRS Ohio saved $74 million by using internal staff as opposed to being 100% externally managed.

The total fund return for STRS Ohio of 12.25% compares favorably with the other Ohio systems. In addition, two other funds with large internal management — CalPERS and CalSTRS — report returns of 12.7% and 11+%, respectively. The ending fiscal year balance of $59.7 billion represents the highest investment asset total in the 85-year history of STRS Ohio.

The Retirement Board voted to approve payment of the PBI Awards totaling $3.8 million, or just over 1% of the net added value of $350 million. An additional $118,331 will be distributed to five members of the West Coast real estate operation as a geographic location pay differential.

Endry and Scott Recognized for Board Service
The August agenda included resolutions recognizing Deborah Scott and Joe Endry for their service to the Retirement Board. Both individuals’ terms end on Aug. 31, 2005. Scott was named to the board in 1994, while Endry was elected in 2001. Board members expressed appreciation for their dedication, wisdom and tireless service to STRS Ohio.

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

49 disability retirements were granted.
2,727 active members were approved for service retirement; 138 inactive retirements were approved.
In June, fixed-income purchases totaled $657 million, domestic equity purchases totaled $2.5 billion and real estate purchases totaled $26.9 million.
In July, fixed-income purchases totaled $500 million, domestic equity purchases totaled $727 million and real estate purchases totaled $26.7 million.

Additional Items Reported at the Meeting by Executive Director Damon Asbury

STRS Ohio Report Receives Certificate of Excellence in Financial Reporting Award
The Government Finance Officers Association has recognized the 2004 Comprehensive Annual Financial Report with its Award for Excellence in Financial Reporting. The announcement notes that the report “meets high standards of the program, including a constructive spirit of full disclosure to clearly communicate the STRS Ohio financial story and to motivate potential users to read the report.” This is the 15th consecutive year that the report has earned this distinction and commendation.

Social Security Numbers no Longer on Checks
STRS Ohio has taken several actions to protect the identity of member Social Security numbers (SSNs). In June, the system stopped printing the complete number on remittance advices for electronic deposits and on paper checks. The last four digits remain to facilitate updating the recipient’s account whenever mail is returned. In March, STRS Ohio removed SSNs from the electronic deposit of monthly benefits, which prevented the number from appearing on bank statements. Last year, the first five digits of the SSN were removed from the Annual Statements to members. Over the last several years, several other decisions were made concerning the use of SSNs in correspondence, such as removing them from some letters and scrambling them in other mailings. Staff will continue to look for ways to protect this member identifier.

Return to the list of STRS Ohio news e-mails sent in 2005.