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STRS Ohio News for Active Members
Actuarial Valuation Reports Show Improved Pension Fund Solvency and Need for House Bill 315 In preparing these reports, the board’s actuarial consultant looks at the system’s experience over the last year in several areas and determines whether the collective result is a reduction or an increase in liabilities from one year to the next. For example, factors that affect the pension fund include investment returns, payroll growth and retiree mortality. These same factors are looked at for the health care fund, plus such additional items as growth in health care claims, how many retirees actually enroll in the health care program and which plans they choose (e.g., Plus Plans versus Basic Plans). A brief overview of the most recent reports follows. STRS Ohio Pension Fund Status Improves Significantly The funding period is the number of years required to pay off the unfunded accrued liability of the system. (A similar comparison to a layperson’s experience would be the number of years until a mortgage is paid off.) As of July 1, 2007, the funding period for the pension fund dropped to 26.1 years from 47.2 years. The funded ratio of the pension fund also improved to 83.0% from 76.1%. This means that STRS Ohio currently has on hand 83% of the assets needed to pay all benefits accrued by STRS Ohio members to date — even though the liabilities are not payable all at once. A pension plan’s actual experience in a particular year is rarely identical with all actuarial assumptions, which reflect an average amount expected over a long period of time. Public pension plans typically review all their actuarial assumptions on a periodic basis to determine if any adjustments are necessary going forward. At the Retirement Board’s January 2008 retreat, a four-year actuarial experience review covering the period July 1, 2003–June 30, 2007, was presented. The actuaries compared what actually happened during this period to what was expected to happen in such areas as service retirements, salary and payroll growth, disabilities, mortality and investment returns, and recommended adjustments in several areas. If approved by the board, these changes will be reflected in the July 1, 2008, pension valuation. Health Care Valuation Report Confirms Need for House Bill 315 This year’s report again confirmed what the Retirement Board and staff have been sharing with members for several years: The funded status of the health care program, which has about $4 billion as of Jan. 1, 2008, is considerably higher than most other public retirement systems in the United States. However, projections continue to show that the principal in the fund will begin to be tapped in just a few years. The report also showed that House Bill 315, which calls for a 5% increase in combined member and employer contributions (phased in over a five-year period), should adequately address this funding challenge. Based on current figures and assumptions made in the valuation, this ongoing, dedicated revenue stream is expected to cover the cost of current health care liabilities, as well as future liabilities, and move the STRS Ohio Health Care Program toward a fully funded basis. However, as noted above, there is a limited time period that this level of contribution increase is a viable solution. Once the principal in the health care fund begins to decline, the annual required contribution increases dramatically. In presenting the health care actuarial valuation for Jan. 1, 2008, the Retirement Board was reminded that the Governmental Accounting Standards Board (GASB) requires a retiree health care program to use a different assumed investment return rate for its health care monies if the program is not fully funded. So, rather than STRS Ohio using a long-term 8% rate (the same rate it assumes for its pension fund), it must lower that rate to 5.5% when calculating liabilities, based on the current funding status of the health care fund. Consequently, it was reported that the annual required contribution (ARC) for health care liabilities — with a 5.5% rate — is 5.92%. But, if H.B. 315 passes and an annual contribution of 5% of payroll is ultimately allocated to the health care fund, GASB allows the investment return rate assumption to be 8%. As the accompanying chart shows, the ARC drops to about 4%, confirming that the proposed 5% contribution increase is still adequate. In short:
*If H.B. 315 passes, the fund solvency period will be greater than 2026 and move toward a fully funded basis.
Next Steps Outlined for House Bill 315 Initiative During this lengthy legislative process, it is important for STRS Ohio members to continue to share their position on the bill with their fellow colleagues, school board members and legislators. This outreach effort will help ensure the bill remains a priority at the Statehouse. Augmenting these efforts is the work of more than 150 Health Care Champions. The grassroots efforts of these active and retired STRS Ohio members have resulted in hundreds of contacts with legislators — everything from postcards to personal, one-on-one visits. With one-third of the seats in the Ohio General Assembly subject to term limits this year, all STRS Ohio members are encouraged to contact candidates during this election season and inform them about the importance of this issue. Additional information about House Bill 315 can be found on the STRS Ohio Web site at www.strsoh.org under the heading “Health Care Funding Initiative.” Included is an online, narrated presentation, as well as responses to “frequently asked questions” about this proposal. STRS Ohio members who would like a print version of these materials can call the STRS Ohio Member Services Center toll-free at 1-888-227-7877.
Additional Options Make Election Voting Easier — and Save STRS Ohio Money Ballots, candidate information and voting instructions will be mailed on April 4, 2008; the deadline for voting will be May 5, 2008. Results of the election will be posted on the STRS Ohio Web site and announced in this newsletter following certification of the election results by the board of tellers on May 10, 2008.
When staff presented its Annual Investment Plan for this fiscal year in June 2007, a lower total fund return for STRS Ohio of approximately 7% was projected after four consecutive fiscal years of double-digit returns. Looking forward, staff believes aggressive monetary policy stimuli (such as a continued reduction in interest rates for federal funds by the Federal Reserve Board), as well as the temporary fiscal policy stimulus provided by the tax rebates, should help shorten the weak period of economic growth and lead to moderately stronger activity in the first half of fiscal 2009. Ohio Pension Funds Brought Into National Discussion About Investment Divestment The issue of investment divestment as a potential means of accomplishing a particular foreign policy, political or social agenda is not new to Ohio, nor new to other states. In the past, countries such as Northern Ireland and South Africa have received similar attention. With this most recent action in Ohio, the state joined more than 15 other states who are also wrestling with this issue of foreign companies’ investments in Iran and/or Sudan — and several states have passed legislation that mandates divestment. After the bill’s introduction in Ohio, a number of meetings were held between the bill sponsors, pension fund representatives and members of both political parties to try to reach some level of agreement. For the pension systems, one of the biggest concerns with the bill was that it put a foreign policy objective above each board’s fiduciary duty to invest in the sole interest of their respective memberships. Further, there would be costs to mandated divestment — costs borne by the membership. In June 2007, STRS Ohio’s board formally passed a motion, stating its opposition to any legislatively mandated divestment of investments in Iran and Sudan. After several months of discussion, it was agreed that the five Ohio systems would explore developing their own policies. STRS Ohio’s policy, which was adopted in October 2007, establishes a voluntary process for divestment of active, direct holdings in STRS Ohio’s international portfolios in certain non-U.S. publicly traded companies doing business in Iran and Sudan. The policy notes that divestment will occur only when substitute investments with similar quality, return and safety can be identified. STRS Ohio is reporting regularly to the Ohio Retirement Study Council (the legislative oversight body for Ohio’s public pension systems) on its actions going forward based on this policy. 2007 Annual Financial Statement Audit Completed STRS Ohio’s financial statements are included in the Comprehensive Annual Financial Report, which is available for viewing on STRS Ohio’s Web site or by calling the Member Services Center toll-free at 1-888-227-7877. Highlights from the report are also featured in the Report to Members included with this newsletter. Questions Frequently Asked By STRS Ohio Members
This rule reflects the fact that STRS Ohio does not distinguish between reemployed retirees and active teachers if the position the reemployed retiree holds is one in which other comparable active employees are eligible for health care coverage. In these cases, STRS Ohio holds that the employer, not the retirement system, is responsible for the employee’s health care coverage. Reemployed retirees who are eligible for Medicare Part B are not affected by this rule. In these cases, Medicare provides primary coverage and STRS Ohio pays as the secondary provider. In addition, the rule only applies when the employer plan provides medical and prescription drug coverage. In simple terms:
Here are some commonly asked questions about the new rule: I became a reemployed retiree before Jan. 1, 2009. Does the new rule apply to me? While other teachers in my district are eligible for coverage through the employer plan, the collective bargaining agreement with my employer restricts access to the employer plan for teachers who are STRS Ohio retirees. Does this make me eligible for STRS Ohio coverage? I’ve returned to public teaching as a part-time teacher. I have access to the employer plan, but have to pay 50% of the premium like all other part-time teachers, compared to the 10% the full-time teachers have to pay. What are my options with STRS Ohio coverage? As an STRS Ohio retiree working full-time as an administrator, I’m eligible for my employer plan, but have to pay a higher premium due to being an STRS Ohio retiree. Am I eligible for primary coverage through STRS Ohio since I have to pay a higher premium than other full-time employees?
The salary-related calculation is used to determine the monthly retirement benefit of most retiring STRS Ohio members. This calculation is based on your age at retirement, total years of service credit and FAS, which is the average of the three highest years of earnings regardless of when they occur. Each year, about 10% of retiring educators learn that some of the increased earnings they received for teaching service in their last three years will not be included in the salary figures used to calculate their retirement benefit. Working extra duties gives you a higher annual income, but may not always provide a higher FAS for your retirement. Your FAS will be limited if the extra earnings you receive cause the percentage increases in your two highest years to be greater than the increases in the three preceding years. The limit may affect either or both of the two highest years. Compensation for a partial year may also be limited. Examples of extra duties that may trigger a limit to your FAS include:
While these are common reasons for FAS limits, these are not exclusive examples. And while some or all of these additional earnings may not be included when determining your FAS, your FAS will never be lower than it would have been if you had not accepted the extra duties. You should discuss your future retirement with an STRS Ohio benefits counselor at least twice before retirement. If you earn additional amounts beyond your contract for regular teaching duties, you should talk with a counselor at least four years before you retire. Also, if you do not plan to work through the last day of your contract in your last year of teaching, be sure to discuss this plan with a benefits counselor before your retirement. For more information or to schedule a counseling session, call STRS Ohio toll-free at 1-888-227-7877.
In announcing his decision, Asbury said, “As I near the completion of almost five years as STRS Ohio’s executive director, I am looking forward to retiring and exploring new opportunities. During my more than 40 years of service in the public arena, I most appreciate that my life has been blessed by so many friends, colleagues and acquaintances. The opportunities and challenges afforded to me have been deeply rewarding. “The opportunity to serve as STRS Ohio’s executive director has been a privilege and a professional capstone. The condition of STRS Ohio is sound and this is a very good time for the Retirement Board to initiate a search for a qualified successor.
Jeffrey Chapman, chair of the State Teachers Retirement Board, noted, “My fellow board colleagues and I are extremely grateful for the outstanding leadership Dr. Asbury has provided to this system and his commitment to serving our members. His door is always open and all constituents are treated with respect. He believes in the mission of this system and has never wavered from it in his work with this board, active and retired teachers, STRS Ohio associates and legislators.” The Columbus-based executive search firm, Hudepohl and Associates, has been chosen to assist the Retirement Board in its search for STRS Ohio’s ninth executive director. The board plans to have a new executive director named by June 30, 2008.
New to the report for 2007 is information required by Governmental Accounting Standards Board (GASB) Statement 43. This mandated that public pension plans, as well as local governments, report the financial liability associated with providing retiree health care coverage in their financial statements, just like they do for pension benefits. In other words, STRS Ohio is now required to report the percentage of teacher payroll needed to fully fund health care for current and future retirees on a full-reserve basis (i.e., a 30-year funding period). Fortunately, the Retirement Board has been assessing these liabilities for more than 10 years through annual valuation reports it receives from its actuary and sharing these results with STRS Ohio’s membership. Data from these reports has shown — and the Comprehensive Annual Financial Report confirms — that the funded status of the health care program is considerably higher than most other public pensions plans in the United States, due to more than $5.4 billion in past allocations made to the health care fund by the Retirement Board and changes in plan design and eligibility. As noted in January 2007 at the board’s retreat by Buck Consultants, the board’s actuarial consultant at that time, “STRS Ohio has been significantly more proactive than other public sector entities in addressing the health care program funding issue. Most public sector health care plans are 0% funded.” The complete 68-page report can be accessed through our Web site at www.strsoh.org; you can also request a copy of the report by calling our Member Services Center toll-free at 1-888-227-7877. As always, we welcome your questions and comments about STRS Ohio. Damon F. Asbury Benefit and Health Care Payments Top $4.5 Billion One percent of employer contributions — approximately $96 million — went into the Health Care Stabilization Fund, along with more than $201 million in premiums from benefit recipients and their dependents who are enrolled in the STRS Ohio Health Care Program. STRS Ohio also received more than $36 million in Medicare Part D reimbursements. Net investment income for the fund was $713 million. From this fund, STRS Ohio paid out $503 million for health care coverage — or more than $1.3 million per day. At the end of the fiscal year, the balance in this fund stood at $4.1 billion. Five consecutive years of positive investment returns (fiscal years 2003–2007) have enabled the system to make a significant recovery from the impact of the market downturn that occurred in the prior three years. As of June 30, 2007, STRS Ohio held more than $76 billion in trust on behalf of more than 450,000 active, inactive and retired educators. The system’s investment assets, which provide more than 75% of STRS Ohio’s annual income, are prudently invested in stocks, bonds, real estate, venture capital and other asset classes. Investment Performance — Total Fund Return Outperformed Benchmark Return Every asset class yielded a positive return, led by the international equities return of 30.79%. Domestic stocks achieved a 21.24% return, real estate generated a 26.72% return and fixed income had a 7.14% return. Over the three prior fiscal years, the STRS Ohio fund returned an annual average of 15.51% versus the benchmark’s return of 14.34%. The STRS Ohio fund performance over the prior five fiscal years was 13.17% versus the benchmark’s 12.16%. Looking at annualized investment returns for the period of July 1, 1997, to June 30, 2007, STRS Ohio had a total fund return of 8.58%, exceeding the actuarial assumption of 8% by 58 basis points. Additional Highlights From the Comprehensive Annual Financial Report
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