Fiscal 2018 Financial Statement Audit Complete, Clean Opinion Issued
At the December meeting of the State Teachers Retirement Board, CliftonLarsonAllen reported the results of its audit of the STRS Ohio financial statements for the fiscal year ending June 30, 2018. The report showed that the retirement system’s financial statements were fairly stated in accordance with generally accepted accounting principles and that no material weaknesses in internal controls or instances of noncompliance were found. As a result, STRS Ohio received an unmodified opinion — also known as a “clean” opinion — affirming the financial information prepared by STRS Ohio.
STRS Ohio’s financial statements are included in the 2018 Comprehensive Annual Financial Report, which will be posted on the system’s website by Dec. 28, 2018. In addition to the financial statements, the report includes investment, actuarial and statistical information about STRS Ohio. This report can also be requested by calling STRS Ohio’s Member Services Center toll-free at 888‑227‑7877.
Board Adopts Health Care Plan Management Policy, Plans to Study Pension Funding Policy in 2019
Following many months of discussion and review, the Retirement Board adopted a health care plan management policy. The new policy’s purpose is to state the board’s objectives for the health care plan and to lay out clear criteria for making decisions regarding changes to benefits, as well as when those changes should be considered by the board. The policy indicates the goal is to provide a sustainable long-term health care benefit and to make benefit adjustments as conditions allow or are necessary. As this policy was developed, the Health Care Fund is currently in a solid actuarial position, with a funded ratio of 176%.
The health care objectives outlined in the policy include (in priority order):
- To maintain an estimated 50% chance that the plan will remain solvent for 60 or more years, to promote intergenerational equity;
- To the extent consistent with the first objective, to provide a baseline of up to 6% inflation protection for the Medicare subsidy;
- To the extent consistent with the first two objectives, to share gains and losses between the pre-Medicare and the Medicare groups; and
- To administer and communicate the plan in a transparent and objective manner.
The policy also directs STRS Ohio to have an annual actuarial valuation of the health care assets and projected liabilities prepared by an actuary. Following the valuation, STRS Ohio will use agreed upon data points and metrics to provide measurements to calculate a scorecard to summarize the overall actuarial health of the plan. The metrics will include:
- The probability of 60 years of solvency for the plan
- The plan’s funded ratio — that is, the Health Care Fund’s Actuarial assets compared to actuarial liabilities
- Stress testing of various aspects of the plan
- The pension funding period (the time needed to reach a 100% funded ratio if all assumptions are met)
- Consideration of current economic environment
As part of the health care plan management discussions, the board and STRS Ohio staff weighed the potential advantages and disadvantages of using a lower risk investment portfolio for the Health Care Fund. The board and staff concurred that the current investment asset mix has the optimal combination of maintaining a high probability of short-term solvency for the fund and allows for the fund to grow in the future, giving the plan a good probability of remaining solvent in the long term as well.
The board is expected to begin reviewing its current pension funding policy in early 2019.
Independent Analysis Shows STRS Ohio Has Strong Investment Returns, Low Investment Costs Compared to Peer Retirement Systems
CEM Benchmarking, a leading global research and benchmarking company, presented the results of its 2017 investment benchmarking study to the Retirement Board. The report compared investment data — both performance and cost data — for the five-year period ending Dec. 31, 2017, from nearly 300 pension funds from around the world. The study showed that STRS Ohio’s five-year total net return of 10.1% placed in the top 10% of CEM Benchmarking’s U.S. public fund universe. STRS Ohio’s strong performance was primarily due to its asset mix, which had a higher weighting than most other funds in one of the better performing asset classes during the five-year period (U.S. stocks) and a lower weighting in one of the poorer performing asset classes during the same period (fixed income).
STRS Ohio also ranked fourth in its peer group of 17 large U.S. public pension fund sponsors for lowest investment costs. STRS Ohio’s strategy of using internal investment managers for about 70% of the system’s assets was the primary reason for its low overall costs, and the report noted STRS Ohio paid less than peers for similar services. The report also showed that STRS Ohio saved about $95 million in calendar year 2017 by using the internal management approach. The savings figure is based on the peer group’s median external management costs.
The Retirement Board approved 46 active members and 46 inactive members for service retirement benefits in December. The Retirement Board previously approved 75 active members and 42 inactive members for service retirement benefits in November.
Other STRS Ohio News
NASRA Report Shows STRS Ohio’s Funding Position Relative to Other Funds
In November 2018, The National Association of State Retirement Administrators (NASRA) published its Public Fund Summary of Findings for fiscal year 2017. The survey contains data on public retirement systems that provide pension and other benefits for 12.9 million active members and 9.3 million annuitants. As of fiscal year end 2017, systems in the survey held combined assets of $3.47 trillion. Membership and assets of systems included in the survey comprise approximately 85% of the entire state and local government retirement system community. Highlights from this year’s survey will be shared with the board in an upcoming month. One highlight of note is that the median funding level is 72.9%, compared to STRS Ohio’s funded ratio of 75.5%.
The report also provided some perspective on each system’s investment return assumptions. NASRA’s findings showed that since 2009, more than 90% of plans in the survey have reduced their assumed investment return. The median return assumption for these plans in fiscal year 2017 was shown to be just below 7.4%, compared to 7.45% for STRS Ohio.
STRS Ohio Earns Awards From Public Pension Coordinating Council
STRS Ohio has received the Public Pension Standards Awards for Funding and Administration for 2018 from the Public Pension Coordinating Council (PPCC). PPCC is a confederation of the National Association of State Retirement Administrators, the National Conference on Public Employee Retirement Systems and the National Council on Teacher Retirement. The awards recognize public pension plans that meet key standards in several assessment areas, including actuarial, audit, benefit programs and communications.
Retirement Board Election Process Now Underway
The contributing member seat currently held by Taiyia Hayden will be up for election in 2019. Members eligible to run are current contributing members, members who have contributions on deposit at STRS Ohio and disability benefit recipients. Individuals interested in running for this seat can request petitions from STRS Ohio by calling toll-free 888‑227‑7877. Election information is also posted on the STRS Ohio website. The four-year term for this seat will begin on Sept. 1, 2019, and run through Aug. 31, 2023. STRS Ohio members will receive their ballots and voting information in April 2019 and will have through May 6, 2019, to cast their votes by mail, phone or online. Board members are not compensated for board service but may be reimbursed for actual necessary expenses incurred while serving on the board.