STRS NEWS

June 16, 2017

Retirement Board Approves Health Care Premiums For 2018; Approximately 80% of Enrollees Will See No Premium Increase

At the June meeting of the State Teachers Retirement Board, the board approved 2018 premiums for all plans offered through the STRS Ohio Health Care Program. A complete list of these premiums is posted on the system’s website, or can be obtained by calling STRS Ohio’s Member Services Center toll-free at 888‑227‑7877. Additional information about the 2018 Health Care Program will be provided in upcoming newsletters and on the STRS Ohio website. In late October, all plan enrollees will receive personalized health care plan information in preparation for the fall open-enrollment period that extends from Nov. 1–21, 2017.

When determining premiums, the Retirement Board and STRS Ohio staff consider the claims experience of plan enrollees, annual health care cost trend rates and administrative expenses for the program. Factors that proved favorable for 2018 rate setting included: better than projected claims experience for the self-insured plans in 2015 and 2016, and low overall administrative expenses — especially for the self-insured plans. As a result, about 80% of enrollees will have 2018 premiums equal to or lower than their 2017 premiums — including more than 100,000 Aetna Medicare Plan enrollees who will see no increase.

Board Receives Updated Projections on Plans to Improve Health Care Fund Solvency

For much of the past year, the Retirement Board and staff have been exploring options to extend the life of STRS Ohio’s Health Care Fund. The health care program is currently funded through premiums charged to plan enrollees, government reimbursements and investment earnings on the fund. STRS Ohio no longer allocates a portion of the employer contributions to the Health Care Fund, as all of the employer contributions are needed to fund pension benefits. While health care coverage is not a guaranteed benefit, the board recognizes that this coverage is important to STRS Ohio members and benefit recipients.

The Health Care Fund has a balance of about $3.2 billion and is currently estimated to remain solvent for about 18 years. Staff has been working with the system’s actuary, Segal Consulting, to develop options to extend solvency to 30 years or more.

Health care trend projections used in the Jan. 1, 2017, valuation showed expected cost increases (trend rate) over the next decade will be significant. Prescription drug costs alone are expected to increase 235% during that time frame. Segal also applied the new actuarial assumptions adopted by the board in March — including mortality improvement and a lower expected rate of return on investments — and these had a negative impact on the projected solvency period. The board is evaluating several cost models, including some that are based on current subsidy levels. Long-term costs, however, are expected to grow for all enrollees. Most of the cost models maintain a higher premium subsidy percentage for Medicare enrollees than for non-Medicare enrollees. The board will continue its discussion on the health care program in August.

In fiscal year 2016 alone, health care benefit payments totaled about $677 million — more than $1.8 million per day. The health care program currently covers about 126,000 individuals.

Fiscal Year 2018 Budgets Adopted, Administrative Spending Down

The Retirement Board adopted the proposed system budgets for the 2018 fiscal year (July 1, 2017–June 30, 2018). The fiscal 2018 operating budget totals $99.6 million, an increase of 2.8% over the fiscal 2017 budget. Investment items account for all of the increase, as administrative department budgets reflect a slight decrease from the current year. Budget increases in the investment area reflect changes in costs for custodial banking fees, payroll and staffing, and quotation and analytic services. The staffing component will expand STRS Ohio’s internal investment capabilities and recognize that STRS Ohio’s model of managing more than 70% of the system’s assets internally is cost effective. CEM Benchmarking analysis estimates STRS Ohio’s use of internal management saves about $100 million annually for the retirement system (based on median external management costs of STRS Ohio’s peer group of similar-sized retirement systems).

The Retirement Board and staff are mindful of expenses. For example, the fiscal 2018 budget is within one percent of the fiscal 2009 operating budget and the number of full time equivalent staff members has decreased from a high of 735 associates in 2001 to 544 associates in fiscal 2018. Other cost containment measures include spending less on printing costs as more members opt for the online services STRS Ohio offers. The adopted capital budget for fiscal 2018 totals $3.3 million, a 1.7% increase from the current year’s budget. STRS Ohio reviewed its budgets with the Ohio Retirement Study Council during its May 2017 meeting. The board voted to adopt the budgets effective June 22, 2017.

Throughout the year, the Retirement Board reviews monthly expenditures and year-to-date expenditure totals as part of its regular meetings. These items are posted on STRS Ohio’s website following each board meeting.

Retirement Board Chair, Vice Chair Named

The Retirement Board elected retired teacher member Robert Stein as its vice chair for the coming year. According to Board Policies, contributing teacher member Mark Hill (Worthington City Schools, Franklin County), who is currently serving as vice chair, automatically moves into the position of chair. Stein and Hill will assume their new responsibilities on Sept. 1, 2017. Board members receive no compensation for serving on the board other than reimbursement for actual, necessary expenses.

Board Adopts Fiscal Year 2018 Investment Plan

The Retirement Board voted to adopt the fiscal year 2018 Investment Plan presented by staff. The plan details staff’s investment strategy for each asset class in the system’s investment fund. The 2018 Investment Plan calls for near policy objective investment returns and slightly accelerating U.S. economic growth for the upcoming fiscal year.

The board’s investment consultants, Callan Associates and Cliffwater LLC, reviewed and expressed support for the Investment Plan. Staff will evaluate the need to issue an addendum to the Annual Investment Plan once market levels are set on June 30, 2017. STRS Ohio will post the fiscal year 2018 Investment Plan on its website in early July. A copy of the plan is also available by request through STRS Ohio’s Member Services Center by calling toll-free 888‑227‑7877.

Retirements Approved

The Retirement Board approved 373 active members and 114 inactive members for service retirement benefits.

May 19, 2017

Correthers Wins Contributing Member Board Seat; Stein, Walters Unopposed for Retired Member Seats

Contributing teacher member Carol Correthers was reelected to the State Teachers Retirement Board in the 2017 election that concluded on May 1. Retired teacher member and current board chair Robert Stein, as well as retired teacher Rita J. Walters, were unopposed for the two retired teacher seats on the board. Walters will be serving her first term on the board. The terms for these three seats begin Sept. 1, 2017, and end on Aug. 31, 2021. Board members receive no compensation for service on the board other than reimbursement for actual, necessary expenses.

Board Reviews Preliminary 2018 Health Care Premiums; Will Continue to Explore Options to Improve Solvency of the Health Care Fund

During the May meeting of the State Teachers Retirement Board, STRS Ohio staff presented a preliminary look at health care program premiums for 2018. Staff works with health care consultants and actuaries to develop expected costs for the health care plans. The board learned that lower than expected health care claims during the review period for STRS Ohio’s self-insured plans will likely have a positive impact on 2018 premiums for these plans. This means premium increases are expected to be smaller than the consultants’ original projections. The board is slated to approve premiums for the 2018 plan year at its June meeting. Once approved, the premiums will be posted on STRS Ohio’s website.

The board has been studying proposals to improve the solvency of the Health Care Fund. This fund is currently funded through premiums charged to enrollees, government reimbursements and investment earnings. At its April meeting, the board learned that long-term trend increase projections, along with the new actuarial assumptions adopted by the board in March, had a negative impact on Health Care Fund solvency. The fund is now estimated to remain solvent for about 18 years. Staff is working with the system’s actuary, Segal Consulting, to develop options to extend solvency to 30 years or more, with the goal to keep the fund solvent until funding from employer contributions can be used to support the program. The board is expected to continue its discussion on Health Care Fund solvency at its June meeting.

STRS Ohio Operations Reviewed as Fiscal Year 2018 Budget Discussion Continues

Following the fiscal year 2018 budget presentation at the April board meeting, the Retirement Board requested information regarding retirement system administration and associated costs. In May, staff presented an overview of STRS Ohio’s operating budgets since fiscal year 2006 and the number of full-time equivalent (FTE) staff members. STRS Ohio’s proposed fiscal 2018 operating budget of $99.6 million is slightly higher (0.7%) than the fiscal year 2009 operating budget. The number of FTE staff members has decreased from a high in that period of 624 in fiscal 2008, to the proposed 544 in the fiscal 2018 budget. Other operational efficiencies noted include:

• High level of member service — STRS Ohio’s service has been ranked #1 compared to nearly 60 participating systems in CEM Benchmarking’s pension administration survey. While maintaining these high service levels, STRS Ohio’s costs have steadily declined while the average cost of CEM participants has increased.
• Low-cost investment structure —STRS Ohio manages about 70% of system assets in-house, a higher percentage than its pension plan peers. Internal management is much less expensive than using external money managers. About 20% of STRS Ohio’s total investment costs are spent on the 70% of assets managed in-house. The remaining 30% of assets are managed by outside money managers — accounting for about 80% of STRS Ohio’s total investment costs. In its most recent study, CEM Benchmarking indicated if STRS Ohio outsourced its internally managed assets and paid the median costs of its peer group, total investment costs would have been about $102 million higher. The CEM study showed STRS Ohio ranked second best in its peer group for lowest investment costs, and its five-year total net return ranked in the top 25% of the peer group.

Retirements Approved

The Retirement Board approved 35 active members and 60 inactive members for service retirement benefits.

April 21, 2017

Board Votes to Reduce Future Cost-of-Living Increases to 0% to Preserve Fiscal Integrity of the System; Will Revisit Within Five Years

At the April meeting of the State Teachers Retirement Board, the board made the difficult but necessary decision to reduce cost-of-living increases granted on or after July 1, 2017, to 0% to preserve the fiscal integrity of the retirement system. Current benefit recipients’ base benefit and past cost-of-living increases will not be affected by this change. The board also agreed to evaluate — not later than the next five-year actuarial experience review — whether an upward adjustment of the cost-of-living increase is payable without materially impairing the fiscal integrity of the retirement system. The cost-of-living adjustment has a large financial impact on the pension fund because it affects both active and retired members of the system. The vote follows last month’s action to approve changes to the actuarial assumptions that are used to calculate pension liabilities. The new assumptions resulted in additional liabilities that took STRS Ohio outside the parameters established in the board’s funding policy and beyond the 30-year funding target in Ohio law.

The board’s action is the culmination of many months of work with staff and consultants to get a detailed look at the financial status of the pension fund. The Retirement Board’s actuarial consultant, Segal Consulting, provided the board with updated financial projections that took into account the newly adopted actuarial assumptions. The system’s financial strength is expressed through the funded ratio — that is, the value of assets compared to accrued liabilities (expressed as a percentage), and the funding period — the amount of time needed to reach a funded status of 100% assuming current contribution rates. Segal’s projections showed STRS Ohio’s funded ratio at 62.6% with a funding period of 57.7 years. Under this scenario, STRS Ohio would be required to present a plan to the legislature to reduce its funding period to 30 years or less. Segal projects the board’s decision to reduce future cost-of-living increases will improve the system’s funded ratio to about 70.8% with a funding period of about 20 years if all economic and demographic assumptions are met. This would meet the benchmarks in the board’s funding policy, as well as the state of Ohio’s funding target.

As noted in the March issue of Board News, the changes to STRS Ohio’s actuarial assumptions followed the five-year experience study conducted by Segal Consulting. The experience review measures the system’s economic and demographic assumptions versus the actual experience over the past five years. Based on this review, Segal recommended adjustments to assumptions about expected investment returns, mortality, inflation, salary growth, payroll growth and teacher retirements, disability inceptions and terminations. The assumption changes with the most significant financial impact were: (1) Reducing the investment rate of return to recognize projections for modest global economic growth and lower expected returns for capital markets; (2) Adopting new mortality assumptions that reflect members are living longer and STRS Ohio is paying benefits for a longer period of time than expected; and (3) Reducing the payroll growth assumption to recognize there will be less money coming into the fund through member and employer contributions than expected.

Assumption Changes Have Negative Impact on Health Care Program Solvency

The Retirement Board has been weighing STRS Ohio staff proposals to improve the solvency of the retirement system’s Health Care Fund. The Jan. 1, 2017, valuation of the Health Care Fund showed a balance of $3.22 billion and an estimated solvency period of 22 years. The board learned at its April meeting that actuarial assumption changes adopted by the board in March had a negative impact, reducing the solvency period to an estimated 18 years. The primary factors for this change were increasing health care cost (trend) projections and a lower assumed rate of return on investments.

The Health Care Fund is currently funded through premiums charged to enrollees, government reimbursements and investment earnings on these funds. With no new sources of revenue for the health care program, the Retirement Board is looking at options to keep the Health Care Fund solvent until funding from the employer contributions can be returned. With the new assumptions in place, staff proposals discussed last month will need further revisions to meet the board’s funding objectives. The board directed staff to work on new options that have at least a 30-year solvency period. Under the plans presented thus far, costs for all participants are expected to increase — more so for non-Medicare enrollees — as health care program costs continue to grow. Health care coverage payouts during fiscal year 2016 totaled $677 million, an average of more than $1.8 million per day.

Proposed Operating Budget for Fiscal Year 2018 Calls for 2.8% Increase Over Current Year to Meet Board’s Investment Initiatives

The Finance Department proposed system budgets for the 2018 fiscal year (July 1, 2017–June 30, 2018) during the April meeting. The proposed operating budget totals $99.6 million, an increase of 2.8% over the fiscal 2017 budget and an increase of 0.7% over the fiscal year 2009 budget. Investment items account for all of the increase, as administrative departments budgets reflect a slight decrease from the current year. The budget increases in the investment area reflect changes in costs for custodial banking fees; payroll and staffing; and quotation and analytic services. The staffing component will expand STRS Ohio’s internal investment capabilities and recognize that STRS Ohio’s model of managing more than 70% of the system’s assets internally is cost effective. CEM Benchmarking analysis estimates STRS Ohio’s use of internal management saves about $100 million annually for the retirement system (based on median external management costs of STRS Ohio’s peer group of similar-sized retirement systems).

The proposed fiscal 2018 budget reflects 544 full-time equivalent associates, down from 556 in the current year. Other cost containment measures include spending less on printing and mailing costs as more members opt for online services. The proposed capital budget for fiscal 2018 totals $3.3 million, a 1.7% increase from the current year’s budget.

Retirements Approved

The Retirement Board approved 61 active members and 79 inactive members for service retirement benefits.

Other STRS Ohio News

STRS Ohio Retains Top Spot for CEM Service Level While Reducing Costs

CEM Benchmarking released its annual Pension Administration Benchmarking report for fiscal 2016 activity and STRS Ohio again received the very top service level score among 52 participating pension systems, primarily in the United States and Canada. STRS Ohio’s service level increased to 94 from 93. This increase was driven by new satisfaction surveying of online activities and faster than usual average speed of answer in the call center. STRS Ohio earned the highest service level score for Pension Payments, Call Center, One-on-One Counseling, Pension Estimates and Disaster Recovery. This is the 19th year STRS Ohio has participated in the benchmarking study and the ninth time the system received the top score.

While the service level was at the top, the administrative cost per active member and annuitant decreased to $107 from $110. This continues a trend of reduced administrative costs. The reduction in administrative costs had been primarily driven by staff reduction that reflects the increased usage of online applications and a reduction in retirements, counseling sessions and purchasable service activity.