BOARD OF TRUSTEES
REGULARLY SCHEDULED MEETING
JUNE 23, 2010
9:00 AM
MEETING MATERIALS
TABLE OF CONTENTS
Agenda ……………………………………………………………………………... 1-2 May 26, 2010 Meeting Minutes ……………………………...…………………... 3-5 Investment Manager Analysis ……………………………………………………… 6-11 Investment Consulant Monthly Report ……………………………………………. 12-19 Real Estate Strategy Discussion ………………………………………………….. 20-34 Renewal of Investment Manager Contracts …………………………………………. 35-37 Emergency Rules ………………………………………………................................ 38 Executive Secretary Report
Service Dashboard …………………………………………………………. 39-41 Client Status Update ……………………………………………………… 42-93 FY-2011 Agency Budget …………………………………………………… 94-95 Other Items …………………………………………………………………. 96-118
TEACHERS’ RETIREMENT SYSTEM OF OKLAHOMA Regular Board Meeting
Wednesday, June 23, 2010 – 9:00 AM TRS Administration Board Room
2500 N. Lincoln Blvd., 5th
Floor, Oklahoma City, OK
AGENDA
1. ROLL CALL FOR QUORUM
2. DISCUSSION AND POSSIBLE ACTION ON APPROVAL OF MINUTES FOR THE MAY 26, 2010 BOARD MEETING
3. PRESENTATION BY INVESTMENT MANAGER(S):
A. Epoch Investment Partners B. Advisory Research
4. DISCUSSION AND POSSIBLE ACTION ON INVESTMENT CONSULTANT MONTHLY
REPORT
5. DISCUSSION AND POSSIBLE ACTION ON MANAGER STATUS SUMMARY REPORT The Board of Trustees may elect to make any changes to the status of any manager based on the information available at the Board meeting
6. DISCUSSION AND POSSIBLE ACTION ON REAL ESTATE RFP
7. DISCUSSION AND POSSIBLE ACTION ON RENEWAL OF MANAGER CONTRACTS A. Advisory Research, Inc. B. Aronson+Johnson+Ortiz C. Brandes Investment Partners, LP D. Capital Guardian E. Causeway Capital Management LLC F. Epoch Investment Partners, Inc. G. Franklin Park, LLC H. Frontier Asset Management I. Goldman Sachs Asset Management J. Hoisington Investment Management Company K. Hotchkis & Wiley Investment, Mid-Cap L. Hotchkis & Wiley Investment, Large-Cap M. JP Morgan N. Loomis, Sayles & Company, Core O. Loomis, Sayles & Company, High Yield P. Lord Abbett & Company, LLC, Core Q. Lord Abbett & Company, LLC, High Yield R. MacKay Shields, LLC, Core S. MacKay Shields, LLC, High Yield T. Sawgrass Asset Management, LLC U. Shapiro Capital Management Company, Inc. V. Stephens Capital Management W. Thornburg Investment Management, Inc. X. Tocqueville Asset Management LP Y. Wellington Management Company, LLP
1
TEACHERS’ RETIREMENT SYSTEM OF OKLAHOMA Regular Board Meeting
Wednesday, June 23, 2010 – 9:00 AM TRS Administration Board Room
2500 N. Lincoln Blvd., 5th
Floor, Oklahoma City, OK
AGENDA (continued)
8. DISCUSSION AND POSSIBLE ACTION ON EMERGENCY RULE MAKING
9. DISCUSSION AND POSSIBLE ACTION ON EXECUTIVE SECRETARY REPORT A. Service Dashboard B. Client Status Update C. Legislative Update D. FY-2011 Agency Budget E. Other Items for Discussion
10. DISCUSSION AND POSSIBLE ACTION ON ELECTIONS OF BOARD OFFICERS
A. Chairman B. Vice-Chairman C. Secretary
11. QUESTIONS AND COMMENTS FROM TRUSTEES
12. NEW BUSINESS
13. ADJOURNMENT
2
MEETING MINUTES MAY 26, 2010
BOARD OF TRUSTEES TEACHERS’ RETIREMENT SYSTEM OF OKLAHOMA
The regularly scheduled meeting of the Board of Trustees of the Teachers’ Retirement System of Oklahoma was called to order by James Smith, Chairman, at 9:00 A.M., in the Administration Board Room, 5th
Floor, Oliver Hodge Education Building, 2500 N. Lincoln Blvd, OKC, OK. The meeting notice and agenda was posted in accordance with 25 O.S. 2001 Section 311(9).
TRUSTEES PRESENT: James Smith, Chairman Michael Simpson, Vice-Chairman Richard Gorman Dick Neptune, Secretary Galeard Roper Sherrie Barnes* Billie Stephenson Bruce DeMuth Gary Trennepohl TRUSTEES ABSENT: Michael Clingman Odilia Dank Cathy Conway Sandy Garrett TRS STAFF PRESENT: James R. Wilbanks, Executive Secretary Joe Ezzell, Assistant Executive Secretary Edward Romero, Secretary/Treasurer Kim Bold, Director of Human Resources Josh Richardson, Internal Auditor Nick Pointer, Investment Associate Becky Wilson, Executive Assistant to the Executive Secretary LEGAL COUNSEL PRESENT: Regina Switzer, Assistant Attorney General INVESTMENT CONSULTANT PRESENT: Gregory T. Weaver, gregory.w.group Douglas J. Anderson, gregory.w.group Tony Kay, gregory.w.group OTHERS PRESENT: Norman Cooper, Oklahoma Retired Educators Association Wayne Maxwell, Retired Professional Oklahoma Educators *Denotes either late arrival or early departure
ITEM 1 - ROLL CALL FOR QUORUM: Chairman Smith called the Board meeting to order and asked for a poll to determine if a quorum was present. Trustees responding were as follows: Ms. Barnes; Mr. DeMuth; Mr. Gorman; Mr. Neptune; Mr. Roper; Mr. Simpson; Ms. Stephenson; Dr. Trennepohl; and Chairman Smith. ITEM 2 - MEETING MINUTES: A motion was made by Mr. Simpson with a second made by Ms. Stephenson to approve the April 28, 2010 meeting minutes as presented. The motion carried by a unanimous voice vote. Trustees responding were Ms. Barnes; Mr. DeMuth; Mr. Gorman; Mr. Neptune; Mr. Roper; Mr. Simpson; Ms. Stephenson; Dr. Trennepohl; and Chairman Smith.
3
ITEM 3 - PRESENTATIONS BY INVESTMENT MANAGERS: Aronson Johnson Ortiz and Wellington Management Company, Investment Managers, were present to give respective presentations to the Board.
A break was taken from 10:23 a.m. to 10:33 a.m. ITEM 4 – INVESTMENT CONSULTANT MONTHLY REPORT: Gregory Weaver and Douglas Anderson of gregory.w.group, Investment Consultants to the Board, gave the Board their monthly report. No action was necessary. ITEM 5 – MANAGER STATUS SUMMARY REPORT: Gregory Weaver and Douglas Anderson of gregory.w.group, Investment Consultants to the Board, gave the Board the Manager Status Summary Report. No action was necessary. ITEM 6 – INVESTMENT CONSULTANT QUARTERLY REPORT: Gregory Weaver and Douglas Anderson of gregory.w.group, Investment Consultants to the Board, gave the Board their quarterly report. No action was necessary. ITEM 7 – STEPHENS CAPITAL MANAGEMENT FEE AMENDMENT: After discussion, a motion was made by Mr. Simpson with a second made by Mr. Roper to approve the Stephens Capital Management Fee Amendment. The motion carried by a unanimous voice vote. Trustees responding were Ms. Barnes; Mr. DeMuth; Mr. Gorman; Mr. Neptune; Mr. Roper; Mr. Simpson; Ms. Stephenson; Dr. Trennepohl; and Chairman Smith. ITEM 8 – EXTERNAL AUDITOR RFP: After discussion, a motion was made by Mr. Roper with a second made by Mr. DeMuth to retain Cole & Reed as the External Auditor. The motion carried by a unanimous voice vote. Trustees responding were Ms. Barnes; Mr. DeMuth; Mr. Gorman; Mr. Neptune; Mr. Roper; Mr. Simpson; Ms. Stephenson; Dr. Trennepohl; and Chairman Smith. ITEM 9 – LEGAL REPORT: Regina Switzer, Assistant Attorney General and legal counsel to the Board, gave the legal report to the Board. There was no action necessary on the report. ITEM 10 – EXECUTIVE SECRETARY REPORT: Dr. Wilbanks gave his report to the Board. A motion was made by Mr. Neptune with a second made by Mr. Simpson to approve the Executive Secretary Report. The motion carried by a unanimous voice vote. ITEM 11 - QUESTIONS AND COMMENTS FROM TRUSTEES: There were no questions or comments from the Trustees. ITEM 12 - NEW BUSINESS: There was no further business from the Board. ITEM 13 - ADJOURNMENT: There being no further business, a motion was made by Mr. Roper with a second made by Ms. Stephenson to adjourn. The meeting was adjourned at 12:00 p.m. Trustees present at adjournment were Ms. Barnes; Mr. DeMuth; Mr. Gorman; Mr. Neptune; Mr. Roper; Mr. Simpson; Ms. Stephenson; Dr. Trennepohl; and Chairman Smith. BOARD OF TRUSTEES, TEACHERS’ RETIREMENT SYSTEM OF OKLAHOMA
BY: Chairman, James E. Smith
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ATTEST:
BY: Dick Neptune, Secretary Certified correct minutes, subject to approval of the Board of Trustees of the Teachers’ Retirement System of Oklahoma, will be available at its next regularly scheduled meeting on June 23, 2010.
BY: Becky Wilson, Executive Assistant to the Executive Secretary
5
Monthly Investment AnalysisMonthly Investment Analysis
Advisory Research
Epoch Investment PartnersEpoch Investment Partners
6
Portfolio SummariesPortfolio Summaries
Advisory Research
Epoch InvestmentResearch Investment
Number of S t 10 10Sectors 10 10
Number of Securities 54 60Securities 54 60
% Large-Cap 63.95% 77.30%% Mid Cap% Mid Cap 15.09% 17.13%
% Small-Cap 14.23% 4.22%% C h% Cash 4.77% 1.35%
7
Portfolio ReturnsPortfolio Returns
3 Months 1 Year 3 Year 5 Year 10 Year3 Months 1 Year 3 Year 5 Year 10 Year
ARI Returns 2.23% 24.34% (9.97%) -- --
Russell 3000 0.02% 23.20% (8.24%) -- --
ARI Alpha -- 3.17% (1.87%) -- --
3 Months 1 Year 3 Year 5 Year 10 Year
Epoch Returns 0.37% 21.81% (5.92%) -- --
Russell 3000 0.02% 23.20% (8.24%) -- --
Epoch Alpha -- (0.93%) 2.16% -- --
8
Portfolio StatisticsPortfolio Statistics
3 Year Risk Statistics3 Year Risk StatisticsARI Epoch
CorrellationCorrellation W/Index 97.15% 97.82%
Correllation W/Oth MW/Other Manager 94.36% --
Beta 0.99 0.98 Sharpe Ratio (1 869) (1 231)Sharpe Ratio (1.869) (1.231)Treynor Ratio (0.118) (0.077)
9
Top Five Sector WeightingsTop Five Sector Weightings
90%
60%
70%
80%
90%
Industrials
40%
50%
60% Consumer Staples
Health Care
Consumer Discretionary
10%
20%
30%y
Energy
Information Technology
0%
ARI Epoch
Financials
10
Ratio AnalysisRatio Analysis
15
20
10
15
ARI
Epoch
5
p
0
P/B Ratio P/CF Ratio P/E Ratio P/S Ratio
11
May 2010 - Market Performance UpdateRisk Aversion Returns
-5.3 58.6 -0.5 14.0 4.3 8.4 8.7 5.5
Index Last Month Last Year Last 3 Years Last 5 Years Index Last Month Last Year Last 3 Years Last 5 Years
Dow Jones Industrial Average -7.6 22.7 -6.8 2.0 BC T-Bills 0.0 0.1 1.6 2.7NASDAQ (prc chg only) -8.3 27.2 -4.7 1.8 BC Long Treasury 4.3 7.8 8.7 5.5
BC US Agg 0.8 8.4 6.9 5.3S&P 500 cap weighted -8.0 21.0 -8.7 0.3S&P 500 equal weighted -7.4 32.0 -6.0 3.1S&P 400 Mid Cap -7.2 34.5 -4.5 4.1S&P Small Cap -7.2 34.9 -5.9 3.0S&P REIT -5.3 58.6 -10.7 2.1Russell 1000 Growth -7.6 21.6 -5.6 1.4Russell 1000 Value -8.2 23.0 -11.3 -0.3Russell Mid Cap Growth -6.9 30.1 -6.0 3.1Russell Mid Cap Value -7.8 37.6 -8.4 2.7Russell 2000 Growth -6.6 30.5 -5.6 3.2Russell 2000 Value -8.4 36.6 -7.8 2.2
Russell Top 200 -8.2 18.1 -8.9 -0.3Russell 1000 -7.9 22.3 -8.4 0.7Russell Mid Cap -7.4 33.9 -6.9 3.1Russell 2500 -7.4 35.1 -6.3 3.1 Equity prices moved sharply throughout May.
Equity Total Returns Bond Total Returns
Russell 2500 -7.4 35.1 -6.3 3.1 Equity prices moved sharply throughout May.
MSCI World Ex US -10.9 8.0 -11.7 2.6MSCI World Ex US Growth -10.5 8.7 -10.6 2.9MSCI World Ex US Value -11.3 7.1 -12.9 2.2MSCI EAFE -11.4 6.8 -12.6 1.8MSCI Emerging Markets -8.8 22.7 -0.5 14.0
TED Spread indicated higher level of perceived risk during May.
Equity markets moved lower during May as investors worried about loomingmacroeconomic issues. The unresolved Greek debt debacle spooked investors worldwide,driving down equity prices and affecting several sovereign debt ratings.
Domestic equity indexes suffered single digit losses. Growth outperformed value byrelatively modest amounts as return correlations increased. Trailing year results still favorvalue stocks.
International equities suffered losses in the low teens as U.S. Dollar strength exacerbatedshare price losses. Emerging markets outperformed developed markets while growthedged value.
The bond market enjoyed positive returns as investors moved into lower risk assets.Treasuries outperformed other market sectors. Corporate bond yield spreads widenedmodestly. Short term interest rates and T-bill returns remained near zero.
May, 2010 112
Oklahoma Teachers’ Retirement SystemInvestment Manager Profile – As of May 31, 2010
Manager Location Structure Portfolio Size (Total) Status Annual Fee
Advisory Research Chicago, Illinois Privately Held $ 313,310,780 On Alert 0.36
Epoch Investment Partners New York, New York Publicly Traded(ticker: EPHC)
$ 351,890,402 In Compliance 0.46
Manager Last Month Last Quarter Last Year Last 3 Years Last 5 Years Last 10 Years Since Inception
Advisory Research -7.0 2.2 24.3 -10.0 - - -2.7Russell 3000 -7.9 0.0 23.2 -8.2 0.8 0.0 0.0
inception: 9.3032006
Epoch Investment Partners -8.4 0.4 21.8 -5.9 - - -0.6Russell 3000 -7.9 0.0 23.2 -8.2 0.8 0.0 0.0
inception: 9.3032006
Manager
Advisory Research ARI's all cap portfolios are composed using the firm’s small cap, mid cap and large capinvestment disciplines. The firm has tailored its investment processes to each market segment.
All Cap Domestic Equity
Represented By:
Chris D. Crawshaw, Managing DirectorMatthew K. Swaim, Managing Director
Investment Mandate
All Cap Domestic Equity
Management Philosophy
Epoch Investment Partners
The small and mid cap teams concentrate on companies selling at discounted price/bookratios. Large cap positions are based on financial strength and sustainable franchisecharacteristics. Shares are purchased into the portfolios when they are trading at less than80% of the firm’s estimate of intrinsic value. The firm seeks to purchase companies thatrepresent the most attractive value opportunities regardless of their current marketcapitalization. Portfolios will hold 50 - 60 positions with turnover around 25%.
Epoch seeks to produce superior risk-adjusted returns by constructing diversified portfolios ofbusinesses with outstanding return profiles without a high degree of capital risk. Investmentsare evaluated on a private investor basis. Epoch uses a centralized decision process thatcomposes the firm’s best ideas into diversified but compact portfolios. Most of the firm’sresearch is proprietary and based on their expectations of free cash flow growth. Analysis ofa firm’s operations and history guide a private market valuation based on discounted freecash flow models. Epoch meets with management either in their offices or on-site to assesstheir skill, honesty and integrity before purchase. Portfolios will hold 55 – 60 positions withturnover around 25%. 100% of their trading is electronic.
Tom Pernice, Client Servicing HeadAndi Glogoff, US Portfolio Team
Bruce M. Zessar, J.D., Managing Director
Bill Priest, CEO/Co-CIO
g g
May, 2010 213
Oklahoma Teachers' Retirement SystemMonthly Asset Allocation ReviewAs of May 31, 2010
Asset Class Total Market Value Percentage of Total Target Percentage Action?*
All Cap/Large Capitalization 1,975,453,343 23.5% 28.0% YesMid Cap 1,191,763,224 14.2% 15.0% No
Small Capitalization 823,748,990 9.8% 10.0% No
Total Domestic Equity (includes private equity allocation) 3,990,965,557 47.5% 53.0% YesInternational Equity 1,208,728,418 14.4% 17.0% YesFixed Income (excludes OBP) 2,332,183,211 27.8% 30.0% No
Opportunistic Bonds 805,233,780 9.6% 10.0% No
Cash 63,800,349 0.8% 0.0% No
Current vs Target Asset Allocation (124,725,349)% of Total Target %
All Cap/Large Capitalization 23.5% 28.0%
Mid Cap 14.2% 15.0%
Small Capitalization 9.8% 10%
International Equity 14.4% 17.0%
Domestic Fixed Income 27.8% 30.0%
Opportunistic Bonds 9.6% 10.0%TOTAL 8,400,911,315 8,276,185,966
*Action is suggested when the allocation falls outside of 90% to 110% of its target allocation.
24% 14% 10% 14% 28% 10%0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
All Cap/LargeCapitalization
Mid Cap Small Capitalization International EquityDomestic Fixed
IncomeOpportunistic Bonds
% of Total 23.5% 14.2% 9.8% 14.4% 27.8% 9.6%
Target % 28.0% 15.0% 10% 17.0% 30.0% 10.0%
Current vs. Target Asset Allocation
May, 2010 314
Oklahoma Teachers' Retirement System Composites and Total FundPerformance Summary as of May 31, 2010
3,990,965,556.66 0.26 4.49 32.39 8.32 6.33 7.04 31.54Market Value Last Month Last Quarter 1 Year 3 Years 5 Years 10 Years Since
InceptionIndex SinceInception
InceptionDate
Total Domestic Equity 3,990,965,557 -7.5 1.3 26.0 -7.4 2.0 2.6 9.7 8.2 3.31.90S&P 500 -8.0 -0.9 21.0 -8.7 0.3 -0.8 3.31.90
Total All Cap Equity 665,201,182 -7.7 1.2 23.1 -7.9 - - -1.5 -2.1 9.30.06Russell 3000 -7.9 0.0 23.2 -8.2 0.8 0.0 9.30.06
Total Large Cap Equity 1,310,252,161 -7.2 -1.2 18.7 -9.9 -0.8 1.8 8.6 7.7 1.31.95S&P 500 -8.0 -0.9 21.0 -8.7 0.3 -0.8 1.31.95
Total Mid Cap Equity 1,191,763,224 -7.5 2.2 32.4 -5.6 4.5 6.0 7.7 7.2 11.30.98Russell MidCap -7.4 2.9 33.9 -6.9 3.1 5.2 11.30.98
Total Small Cap Equity 823,748,990 -7.7 4.5 32.1 -5.4 4.8 4.4 7.7 4.9 1.31.98Russell 2000 -7.6 5.6 33.6 -6.6 2.8 4.7 1.31.98
Total International Equity 1,208,728,418 -10.1 -4.8 9.3 -10.5 3.2 3.3 8.5 3.8 1.31.96MSCI EAFE -11.4 -7.4 6.8 -12.6 1.8 1.1 1.31.96
Total Fixed Income (excludes OBP) 2,332,183,211 0.3 1.9 11.7 8.3 6.3 7.0 7.4 7.2 3.31.90Barclays Aggregate 0.8 1.8 8.4 6.9 5.3 6.5 3.31.90
Opportunistic Bond Portfolio 805,233,780 -3.2 1.8 26.6 - - - 31.5 38.7 2.28.09ML High Yield -3.5 1.7 29.9 5.3 7.2 7.2 2.28.09
Cash 63,800,349 - - - - - - - -91 Day T-bill 0.0 0.0 0.2 1.7 2.8 - - -
Total Fund 8,545,556,092 -5.3 0.7 19.6 -2.6 4.2 5.0 8.9 11.30.91Allocation Index -5.8 0.1 17.9 -3.9 3.1 3.9 8.7 11.30.91
Actuarial Assumption 0.6 1.9 8.0 8.0 8.0 8.0 8.1 11.30.91182 00%182.00%
eep value individual stock selection with special attention paid to undiscovered value and management. Total Domestic Equity46%
Total Fixed Income39%
Total International Equity14%
Cash, 1%
Composite Allocation by Asset Class
May, 2010 415
Oklahoma Teachers' Retirement System Equity PortfoliosPerformance Summary as of May 31, 2010
501,286,786 (5.829) 5.983 46.664 (1.668) 8.010 10.589 #REF!Market Value Last Month Last Quarter 1 Year 3 Years 5 Years 10 Years Since
InceptionIndexSince
Inception
InceptionDate
Hotchkis & Wiley Large Cap 324,840,884 -8.6 1.8 31.1 -13.6 -2.9 5.4 9.8 8.9 3.31.90Russell 1000 Value -8.2 0.3 23.0 -11.3 -0.3 2.5
Goldman Sachs 484,124,491 -7.7 -2.7 16.1 -5.0 2.2 -1.2 9.2 7.5 3.31.90Sawgrass 501,286,786 -5.8 -1.7 19.9 -6.2 - - -0.4 0.4 6.30.06
Russell 1000 Growth -7.6 -1.2 21.6 -5.6 1.4 -3.9Advisory Research 313,310,780 -7.0 2.2 24.3 -10.0 - - -2.7 -2.1 9.30.06EPOCH 351,890,402 -8.4 0.4 21.8 -5.9 - - -0.6 -2.1 9.30.06
Russell 3000 -7.9 0.0 23.2 -8.2 0.8 0.0Capital Guardian 323,880,253 -9.6 -4.0 10.9 -10.5 3.2 - 7.7 10.3 4.30.03Causeway Capital 249,792,344 -12.0 -6.0 11.5 -10.9 1.9 - 9.4 8.5 4.30.03Brandes 391,100,510 -10.4 -6.0 5.1 -12.0 2.6 5.3 10.6 3.8 1.31.96Thornburg 243,955,311 -8.4 -2.6 12.4 -5.6 - - 4.4 -0.4 11.30.05
MSCI EAFE GD -11.4 -7.4 6.8 -12.6 1.8 1.1MSCI ACWI Ex US -9.5 -3.5 14.7 -9.7 2.0 0.4
Wellington 282,244,269 -7.7 2.4 31.1 -6.1 5.0 7.5 9.1 6.2 8.31.98Frontier Capital 328,613,818 -8.4 0.8 24.4 -1.7 8.0 - 7.2 5.6 5.31.02
Russell MidCap Growth -6.9 2.5 30.1 -6.0 3.1 -0.3AJO Partners 282,028,190 -6.1 2.3 30.2 -7.3 2.5 7.4 8.4 6.6 8.31.98
Russell MidCap -7.4 2.9 33.9 -6.9 3.1 3.4Hotchkis & Wiley Mid Cap 298,876,948 -7.5 3.4 46.7 -7.6 2.4 - 11.0 8.8 7.31.02
Russell MidCap Value -7.8 3.4 37.6 -8.4 2.7 -Shapiro Capital Management 423,679,420 -7.9 3.1 38.0 -2.9 6.6 10.6 8.4 6.8 1.31.98Tocqueville 400,069,570 -7.6 6.0 26.2 -6.4 6.5 - 8.4 8.0 10.31.00
Russell 2000 Value -8.4 6.1 36.6 -7.8 2.2 8.8Russell 2000 -7.6 5.6 33.6 -6.6 2.8 4.7
Private Equity Portfolio 24,859,901 - - - - - - - 9.30.08
Deep value individual stock selection with special attention paid to undiscovered value and management.
Hotchkis LC6%
Goldman Sachs9%
Sawgrass10%
ARI6%
EPOCH7%
AJO5%Hotchkis MC
6%
Frontier6%
Wellington5%
Shapiro8%
Tocqueville8%
Capital Guardian6%
Causeway5%
Brandes7%
Thornburg5%Equity Portfolio Allocation by Manager
May, 2010 516
Oklahoma Teachers' Retirement System Fixed Income PortfoliosPerformance Summary as of May 31, 2010
805,233,780.44 6.08 11.68 93.43 9.98 7.90 7.08 55.36Market Value Last Month Last Quarter 1 Year 3 Years 5 Years 10 Years Since
InceptionIndex SinceInception
InceptionDate
Hoisington 317,028,532 6.1 7.3 8.3 9.0 5.1 - 7.3 5.1 10.31.04Loomis Sayles 566,779,000 -1.7 0.6 15.7 10.0 7.9 7.1 6.8 6.3 7.31.99Lord Abbett 587,689,571 0.2 1.9 13.3 8.3 6.4 - 6.3 5.1 10.31.04Mackay Shields 572,568,114 -1.0 1.3 11.5 7.9 6.2 - 6.0 5.1 10.31.04PIMCO Distressed Mortgage I 75,852,987 2.7 11.7 93.4 - - - 1.8 - 5.31.2008PIMCO Distressed Mortgage II 43,205,903 0.0 3.0 56.3 - - - 55.4 - 12.31.2008Stephens 285,356,091 0.8 1.0 5.3 8.3 6.0 - 5.7 5.1 10.31.04
Barclays Aggregate 0.8 1.8 8.4 6.9 5.3 6.5Opportunistic Bond Portfolio 805,233,780 -3.2 1.8 26.6 - - - 31.5 38.7 2.28.09
Merrill Lynch High Yield II -3.5 1.7 29.9 5.3 7.2 7.2
Hoisington13%
PIMCO Distressed Mortgage II2%
Stephens12%
Fixed Income Portfolio Allocation by Manager
Hoisington13%
Loomis Sayles23%
Lord Abbett24%
Mackay Shields23%
PIMCO Distressed Mortgage I3%
PIMCO Distressed Mortgage II2%
Stephens12%
Fixed Income Portfolio Allocation by Manager
May, 2010 617
Oklahoma Teachers' Retirement SystemEstimated Net of Management Fee Performance SummaryAs of May 31, 2010
805,233,780.44 0.73 6.07 11.61 93.18 9.83 7.74 9.86 55.11 38.70Portfolio Market Value Estimated Last Last 1 Year 3 Years 5 Years 10 Year Since Index Since Inception
Fee Month Quarter Annualized Annualized Annualized inception inception DateHotchkis & Wiley 324,840,884 0.36 -8.7 1.7 30.7 -13.9 -3.3 5.0 9.4 8.0 3.31.90
Russell 1000 Value -8.2 0.3 23.0 -11.3 -0.3 2.5Goldman Sachs 484,124,491 0.27 5.0 -2.8 15.8 -5.3 1.9 -1.5 9.0 6.6 3.31.90
Sawgrass 501,286,786 0.36 -5.9 -1.8 19.6 - - - -0.7 6.6 6.30.06
Russell 1000 Growth -7.6 -1.2 21.6 -5.6 1.4 -3.9Advisory Research 313,310,780 0.36 -7.0 2.1 24.0 -10.3 - - -3.1 -2.1 9.30.06
EPOCH 351,890,402 0.46 -8.4 0.3 21.4 -6.4 - - -1.0 -2.1 9.30.06
Russell 3000 -7.9 0.0 23.2 -8.2 0.8 0.0AJO Partners 282,028,190 0.68 -6.1 2.1 29.5 -8.0 1.8 6.7 7.8 6.6 8.31.98
Wellington 282,244,269 0.45 -7.7 2.3 30.7 -6.5 4.5 7.1 8.7 6.2 8.31.98
Frontier Capital Management 328,613,818 0.56 -8.4 0.6 23.9 -2.2 7.4 - 6.6 5.6 5.31.02
Hotchkis & Wiley Mid Cap 298,876,948 0.50 -7.5 3.3 46.2 -8.1 1.9 - 10.5 8.8 7.31.02
Russell MidCap -7.4 2.9 33.9 -6.9 3.1 3.4Shapiro Capital Management 423,679,420 0.73 -7.9 2.9 37.3 -3.6 5.8 9.9 7.7 6.8 1.31.98
Tocqueville 400,069,570 0.66 -7.6 5.8 25.5 -7.1 5.8 - 7.8 8.0 9.30.00
Russell 2000 -7.6 5.6 33.6 -6.6 2.8 4.7Private Equity 24,859,901 - - - - - - - - 9.30.08
S&P 500 + 4.0% -7.9 0.1 25.0 -4.7 4.3 3.2Capital Guardian 323,880,253 0 42 -9 7 -4 1 10 5 -11 0 2 7 - 7 6 10 3 4 30 03Capital Guardian 323,880,253 0.42 -9.7 -4.1 10.5 -11.0 2.7 - 7.6 10.3 4.30.03
Causeway Capital 249,792,344 0.41 -12.0 -6.1 11.1 -11.3 1.5 - 9.0 10.5 4.30.03
Brandes 391,100,510 0.41 -6.0 -6.1 4.7 -12.4 2.2 4.8 10.2 3.8 1.31.96
Thornburg 243,955,311 0.52 -8.5 -2.7 11.9 -6.1 - - 3.9 -0.4 11.30.05
MSCI EAFE GD -11.4 -7.4 6.8 -12.6 1.8 1.1MSCI ACWI Ex US -9.5 -3.5 14.7 -9.7 2.0 0.4
Hoisington 317,028,532 0.15 6.1 7.2 8.1 8.8 4.9 - 7.1 5.1 10.31.04
Loomis Sayles 566,779,000 0.15 -1.7 0.6 15.5 9.8 7.7 6.9 6.7 6.3 7.31.99
Lord Abbett 587,689,571 0.17 0.2 1.8 13.1 8.1 6.3 - 6.1 5.1 10.31.04
Mackay Shields 572,568,114 0.21 -1.0 1.2 11.3 7.7 6.0 - 5.8 5.1 10.31.04
PIMCO Distressed Mortgage I 75,852,987 0.25 2.7 11.6 93.2 - - - 1.6 - 5.31.2008
PIMCO Distressed Mortgage II 43,205,903 0.25 0.0 2.9 56.1 - - - 55.1 - 12.31.2008
Stephens 285,356,091 0.16 0.8 1.0 5.2 8.2 5.8 - 5.5 5.1 10.31.04Barclays Aggregate 0.8 1.8 8.4 6.9 5.3 6.5
Opportunistic Bond Portfolio 805,233,780 0.44 -3.2 1.6 26.2 - - - 31.5 38.7 2.28.09
ML High Yield II -3.5 1.7 29.9 5.3 7.2 7.2
Total Fund 8,545,556,092 0.38 -5.3 0.6 19.2 -3.0 3.9 4.7 8.5 9.1 11.30.91
Allocation Index -5.8 0.1 17.9 -3.9 3.1 3.9 9.1Actuarial Assumption 0.6 1.9 8.0 8.0 8.0 8.0 8.0
May, 2010 718
Oklahoma Teachers' Retirement SystemManager Status SummaryAs of May 31, 2010
Manager % of Total Portfolio Mandate Status Reason - Date of Most Recent Change (term)
Domestic Equity 5Goldman Sachs 6% Large Cap Growth Equity On Alert Organizational Issues - October, 2010Sawgrass 6% Large Cap Growth Equity In ComplianceHotchkis & Wiley 4% Large Cap Value Equity In Compliance
Advisory Research 4% All Cap Equity On Alert Performance - June 2010EPOCH 4% All Cap Equity In Compliance
AJO Partners 3% Mid Cap Value Equity In ComplianceFrontier Capital Management 3% Mid Cap Growth Equity In ComplianceHotchkis & Wiley 4% Mid Cap Value Equity In ComplianceWellington 3% Mid Cap Growth Equity In Compliance
Shapiro Capital Management 5% Small Cap Value Equity In ComplianceShapiro Capital Management 5% Small Cap Value Equity In ComplianceTocqueville 5% Small Cap Value Equity In Compliance
International EquityBrandes 5% International Value Equity In ComplianceCapital Guardian 4% International Growth Equity On Alert Performance - June 2010Causeway Capital 3% International Value Equity In ComplianceThornburg 3% International Value Equity In Compliance
Fixed IncomeHoisington 4% Fixed Income In ComplianceLoomis Sayles 7% Fixed Income In ComplianceLord Abbett 7% Fixed Income In ComplianceMackay Shields 7% Fixed Income In ComplianceStephens 3% Fixed Income In Compliance
May, 2010 819
Real Estate Strategy Discussion
June, 2010
20
Economic Environment
• Mid 2010: uneven worldwide economic recovery.
• Commercial real estate prices have not rebounded like equities or fixed income.
• U.S. office vacancy rate: 16.6% during the first quarter of 2010 from 12.5% as of the fourth quarter of 2007. Vacancy rates vary drastically by city: Phoenix: 25.8%; New York 8.5%. They could move even higher.
• Rent declines have been large even in New York: 40% to 45% in some cases. They could move even lower.
• The real estate market is still soft and prices remain depressed. Appraisals have stabilized.
• The supply of credit remains tight – especially bank debt.
• Capital flows from institutional investors is picking up.
21
Goals for Real Estate Allocation
• Relatively stable returns coming from income and gradual capital appreciation.• Allocation might eventually compose 5% to 10% of the System’s investment
portfolio. The average public pension plan has an allocation of 6.7% to real estate (public fund survey).
• Maintenance of reasonable liquidity.• We anticipate that the initial allocation will be relatively low risk, established
properties. These are commonly called “core” allocations. Future allocations might be made to value-added, distressed, opportunistic, special situations or potentially, in-state properties.
• Real estate is a “real” asset. It generally performs well during inflationary periods.
• Allocation could take form of direct transactions in a separate account, participation in a commingled fund, or via a portfolio of REITS. A combined strategy could also be employed. Each type of exposure has strengths and drawbacks.
22
Active vs. Passive Management
• Active management in real estate can be based upon market fundamentals: asset replacement cost, discounted cash flows, comparable property sales and other supply/demand reference points. Competent management of properties maximize their individual attractiveness and residual value.
• Active management can be extremely useful during portfolio construction and maintenance. Selecting a portfolio of attractive properties can be enhanced through experience, insight and local knowledge.
• Return dispersion among top quartile and bottom quartile real estate managers falls between publicly traded asset classes and private/alternative assets. Real estate investors can add value through good manager selection.
23
Real Estate: BasicsReal estate is a distinct asset class that encompasses a wide variety of investment strategies.
• Debt vs. Equity– Income generation– Capital gains
• REITs vs. Direct Investment• Property Type
– Established– Development– Rehabilitation– Commercial– Non-commercial
• Manager Type– Large firm/global portfolio– Smaller firm/boutique
• Diversification: Local, Regional, National, International• Liquidity premium is an integral component of Real Estate investing
24
Real Estate Investment OptionsRisk/Return Comparison
0%
5%
10%
15%
20%
25%
30%
35%
Core Value Added Opportunistic
Stabilized, income producing properties located in prime markets.Return: 7% - 10%Leverage: 0%-30%
Re-leasing, redevelopment and repositioning.Return: 13% - 17%Leverage: 40% - 65%
Distressed propertiesReturn: 18%+Leverage: +66%
25
Performance Comparison as of 12.31.2009
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Last Quarter Last Year Last 3 Years Last 5 YearsLast 10 Years
Open End Diversified Core Equity -3.5% -29.8% -9.8% 0.7% 5.0%
NCREFI Property Index -2.1% -16.9% -3.4% 4.8% 7.3%
NFTSE NAREIT REIT 9.4% 28.0% -12.4% 0.4% 10.6%
S&P 500 6.0% 26.5% -5.6% 0.4% -1.0%
Russell 2000 3.9% 27.2% -6.1% 0.5% 3.5%
BC Aggregage 0.2% 5.9% 6.0% 5.0% 6.3%
26
Real Estate Capital Returns
-9% -10%-25% -13%
-37% -34%-17% -30%-31% -44%
26% 27%
-100.0%
-80.0%
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
2008 2009
27
Performance Breakdown 1.6% 1.6%
6.1% 5.4% 5.7% 6.8%
-5.1%
-8.9%
-34.1%
-14.6%
-4.8% -1.7%
Last Quarter
Previous Quarter
Last Year Last 3 Years
Last 5 Years
Last 10 Years
Income Appreciation
Real Estate contains characteristics of both stocks and bonds. Contractual lease payments closely resemble fixed income while the residual value of the property is equity like in its appreciation.
As with many asset classes, a contrarian investment strategy can be wise. When reviewing historical performance data, real estate appears most attractive when its past returns are the bleakest. Buy low and sell high!
28
Search Overview
• Number of responses: 34– Open Ended Funds: 21
– Closed Ended Funds: 7
– Separate Accounts: 6
– Core: 21
– Core Plus: 8
– REITs: 2
– Debt: 3
29
REITs
• Real Estate Investment Trusts are publicly traded vehicles that invest in real estate. Currently, there are roughly 134 publicly trades REITs. They are liquid and transparent. They should be considered return enhancement rather than diversification.
• Equity REITS: mostly own and operate income producing real estate properties. 84% of publicly traded REITS are equity.
• Mortgage REITS: mostly lend money directly to real estate owners or operators. They also extend credit indirectly through acquisition of loans or mortgage-backed securities.
• Hybrid REITS: This category owns properties and lend money to real estate operators.
• They offer liquid exposure to real estate. However, short-term results can be closely correlated with equity markets.
• Total REIT exposure in the OTRS’ equity portfolios is roughly $25 million.
30
Additional Consideration: Secondary Market Opportunities
• Secondary transactions occur when real estate investors wish to sell properties out of existing portfolios. Secondary transactions can occur on quite favorable terms for buyers. They can also prove to be quite competitive and expensive.
• 2009 was a record year for secondary transactions. $6 billion of transactions with 70% of traded funds being non-US. This can be seen as a measure of market/investor/owner stress.
• Sellers’ motivations are highly varied. However, many transaction were not completed due to market uncertainty.
31
Possible Portfolio Structures
Core100%
Core80%
REITS20%
32
Possible Portfolio Structures
Core70%
REITS20%
Debt10%
Core60%
REITS20%
Debt10%
Value Added
10%
33
Strategic Ideas
• Capitalize on motivated sellers.• Start with lower risk investments =
Core Portfolio.• Focus on high quality properties.• Acquire assets at attractive
discounts to normalized value.• Selective and patient manager
review.• Moderate investment pace – no
need to rush.• Approach value-added
opportunities cautiously.• Depressed market makes aggressive
returns attainable within moderate risk portfolios.
34
RENEWAL OF INVESTMENT MANAGER CONTRACTS
JUNE 2010
The contracts with the following managers need to be ratified for another year. These ratifications will be through June 30, 2011.
Advisory Research First $100 Million .50 percent
Next $100 Million .375 percentThereafter .225 percent
Aronson+Johnson+Ortiz Performance Based
Brandes First $50 Million .55 percentNext $50 Million .50 percentNext $50 Million .45 percentNext $50 Million .40 percentThereafter .35 percent
Capital Guardian First $25 Million .70 percentNext $25 Million .55 percentNext $200 Million .425 percentThereafter .375 percent
Causeway Capital First $10 Million .75 percentNext $40 Million .65 percentNext $50 Million .50 percentNext $50 Million .35 percentNext $50 Million .30 percentThereafter .25 percent
Epoch First $250 Million .49 percentNext $50 Million .45 percentThereafter .35 percent
Franklin Park First $100 Million .80 percentNext $100 Million .70 percentThereafter .60 percent
Monitoring feeon Net Invested Capital .25 percent
35
Frontier Capital First $50 Million .75 percentNext $50 Million .65 percentThereafter .50 percent
Goldman Sachs First $250 Million .25 percentNext $250 Million .25 percentThereafter .22 percent
Hoisington First $300 Million .15 percentThereafter .05 percent
Hotchkis Wiley Mid‐Cap AUM .50 percent
Hotchkis Wiley Large‐Cap First $10 Million .60 percentNext $140 Million .50 percentNext $50 Million .30 percentThereafter .20 percent
JP Morgan Profit Share
Loomis Sayles First $100 Million .20 percentNext $400 Million .15 percentThereafter .10 percent
Loomis Sayles High Yield AUM .50 percent
Lord Abbett First $250 Million .20 percentNext $250 Million .15 percentThereafter .125 percent
Lord Abbett High Yield First $10 Million .65 percentNext $20 Million .50 percentThereafter .40 percent
MacKay Shields First $100 Million .30 percentNext $100 Million .25 percentThereafter .20 percent
MacKay Shields High Yield AUM .45 percent
Sawgrass First $100 Million .50 percentNext $250 Million .34 percentThereafter .25 percent
36
Shapiro First $100 Million .905 percentNext $300 Million .67 percentThereafter .925 percent
Stephens First $10 Million .30 percentNext $15 Million .25 percentNext $175 Million .15 percentThereafter .10 percent
Tocqueville First $10 Million 1.00 percentNext $15 Million .75 percentThereafter .65 percent
Thornburg First $200 Million .525 percentThereafter .50 percent
Wellington AUM .45 percent
37
2010-2011 Emergency Rules
The Board is requested to adopt emergency rules as a result of the passage of House Bill 1935 of the 2010 Legislature, modifying provisions related to certain retirement options.
Below is a draft of changes to the rules.
Subchapter 15. Service Retirement 715:10-15-5. Date of retirement contract is binding; revocation of contract
The final contract for retirement becomes binding on the effective date shown on the contract and shall be known as the date of retirement. The contract may be revoked by the member, or the retirement plan changed, before the date of retirement. Any change or revocation must be in writing, delivered to the Teachers' Retirement System, Oklahoma City, Oklahoma, or postmarked by the United States Postal Service prior to the effective date of retirement. After the retirement date, the contract cannot be canceled, nor the retirement plan changed. After the retirement date the retirement plan cannot be changed except as outlined in paragraphs one (1) and two (2) below.
(1)
If the member elected the Option 2 or Option 3 retirement contract and the member's designated beneficiary dies before the retirement date, the member may select another retirement plan without penalty. If a Maximum or Option 1 retiree should die during the month following the date of retirement and before the first retirement benefit is due, any distribution to beneficiaries designated on the member's retirement contract shall be paid pursuant to OAC 715:10-9-1 and 715:10-9-2.
(2)
After the retirement date, a member who elected a reduced benefit under Option 1, Option 2, Option 3 or Option 4 may make a one-time irrevocable election to change their retirement plan within sixty (60) days of the retirement date. The beneficiary designated by the member at the time of retirement shall not be changed if the member makes the election provided for in this paragraph. Such election must be made in writing, delivered to the Teachers' Retirement System, Oklahoma City, Oklahoma, or postmarked by the United States Postal Service prior to the sixtieth day after the date of retirement.
A member who elected the Maximum benefit and marries after the retirement date, may make a one-time election to change to an Option 2 or Option 3 benefit and name the member’s spouse as the designated beneficiary. The member shall provide proof of the member's good health before the Board of Trustees will permit a change to either Option 2 or 3 and the naming of a designated beneficiary. A medical examination conducted by a licensed physician is required for purposes of determining good health. Such examination must be approved by the Medical Board. The member shall be required to provide proof of age for the new beneficiary. The Board of Trustees shall adjust the monthly benefit to the actuarially equivalent amount based on the new designated beneficiary's age. Such election must be made in writing using the forms proscribed by the Teachers’ Retirement System and delivered to the Teachers' Retirement System, Oklahoma City, Oklahoma, or postmarked by the United States Postal Service prior to one (1) year after the date of marriage, or July 1, 2011, whichever date is later.
Specifically, 715:10-15-5 is being amended to allow a member who elected a reduced benefit a one-time irrevocable election to change their retirement plan within sixty (60) days of the retirement date. Additionally, this rule is being amended to allow a member who elected the maximum benefit, and marries after the retirement date, a one-time election to change their retirement plan.
38
Clients Served
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10
Analysts 1,241 1,309 1,422 834 1,505 1,585 1,553 1,211 805
Info Center 4,715 5,275 6,136 3,644 6,228 9,308 8,803 7,150 7,789
Support 3,547 3,596 4,114 2,546 3,348 4,754 7,331 6,179 2,488
Total 9,503 10,180 11,672 7,024 11,081 15,647 17,687 14,540 11,082
70%
75%
80%
85%
90%
95%
100%
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10
Percent Client Services Accomplishes Objectives
Objectives:
Info Center - Percentage of Clients Served
Benefit Analysts - Estimates complete within 24 hours
Support - Mail, Estimates, other activities complete within 24-48 hours39
Total Clients Served 10,031 10,741 12,159 10,190 12,578 9,503 7,838 9,238
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10
Clients Served by Department
ANALYSTS INFORMATION CENTER SUPPORT
40%
50%
60%
70%
80%
90%
100%
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10
Percent Client Services Accomplishes Objectives
ANALYSTS INFORMATION SUPPORT
Objectives:
Info Center - Percentage of Clients Served
Benefit Analysts - Estimates complete within 24 hours
Support - Mail, Estimates, other activities complete within 24-48 hours
40
Clients Served by Information Center
3.00
4.00
5.00
6.00
7.00
8.00
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10
Min
ute
sMaximum Answer Delay - Information Center
0.00
0.10
0.20
0.30
0.40
0.50
0.60
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10
Min
ute
s
Average Answer Delay - Information Center
41
Client Status Update Report
June 3, 2010
Regular Retirement
Clients Recommended: 1453 Monthly Pay: $2,884,524.76
Disability Retirement
Clients Recommended for Regular Disability 8 Clients Recommended for Social Security Disability 3 Clients Not Recommended for Disability Retirement 0
Retirement Payroll Termination
Payroll Changes ($111,988.83) Deceased 103 Retirement Cancelled 1 Return To Teaching 4
42
Board Meeting June 23, 2010
Cash Basis May 2009 May 2010
Monthly Contributions: Fiscal Year 2009 Fiscal Year 2010 $ Change % Change
Member Deposits $25,506,866.05 $25,455,405.30 ($51,460.75) -0.20%
Employer Contributions 33,373,271.20 35,821,009.63 2,447,738.43 7.33%
State Revenue 25,687,491.60 24,446,111.21 (1,241,380.39) -4.83%
Total Retirement Receipts 84,567,628.85 85,722,526.14 1,154,897.29 1.37%
Monthly Distributions:
Retirement Benefits 70,553,810.07 73,787,709.27 3,233,899.20 4.58%
Withdrawals and Death Benefits 1,986,764.56 2,968,434.05 981,669.49 49.41%Total Benefit Payments 72,540,574.63 76,756,143.32 4,215,568.69 5.81%
Net (Receipts - Payments) $12,027,054.22 $8,966,382.82 ($3,060,671.40) -25.45%
Year to Date Year to Date
Year to Date Contributions: Fiscal Year 2009 Fiscal Year 2010 $ Change % Change
Member Deposits $259,950,498.75 $262,926,434.46 $2,975,935.71 1.14%
Employer Contributions 322,474,010.86 352,162,112.34 29,688,101.48 9.21%
State Revenue 246,041,661.73 208,223,825.96 (37,817,835.77) -15.37%
Total Retirement Receipts 828,466,171.34 823,312,372.76 (5,153,798.58) -0.62%
Year to Date Distributions:
Retirement Benefits 793,611,967.97 825,482,650.91 31,870,682.94 4.02%
Withdrawals and Death Benefits 40,979,922.51 39,418,563.56 (1,561,358.95) -3.81%
Total Benefit Payments 834,591,890.48 864,901,214.47 30,309,323.99 3.63%
Net (Receipts - Payments) ($6,125,719.14) ($41,588,841.71) ($35,463,122.57) 578.92%
Client Status Update Report - Finance Division
May 31, 2010
43
DISABILITY RETIREMENT AS PROVIDED BY 70 O.S. 17-105 SOCIAL SECURITY DISABILITY
JUNE 3, 2010
RETIREMENT SSA EFFECTIVE RETIREMENT MEMBER NAME NUMBER DATE DATE
1. JANE R ROBERTS 03/01/2009 June 2010 2. LUELLA RANDIOLPH 11/01/2007 June 2010 JUNE 3, 2010 ______________________________________________ _________________________ ADMINISTRATIVE ASSISTANT II DATE PREPARED
HB 2392 EFFECTIVE 9/1/94 MEDICAL BOARD MEETING JUNE 3, 2010 44
DISABILITY RETIREMENT NOT RECOMMENDED JUNE 3, 2010
MEMBER NAME/COMMENTS SEX/AGE DATE OF BIRTH
NONE JUNE 3, 2010 ______________________________________________ _________________________ ADMINISTRATIVE ASSISTANT II DATE PREPARED
MEDICAL BOARD MEETING JUNE 3, 2010 45
DISABILITY RETIREMENT RE-EVALUATED JUNE 3, 2010
RETIREMENT MEMBER NAME SEX/AGE DATE OF BIRTH COMMENTS NUMBER
1. D-3074 CATHIE I SCHMIDT F-53 11/02/1956 CONTINUE JUNE 3, 2010 ______________________________________________ _________________________ ADMINISTRATIVE ASSISTANT II DATE PREPARED
MEDICAL BOARD MEETING JUNE 3, 2010 46
MEDICAL BOARD REPORT JUNE 3, 2010 The Medical Board of the Teachers' Retirement System of Oklahoma met in the Board Room of the Teachers' Retirement System, located in the Oliver Hodge Building, 2500 North Lincoln Boulevard, 5th
floor, Oklahoma City, Oklahoma 73105.
BOARD MEMBERS PRESENT: George R. Jay, M.D. Dathan Jay, M.D. Joseph Harroz, M.D. OTHERS PRESENT: Anthony W Gilliard, Administrative Assistant II The following member’s applications for Disability Retirement were presented and the Medical Board's action is noted beneath each name:
MEMBER NAME/COMMENTS SEX/AGE
1. MELISSA D CHAPMAN F-51 DISABILITY RETIREMENT RECOMMENDED 2. LORALEE A HARDEN F-55 DISABILITY RETIREMENT RECOMMENDED 3. SHERRI L INSKEEP F-55 DISABILITY RETIREMENT RECOMMENDED 4. PATRICIA M LANIER F-59 DISABILITY RETIREMENT RECOMMENDED 5. JAMES H PHILLIPS M-46 DISABILITY RETIREMENT RECOMMENDED 6. ANDREW A WRIGHT M-51 DISABILITY RETIREMENT RECOMMENDED 7. BARBARA I PITTMAN F-53 DISABILITY RETIREMENT RECOMMENDED JUNE 3, 2010 ______________________________________________ _________________________ ADMINISTRATIVE ASSISTANT II DATE PREPARED
MEDICAL BOARD MEETING JUNE 3, 2010 47
MEDICAL BOARD REPORT JUNE 3, 2010
MEMBER NAME/COMMENTS SEX/AGE
8. YULANDA R WARNER F-48 DISABILITY RETIREMENT RECOMMENDED 9. VIRGINIA S GROSS F-59 DISABILITY RETIREMENT RECOMMENDED JUNE 3, 2010 ______________________________________________ _________________________ ADMINISTRATIVE ASSISTANT II DATE PREPARED
MEDICAL BOARD MEETING JUNE 3, 2010 48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
Projected Proposed Increase Increase FY 2008 FY 2009 FY 2010 FY 2011 (Decrease) (Decrease)
Object of Expenditure Actual Expenses Actual Expenses Expenses Budget Amount PercentagePersonal Services
Salary and Longevity Pay Expenses 2,367,731 2,512,457 2,188,455 2,508,051 319,596 14.6%Taxes, Benefits, and Other Expenses 1,096,662 1,159,025 1,051,702 1,280,246 228,544 21.7%
Subtotal Personal Services 3,464,393 3,671,482 3,240,157 3,788,297 548,140 16.9%Professional Services
Investment Manager Expenses 32,883,561 25,673,384 29,052,606 45,840,225 16,787,619 57.8%Investment Consultant Expenses 880,407 742,681 716,566 702,000 (14,566) -2.0%Investment Custodian Expenses 0 0 0 1,500,000 1,500,000 100.0%Pension Commission Expenses 56,146 58,351 35,690 60,000 24,311 68.1%
Subtotal Investment Expenses 33,820,114 26,474,416 29,804,862 48,102,225 18,297,363 61.4%Legal Services - Special Projects 45,959 48,007 15,112 60,000 44,888 297.0%Legal Services - Attorney General 115,658 116,005 46,344 55,000 8,656 18.7%Administrative Hearings 500 0 0 1,000 1,000 100.0%Auditing Services 42,200 44,800 44,800 45,000 200 0.4%Actuarial Services 66,715 80,606 74,338 125,000 50,662 68.2%Medical Hearings 7,040 11,174 10,800 20,000 9,200 85.2%Miscellaneous Services 71,524 24,749 20,725 114,000 93,275 450.1%
Subtotal Professional Services 349,596 325,341 212,119 420,000 207,881 98.0%
Subtotal Professional Services 34,169,710 26,799,757 30,016,981 48,522,225 18,505,244 61.6%
Travel and Per Diem ExpensesNon-Employee Travel Expenses 52,396 58,170 57,099 78,000 20,901 36.6%Employee Travel Expenses 47,870 37,835 43,306 73,900 30,594 70.6%
Subtotal Travel and Per Diem Expenses 100,266 96,005 100,405 151,900 51,495 51.3%Administrative Expenses
Miscellaneous Administrative Expenses 376,535 443,141 368,956 604,634 235,678 63.9%Rent Expenses 189,857 200,953 201,161 204,500 3,339 1.7%Maintenance and Repair Expenses 11,835 5,889 7,798 21,500 13,702 175.7%Office Supplies and Material Expenses 32,391 40,301 19,100 42,211 23,111 121.0%Office Furniture and Equipment Expenses 3,792 14,120 141,626 137,800 (3,826) -2.7%
Subtotal Administrative Expenses 621,901 712,274 745,926 1,018,645 272,719 36.6%Data Processing Expenses
Professional Services 8,948 32,414 62,850 1,530,000 1,467,150 2334.4%Travel and Per Diem Expenses 1,706 1,143 108 45,000 44,892 41566.7%Miscellaneous Administrative Expenses 11,086 10,781 47,011 40,000 (7,011) -14.9%Office Supplies and Material Expenses 21,199 22,596 15,892 35,000 19,108 120.2%Office Furniture and Equipment Expenses 53,721 35,381 20,490 53,000 32,510 158.7%
Subtotal Data Processing Expenses 161,056 172,457 176,580 1,815,500 1,638,920 928.1%
Total Expenses 38,517,326 31,451,975 34,280,048 55,296,567 21,016,519 61.3%Totals Investment Expenses Only 33,820,114 26,474,416 29,804,862 48,102,225 18,297,363 61.4%Totals Data Processing Expenses Only 911,170 897,730 633,824 2,171,390 1,537,566 242.6%Totals ex Investment and Data Processing Expenses 3,786,042 4,079,829 3,841,363 5,022,952 1,181,590 30.8%
Budget Work Program FY 2011
Board Meeting June 23, 2010Chart I
94
Proposed Increase Increase FY 2008 FY 2009 FY 2010 FY 2011 (Decrease) (Decrease)
Object of Expenditure Actual Expenses Actual Expenses Budget Budget Amount PercentagePersonal Services
Salary and Longevity Pay Expenses 2,367,731 2,512,457 2,492,765 2,508,051 15,286 0.6%Taxes, Benefits, and Other Expenses 1,096,662 1,159,025 1,403,833 1,280,246 (123,587) -8.8%
Subtotal Personal Services 3,464,393 3,671,482 3,896,598 3,788,297 (108,301) -2.8%Professional Services
Investment Manager Expenses 32,883,561 25,673,384 33,836,693 45,840,225 12,003,532 35.5%Investment Consultant Expenses 880,407 742,681 855,135 702,000 (153,135) -17.9%Investment Custodian Expenses 0 0 1,500,000 1,500,000 0 0.0%Pension Commission Expenses 56,146 58,351 60,000 60,000 0 0.0%
Subtotal Investment Expenses 33,820,114 26,474,416 36,251,828 48,102,225 11,850,397 32.7%Legal Services - Special Projects 45,959 48,007 60,000 60,000 0 0.0%Legal Services - Attorney General 115,658 116,005 55,000 55,000 0 0.0%Administrative Hearings 500 0 1,000 1,000 0 0.0%Auditing Services 42,200 44,800 45,000 45,000 0 0.0%Actuarial Services 66,715 80,606 125,000 125,000 0 0.0%Medical Hearings 7,040 11,174 15,000 20,000 5,000 33.3%Miscellaneous Services 71,524 24,749 32,600 114,000 81,400 249.7%
Subtotal Professional Services 349,596 325,341 333,600 420,000 86,400 25.9%Subtotal Professional Services 34,169,710 26,799,757 36,585,428 48,522,225 11,936,797 32.6%
Travel and Per Diem ExpensesNon-Employee Travel Expenses 52,396 58,170 60,000 78,000 18,000 30.0%Employee Travel Expenses 47,870 37,835 65,000 73,900 8,900 13.7%
Subtotal Travel and Per Diem Expenses 100,266 96,005 125,000 151,900 26,900 21.5%Administrative Expenses
Miscellaneous Administrative Expenses 376,535 443,141 575,500 604,634 29,134 5.1%Rent Expenses 189,857 200,953 199,500 204,500 5,000 2.5%Maintenance and Repair Expenses 11,835 5,889 16,500 21,500 5,000 30.3%Office Supplies and Material Expenses 32,391 40,301 39,000 42,211 3,211 8.2%Office Furniture and Equipment Expenses 3,792 14,120 120,000 137,800 17,800 14.8%
Subtotal Administrative Expenses 621,901 712,274 958,500 1,018,645 60,145 6.3%Data Processing Expenses
Professional Services 8,948 32,414 75,000 1,530,000 1,455,000 1940.0%Travel and Per Diem Expenses 1,706 1,143 15,000 45,000 30,000 200.0%Miscellaneous Administrative Expenses 11,086 10,781 58,000 40,000 (18,000) -31.0%Rent Expenses 26,807 27,398 50,000 50,000 0 0.0%Maintenance and Repair Expenses 37,589 42,744 100,000 62,500 (37,500) -37.5%Office Supplies and Material Expenses 21,199 22,596 35,000 35,000 0 0.0%Office Furniture and Equipment Expenses 53,721 35,380 140,000 53,000 (87,000) -62.1%
Subtotal Data Processing Expenses 161,056 172,456 473,000 1,815,500 1,342,500 283.8%
Total Expenses 38,517,326 31,451,974 42,038,526 55,296,567 13,258,041 31.5%Totals Investment Expenses Only 33,820,114 26,474,416 36,251,828 48,102,225 11,850,397 32.7%Totals Data Processing Expenses Only 911,170 897,729 934,077 2,171,390 1,237,313 132.5%Totals ex Investment and Data Processing Expenses 3,786,042 4,079,829 4,852,621 5,022,952 170,331 3.5%
Budget Work Program FY 2011
Board Meeting June 23, 2010Chart II
95
Total Fund Performance
% % % % % % % % % %
5 Year 7 YearQuarter 1 Year 3 Year
% Return % Rank % Return % Rank % Return % Rank % Return % Rank % Return % Rank
Teachers 5.1% 4 38.6% 14 0.3% 34 5.2% 21 9.7% 5
PERS 3.6% 49 34.9% 27 0.5% 30 4.8% 39 8.1% 31
Firefighters 3.4% 64 27.0% 72 (1.1)% 69 4.0% 71 7.3% 65
Police 2.8% 88 25.5% 79 (0.2)% 44 4.7% 41 8.0% 34
Law 4.0% 23 29.1% 57 (1.5)% 79 3.5% 90 7.3% 61
Judges 3.7% 44 36.0% 22 0.4% 30 4.4% 51 7.3% 63
Wildlife 3.4% 59 25.1% 82 (0.6)% 56 3.4% 91 6.0% 95
Med Tot Public Fund 3.6% 30.4% (0.3)% 4.5% 7.6%
Green = 1st Quartile
Yellow = 2nd Quartile
Blue = 3rd Quartile
Red = 4th Quartile
Period Ending 3/31/201096
5 Year Return/Volatility vs. Public Funds
BC AggregateTeachers
PERSPolice
FirefightersMSCI EAFE
60% S&P/ 40% BC AGG
S&P 500
Period Ending 3/31/201097
Oklahoma State Pension Commission
Pension Funding Options
June 9, 2010
Allan Martin, PartnerLynda Dennen, ASA, EA, Research Consultant
98
Table of Contents
I t d ti 3
Page
Introduction 3
Pension Funding Solutions 6
Summary and Conclusions 20
References 21
299
Introduction
• NEPC was asked to present possible solutions for the Oklahoma State Pension Plans to improve their funded position
• The goals of this presentation are: g p– To present the possible options to improve the funded position of the plans– To discuss the pros and cons of each option; and – To review what other states are doing to solve their own pension funding gaps
i di l i b i i l idi• NEPC is not recommending any one solution, but is simply providing options from a basic pension plan funding standpoint
– Some of the options may not be feasible for the State to pursue– Some of the options may need to be researched further by the plans’ actuaries and
plan administratorsp
• Comparison information about other States’ pension plans was gathered from multiple sources
– (1) “The Trillion Dollar Funding Gap: Underfunded State Retirement Systems and the Roads to Reform” published by The Pew Center on the States in February 2010
– State Pension and Retirement Legislation summaries from 2008, 2009 (3), and preliminary 2010 (2) by the National Conference of State Legislatures
– “Public Fund Survey Summary of Findings” published by the National Association of State Retirement Administrators (NASRA) in October 2009 (4)( )
3
100
Background
• The funded status of the Oklahoma state pension plans as of June 30, 2009 is summarized below:
Plan Assets Liabilities Funded Status
Teachers $9,439 $18,951 49.8%
Public Employees (PERS) $6,208 $9,291 66.8%
Firefighters $1,668 $3,075 54.2%
Police $1,718 $2,253 76.2%
Law Enforcement $660 $892 74 0%Law Enforcement $660 $892 74.0%
Judges $222 $261 84.8%
Wildlife $68 $91 74.7%
Total $19,982 $34,815 57.4%
• Median funding level for public pensions is 82.5% as of the end of FY 2008 (4)
• For fiscal year ending 2009, the total cost of the pension plans for the State was $1.35 billionState was $1.35 billion
– $1.03 billion was actually contributed in fiscal 2009, or 77% of required amount
• For fiscal year ending 2010, the GASB recommended contribution to the Oklahoma pension plans is $1.52 billion (23.9% of payroll)
4
101
Th l i t i f d d t t f th i l
Pension Funding Basics
• The goal is to increase funded status of the pension plans• To do this, either assets must increase and/or liabilities must decrease
• There are five major factors that
k t d 21
Employer Contribu-
tions
Employee Contribu-
tions
Investment Returns
make up assets and liabilities
• We will look at four of these integral factors of funded
21
Assets
factors of funded status for possible changes
Funded StatusFunded Status
Liabilities
Benefits Offered
Actuarial Assump-tions and M h dMethods
3 4
5
102
Pension Funding Solutions
• According to the Pew study, for most States, actions towards funding solutions fall under 5 major categories:
– Keeping up with funding requirements– Reducing benefits or increasing retirement age– Increasing employee contributions– Improving governance and investment oversight– Sharing the risk with employees (i.e. Defined Contribution plans)
• We will review each of these approaches individually and how they • We will review each of these approaches individually and how they apply to the Oklahoma State Pension Plans specifically, in addition to some other funding solution ideas
• The possible pension funding solutions we will address in this The possible pension funding solutions we will address in this presentation are:
1. Increasing State and Employer contributions2. Increasing Employee contributions3. Reducing benefits or increasing retirement age4. Changing actuarial assumptions5. Change the plan design to a Defined Contribution or Hybrid plan 6. Other solutions
• Consolidating all seven plans in one plan• Improving governance and plan oversightImproving governance and plan oversight
6
103
Pension Funding Solutions
• The following table summarizes the percentage that Oklahoma has contributed to its pension plans over the past 10 years, compared to the amount recommended by their actuaries per GASB 25
Solution #1: Increase Employer Contributions
Valuation Date 7/1/1999 7/1/2000 7/1/2001 7/1/2002 7/1/2003 7/1/2004 7/1/2005 7/1/2006 7/1/2007 7/1/2008 7/1/2009Required Employer Contribution(per GASB 25) $716.7 $742.1 $874.8 $990.6 $956.4 $1,198.2 $1,085.9 $1,197.5 $1,245.6 $1,346.1 $1,514.4
• Average percentage of Annual Required Contribution (ARC) paid by public plans
Actual Employer Contribution $524.8 $587.1 $637.3 $638.6 $570.2 $700.9 $788.4 $936.2 $986.1 $1,033.9 TBD% of Required Contribution Actually Contributed 73.2% 79.1% 72.9% 64.5% 59.6% 58.5% 72.6% 78.2% 79.2% 76.8% TBD
g p g q ( ) p y p pis 88% (4)
• If Oklahoma had contributed 100% of the actuarial recommended amount over the last 10 years, the funded status of the plans is estimated to be 68.7%, instead of 57.4%
Actual Funded Status as Funded Status if 100% of Recommended Pension Plan Actual Funded Status as
of June 30, 2009 Contributions had been made during the last 10 years
Teachers 49.8% 61.0%PERS 66.8% 79.5%Firefighters 54.2% 63.5%Police 76.2% 91.0%Law Enforcement 74 0% 74 0%Law Enforcement 74.0% 74.0%Judges 84.8% 91.8%Wildlife 74.7% 75.6%Total 57.4% 68.7%
7
104
Pension Funding Solutions
• Whenever contributions of less than 100% of the required amount are made, the Unfunded Accrued Liability grows, increasing contributions for the following year
Similar to paying less than the full amount on your credit card spending continues and interest on
Solution #1: Increase Employer Contributions (cont’d.)
– Similar to paying less than the full amount on your credit card … spending continues and interest on past debts accrue, making the next payment even higher and harder to make
• The following table summarizes the contribution requirements and estimated mandated rates for the fiscal year ending 2010
Pension Plan
Total post-EE Contribution
as % Pay
Employer + Federal
Mandated Contrib rate
Municip. Mandated
Contrib rate
State Mandated
Contrib rate
Total Mandated Contrib.
Total Mandated Contrib (in
$M)
Anticipated Shortfall as a
% of Pay
Anticipated Shortfall In $
M
FY 2010 Contribution RequirementsRemaining Discretionary
ContributionCurrent Mandated Employer and State Contributions as % of Payroll
y $ ) yTeachers 18.6% 10.00% 6.75% 16.75% $667 1.9% $75OPERS 22.2% 15.50% 15.50% $269 6.7% $116
Firefighters 75.8% 13.00% 21.90% 34.90% $88 40.9% $103Police 52.2% 13.00% 11.20% 24.20% $61 28.0% $71
Law Enforcement 63.8% 10.20% 19.40% 29.60% $23 34.2% $27J d 32 2% 8 50% 8 50% $3 23 7% $8Judges 32.2% 8.50% 8.50% $3 23.7% $8
Wildlife 29.8% 0.00% $0 29.8% $4
Total as % of Payroll 23.9% 6.3% 1.2% 10.0% 17.5% 6.4%Total in Millions $ $1,514 $398 $77 $637 $1,112 $402* Contribution rates in red are estimated based on last year’s contributions. Actual amounts are based on taxes and insurance premiums.
• Median Employer contribution rates are 8.7% if participating in Social Security, 11.8% if not participating (4)
8
105
Pension Funding Solutions
Solution #1: Increase Employer Contributions (cont’d.)
• Some steps have already been made by Oklahoma to increase contributions– In 2005, the Oklahoma Public Employees plan implemented an increasing statutory
contribution schedule: State contribution rates will increase 1% per year until reaching 16.5% for fiscal year ending 2011
– In 2006, the Oklahoma Judges and Justices plan implemented an increasing contribution schedule for Employers: Employer contributions will increase from 3% in FY 2006 up to 22% in FY 2019
– In 2007, the Oklahoma Teachers plan implemented an increasing contribution schedule for Employers: Contributions will increase to 9 5% per year by fiscal year ending 2011 for employers Employers: Contributions will increase to 9.5% per year by fiscal year ending 2011 for employers in the Education Employees Service Incentive Plan (EESIP), and up to 8.5% for those employers not in the EESIP (the comprehensive and four-year universities)
• State legislature could pass a law stating that the Actuarial Required amount be contributed each year, or over a series of set yearsy , y
– Actuaries can produce estimated amounts for State budgeting purposes, with the biggest variable being investment return performance
• Current statutory contributions are not tied to actuarial performance, but instead are tied to insurance premiums and certain tax revenues
– May want to address the discrepancy with an additional contribution amount of the shortfall voted in by the legislature each year
9
106
Pension Funding Solutions
Cons• The calculated contribution amount for the
Solution #1: Increase Employer Contributions (cont’d.)
Pros• If Oklahoma had funded the required
pension plans for the 2010 fiscal year is $1.51 billion – is this affordable to the State?
• Contributions are expected to increase in the future, at the same time that tax revenue is expected to decrease
amount each year since 2000, the plans would be 69% funded today, instead of 57%
• By funding the amount calculated each year by the actuaries, the plans would decrease the funding gap and always remain within the plan’s amortization period of being fully
What other States are doingArizona, Vermont: A statutory requirement dictates that the full recommended contribution is made each year(1)
the plan s amortization period of being fully funded (30 years or sooner, varying by plan)
A statutory requirement dictates that the full recommended contribution is made each year(1)
Connecticut: Issued a $2 billion bond in 2008 to help fund the Teachers’ pension system, with a covenant that required the state to fully fund that plan based on the actuary’s recommended contribution amounts(1)
Iowa: Increased contributions for employees and employers. Increases employer rate in PORS plan from 21% in 2010 h l f 37% N l C b 2018(2)2010 to the lesser of 37% or Normal Cost by 2018(2)
New Jersey: Beginning July 2011, the State is to make the full actuarial required contribution for each year, to be made over a 7 year period (2)
Wyoming:Effective September 2010, employer contribution is increased from 5.57% to 7.12% of pay(2)
Nebraska:Beginning September 2009, employer contribution rate increased from 7.35% to 8.36% of pay(3)
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Pension Funding Solutions
• The following table summarizes the current employee contribution amounts for Oklahoma by plan
Solution #2: Increase Employee Contributions
Plan EE Contribution Rate % f P ll
Fiscal Year 2009 EmployeePlan as % of Payroll Employee
Contribution ($M)Teachers 7.0% $279.0OPERS 3.5% $60.7
Firefighters 8.0% $20.2Police 8.0% $20.3
• Median Public Plan Employee contribution rates are 5.0% if participating in Social
Law Enforcement 8.0% $6.2
Judges & Justices 8.0% $2.7Wildlife 3.0% $0.4
Average Rate / Total $ 6.1% $389.5
Median Public Plan Employee contribution rates are 5.0% if participating in Social Security, 8.0% if not (4)
• Many states are increasing employee contributions in order to share more of the cost of the pension plan with its beneficiaries
• Increasing the OPERS plan employee contribution from 3.5% to 7% would increase that plan’s funded status by .7% in 2009 and have a similar effect on increase that plan s funded status by .7% in 2009 and have a similar effect on each year in the future
– Would increase OPERS contributions for employees by approximately $60 million
• Increasing both the Teachers and OPERS plans employee contributions to 8% (to match Police and Fire contributions) would increase the Teachers and OPERS plans’ funded status by .2% and .8% in 2009, respectively, and similarly in future p y , p y, yyears
– Would increase contributions for employees by approximately $116 million
11108
Pension Funding Solutions
ConsPros
Solution #2: Increase Employee Contributions (cont’d.)
• Would likely be unpopular with those employees and unions who would see increases to their contribution amounts
What other States are doing
• Would help decrease the plans’ funding gaps without costing the State additional funds
gArizona: General employees and employers contribute equal amounts (1)
Iowa, Minnesota, Nebraska: Have been raising employee contribution rates over the last several years (1)
New Mexico: Temporarily shifted 1 5% of the employer’s contribution to employees in 2009 (1)Temporarily shifted 1.5% of the employer’s contribution to employees in 2009 (1)
New Hampshire, Texas: Increased payroll contributions for new employees entering the plan (1)
New York: Increased Teachers plan employee contribution rate from 3.0% of pay to 3.5% (1)
Colorado: Increased employee contribution rates in fiscal 2011 from 8.0% to 10.5% of pay (2)
Mississippi: Increased employee contribution rates for Public Employees from 7.25% to 9.0% of pay (2)
Vermont: Increased employee contribution rates for the Teachers plan from 3.54% to 5.0% of pay (2)
Wyoming: Wyoming: Increased employee contribution rates from 5.57% to 7.0% (2)
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Pension Funding Solutions
• If the State decides that its seven pension plans have become too expensive to maintain, they may decide to reduce benefits
Solution #3: Decrease or Control Pension Benefits
• Changes to current employees’ benefits– Benefits already earned by and/or promised to current employees are protected under the law and
may not be reduced– Certain early retirement provisions or salary caps may be implemented however
• Changes to new employees’ benefits– Benefits offered to employees not yet hired may be changed– Savings from these changes will not be seen for many years as liabilities for new employees are
small in their first years of employment
• The following are a few ideas of ways to reduce benefits – Review future benefit increases in terms of liability cost prior to approval– Fully fund Cost of Living increases at the time of implementation– Increase unreduced early retirement age and/or service requirements– Change benefit formulas to increase years used in final average pay formulas
• Salaries from more past years will be used in the calculation of benefits
– Limit the amount of overtime, vacation payout, or other “perks” that are counted in the definition of salary for pension calculation purposes• Only include annual base salary or another pay definition in the calculation of pension benefits
Cap salary increases in the last few years of pay to prevent possible salary “spiking”– Cap salary increases in the last few years of pay to prevent possible salary spiking
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Pension Funding Solutions
Cons• Would likely be unpopular with those
l h b fit h d
Pros• Would help decrease the plans’ funding gaps
ith t ti th St t dditi l f d
Solution #3: Decrease or Control Pension Benefits (cont’d.)
employees whose benefits are changed• May be allowed to decrease benefits only for
new employees entering the plans, therefore liability decreases and cost savings would not be seen for many years
without costing the State additional funds• Would allow for the pension plans to remain
in tact and be viable into the distant future• Would maintain benefits as they were meant
to be earned
What other States are doingNevada: Reduced benefits for new employees from 2.67% of pay x service to 2.5%, and increased the retirement age from 60 to 62 for eligibility to retire with 10 years of service(1)
New York: New York: For new hires, they raised the minimum retirement age from 55 to 62 (to age 57 for their Teachers plan), increased pension eligibility from 5 to 10 years of service, and capped overtime used in benefit calculations(1)
Rhode Island: Raised the retirement age for new hires from 60 to 62, and raised the retirement age for current workers to a schedule depending on years of service(1)
Kentucky, New Jersey, Texas: In 2008 and 2009, they reduced benefits offered to new employees and/or raised the retirement age(1)
Georgia, North Carolina, Tennessee:In the past, these states have required that the long-term cost of any changes to pension assumptions or provisions be reviewed before they are implemented(1)
C l dColorado:Imposed an 8% cap on salary increases from one year to the next on pay that will be used in benefit calculations(2)
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Pension Funding Solutions
• Increase discount rate– Oklahoma plans have a 7.5% discount rate, except for the Teachers plan which uses 8% – Increasing the discount rate to 8% for all plans would reduce the State’s contribution by
Solution #4: Change Actuarial Assumptions
Increasing the discount rate to 8% for all plans would reduce the State s contribution by approximately $103 million, and increases the funded status of all plans by 4% to 6% (except Teacher’s plan which would remain unchanged)
– Median public pension actual investment returns for the 25-year period ended December 31, 2009 was 9.25%, which exceeded the median assumed return rate of 8.0% (NASRA, 3/15/10)
– Median public plan discount rate is 8%, but the recent trend has been to lower itUt h d d th i di t t f 8% t 7 75% i 2008• Utah reduced their discount rate from 8% to 7.75% in 2008
• Pennsylvania State Employees plan lowered their discount rate assumption from 8.5% to 8% in 2009
• Increase amortization period for unfunded accrued liability amounts– Each plan uses a different amortization period and method to calculate the amortization amount of
its unfunded accrued liabilityits unfunded accrued liability– Amortization periods range from 9 years to 30 years, and some plans’ period declines each year,
while others remain level from year to year– By resetting all amortization periods to 30 years, level % of payroll – the amortization method
used by the Teachers plan – it would reduce the State contribution by approximately $195 million– This assumption/method change would not affect the plans’ funded statusp g p
• Reset asset smoothing to Market Value– Asset losses are being recognized over 5 years– This year or next, the Market Value of assets will be greater than the smoothed Actuarial Value
Wh thi h thi b t tti th fi t f thi l t M k t – When this happens, smoothing can be reset, setting the first year of smoothing equal to Market Value
– Will see an increase in funded status for all plans when this can occur
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Pension Funding Solutions
• Convert the plans to a Defined Contribution plan– Could do this for current and new employees or only for new employees
Solution #5: Change the Plan Design to a Defined Contribution or Hybrid Plan
– Could do this for current and new employees, or only for new employees– Current employees could keep their currently earned defined benefit amount, and start with an
account balance of zero in the DC plan, or could have a choice of plans in which to participate– Eventually, the employer contribution to a Defined Contribution plan may be lower than the current
Defined Benefit plan contribution requirement, but this will not be true in the short to mid term, and administrative fees may be higher as well
– Retirement benefits are the employee’s account balance, which is not a guaranteed benefit– Assets will rise and fall, therefore retirement benefits received will depend solely on investment
returns and employee’s fund balance at retirement
Pros• A DC plan would eliminate the plans’ funding
Cons• Savings would not be seen for many years as • A DC plan would eliminate the plans funding
gaps all together – no funded status tracking• Would allow for the State to offer retirement
benefits into the distant future• Would eventually decrease the annual
pension contribution of the State
g y yboth the (possibly frozen) DB plan and current DC plan would both need funding
• Less active employees in the DB plan means lower Employee contributions and payroll to pay continuing participant and retiree benefitsp
• The State’s contributions would eventually be more predictable from year to year
• Benefits to current retirees would not change
benefits• May be unpopular with unions and some
employees• Retirement income will not be known until an
employee actually retires• Pension risk is moved to the employee --
when investment returns are poor when investment returns are poor, employees could see large decreases in their account balances
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Pension Funding Solutions
• Convert the plans to a Hybrid or “Cash Balance” plan– A cash balance plan is a Defined Benefit plan that looks like a Defined Contribution account balance
Solution #5: Change the Plan Design to a Defined Contribution or Hybrid Plan (cont’d.)
– A cash balance plan is a Defined Benefit plan that looks like a Defined Contribution account balance for each employee, but where the employer contributes a pre-determined amount to each account and increases the accounts with a set (or tied to a market rate) investment return
– Retirement benefits are the employee’s account balance, which IS a guaranteed benefit– Account balances cannot decline– Oklahoma could implement this type of plan for current employees, or only for new employees– Current employees could start with an account balance that represents the lump sum amount of
their current defined benefit, and current DB plan could be eliminated– Employer contribution to a cash balance plan could be similar to that of the defined contribution
plan, which would be predictable and likely less than the current DB plan contribution– Assets will rise and fall, but the State will still be required to make the contractual annual
contribution to each employee’s account and to increase each account with the plan’s required contribution to each employee s account and to increase each account with the plan s required interest rate, no matter how the underlying assets have performed. • This amount of gain or loss on asset returns in unknown• Therefore the risk of the investment return for the plan remains with the State, not with the employees
ProsWo ld eliminate the plans’ f nding gaps all
Cons• Administrative costs may increase• Would eliminate the plans’ funding gaps all
together – no funded status tracking• Would allow for the State to offer retirement
benefits into the distant future• Would decrease the annual pension
contribution of the State in the future
• Administrative costs may increase• May be unpopular with unions and some
employees• Portability increases, eliminating the
incentive aspect of defined benefit plans
contribution of the State in the future• The State’s contributions would be more
predictable from year to year• Benefits to current retirees would not change
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Pension Funding Solutions
What other States are doing
Solution #5: Change the Plan Design to a Defined Contribution or Hybrid Plan (cont’d.)
gNebraska: Enacted a “cash balance” plan in 2003 where employee contributions are put into an account earning investment returns, but with a minimum annual investment return of 5% guaranteed (1)
Georgia: In 2009 implemented a defined contribution-type plan for new hires, and the State matches employee contributions into the plan Employees hired before that date have approximately half of their benefit paid contributions into the plan. Employees hired before that date have approximately half of their benefit paid from the existing defined benefit plan (1)
Alaska: Implemented a defined contribution plan for new employees in 2005 (1)
Michigan: Implemented a defined contribution plan in 1997 (1)Implemented a defined contribution plan in 1997Louisiana, Florida, Kansas, Utah:Have policymakers that have at least mentioned reviewing defined contribution plans at one time (1)
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Pension Funding Solutions
• Consolidate all seven pension plans into one defined benefit plan – If the plans were combined today, the Combined plan would have a funded status of 57.4%
• An improvement for the Teachers (at 49.8%) and Firefighters (at 54.2%), but would be a decrease in funded
Solution #6: Additional Solution Ideas
p ( ) g ( )status for all of the other plans
• May have some backlash from the participants of the better funded plans, who might view the security of their pensions as having been breached
– May cost additional fees in the year of consolidation, but should eventually decrease annual administrative fees from actuarial services and investment management and consulting
– This option does not decrease State contributions unless assumptions are modified• If the Combined plan adopted the assumptions used by the current Teachers plan (8% discount rate and 30
year amortization of UAL), the State’s contributions would be reduced by approximately $240 million per year and funded status would improve to 59.3%
• Increased oversight and governance– National newspapers have been full of stories about loopholes in public pension plans (i.e. “spiking”, p p p p p p ( p g ,
etc.) which allow participants to retire with a greater benefit than what was originally intended by the plan• Each plan could conduct a review to see if this is occurring in any of the Oklahoma State pension plans
– Disability oversight – review and check ups required to continue disability payments– Reconsider the provision for receiving lifetime disability retirement for injuries received while NOT in the
line of duty and with no service requirement line of duty and with no service requirement – Pros:
• Could possibly save the State money in unnecessary and unintended future pension benefits
– Cons:• May not be popular changes with employees• May create negative press if any abuses are found• Amount of possible savings is unknown until further investigations occur• Amount of possible savings is unknown until further investigations occur
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Summary and Conclusions
• There are many different methods for reducing funding shortfalls in the Oklahoma pension plans
– Many may not be popular, but may be necessary– Further cost analysis from the plans’ actuaries may be needed to determine savings
• Increasing contribution amounts up to the annual Actuarial Required amount is the best way to catch up plan funded status
– This can be achieved through increased State contributions, increasing employee contributions or mandated into the State budgetcontributions, or mandated into the State budget
– Many other States have been increasing both employer and employee contributions
• A deeper look into benefit provisions and possible abuses is needed – The plans’ actuaries can provide more information on the best ways to change p p y g
assumptions or plan provisions in order to reduce costs, in such a way as to have a minimal effect on the most employees
– The plans’ administrators can provide information about the best ways to find and control possible benefit abuses, if any
• Additional discussion and cost analysis is needed if Oklahoma intends to pursue larger changes to the pension plan structure
– Plan consolidation– Moving to a Defined Contribution or Cash Balance Plan– Closing the current plans to new entrants and offering a second plan with reduced
benefits to new employees
20117
References
1 “The Trillion Dollar Funding Gap: Underfunded State Retirement Systems and the Roads to Reform” published by The Pew Center on the States in February 2010
2 “Pensions and Retirement Plan Enactments in 2010 State Legislatures: Preliminary Report” published by the National Conference of State Legislatures on May 3, 2010
3 “State Pension and Retirement Legislation 2009” published by the National Conference of State Legislatures on August 17, 2009
4 “Public Fund Survey Summary of Findings” published by the National Association of State Retirement Administrators (NASRA) in October 2009Retirement Administrators (NASRA) in October 2009
21118