Annual Financial Report – 2018
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ForFor the year ended JuneJun 30, 2018 CAFRComprehensiveComprehensive AnnualAnnual FinancialFinancial ReportReport School Employees Retirement System of Ohio Serving the People Who Serve Our Schools® SCHOOL EMPLOYEES RETIREMENT SYSTEM OF OHIO COMPREHENSIVE ANNUAL FINANCIAL REPORT For the year ended June 30, 2018 Prepared by SERS Staff Richard Stensrud, Executive Director 300 E. Broad St., Suite 100, Columbus, Ohio 43215-3746 www.ohsers.org Serving the People Who Serve Our Schools® Mission To provide our membership with valuable lifetime pension benefit programs and services Vision Through the continuous pursuit of excellence and innovative solutions, we will partner with our stakeholders so that our membership will understand and achieve security in retirement Values • Focus • Accountability • Communication • Collaboration • Innovation Table of Contents Introductory Section (unaudited) SERS Retirement Board 2 Executive Staff and Organizational Chart 3 GFOA Certificate of Achievement 4 PPCC Standards Award 4 Letter of Transmittal 5 Legislative Summary 9 Pension Benefits by County 10 Financial Section Independent Auditors’ Report 12 Management’s Discussion and Analysis (unaudited) 16 Financial Statements Statement of Fiduciary Net Position 22 Statement of Changes in Fiduciary Net Position 23 Notes to Financial Statements 24 Required Supplementary Information Schedule of Changes in the Employers’ Net Pension Liability 50 Schedule of the Net Pension Liability 50 Schedule of Employer Contributions 51 Schedule of Investment Returns 51 Notes to Required Supplementary Pension Information 52 Schedule of Changes in the Net OPEB Liability 53 Schedule of the Net OPEB Liability 53 Schedule of Employer Contributions - OPEB 53 Schedule of Investment Returns - OPEB 53 Notes to Required Supplementary Health Care Information 54 Schedule of SERS' Proportionate Share of the Net Pension Liability - OPERS Traditional Pension Plan 55 Schedule of SERS' Proportionate Share of the Net Pension Liability - OPERS Combined Pension Plan 55 Schedule of Contributions - OPERS Traditional Pension Plan 55 Schedule of Contributions - OPERS Combined Pension Plan 55 Schedule of SERS' Proportionate Share of the Net OPEB Liability - OPERS 56 Schedule of OPEB Contributions - OPERS 56 Other Supplementary Schedules Schedule of Administrative Expenses 57 Schedule of Investment Expenses 58 Schedule of Payments to Consultants 58 Investment Section (unaudited) Letter from Chief Investment Officer 60 Investment Report 61 SERS Comprehensive Annual Financial Report FY2018 i Table of Contents Investment Section (unaudited) continued Investment Summary 64 Asset Allocation vs. Policy 64 SERS Total Investment Return (Gross of Fees) 64 Total Investment Fund at Fair Value 65 Schedule of Investment Results 65 Notes to Investment Results 66 SERS Detailed Asset Allocation 67 Largest Individual Global Equities Holdings 67 Largest Individual Global Fixed Income Holdings 68 Investment Consultants and Investment Managers 69 Summary Schedule of Brokers’ Fees 70 Reconciliation to Statement of Fiduciary Net Position 72 Statement of Investment Policy 73 Actuarial Section (unaudited) Actuary’s Letter 82 Pension Summary of Actuarial Assumptions and Methods 84 Pension Actuarial Accrued Liabilities 87 Active Member Valuation Data 87 Pension Retirees and Beneficiaries Added to and Removed from Rolls 88 Medicare B Retirees and Beneficiaries Added to and Removed from Rolls 88 Short-Term Solvency Test 89 Analysis of Financial Experience 90 Health Care Summary of Actuarial Assumptions and Methods 92 Health Care Actuarial Accrued Liabilities 93 Health Care Analysis of Financial Experience 94 Health Care Solvency Test 95 Health Care Retirees and Beneficiaries Added to and Removed from Rolls 95 Statistical Section (unaudited) Statistical Section Overview 98 Net Position by Fund 99 Total Net Position 99 Changes in Net Position 100 Benefit and Refund Deductions from Net Position by Type 104 Employee and Employer Contribution Rates 106 Demographics of New Pension Benefit Recipients 106 Demographics of Active and Retired Members Used for Valuation Purposes 107 Retired Members by Type of Benefit 108 Retirees, Spouses, and Dependents Receiving Health Care Coverage 108 Principal Participating Employers 109 Average Benefit Payments - New Retirees (Service Only) 110 Plan Summary Plan Summary 112 ii SERS Comprehensive Annual Financial Report FY2018 Introductory Section SERS Retirement Board 2 Executive Staff and Organizational Chart 3 GFOA Certificate of Achievement 4 PPCC Standards Award 4 Letter of Transmittal 5 Legislative Summary 9 Pension Benefits by County 10 SERS Retirement Board Daniel Wilson James Rossler, Jr. Jeffrey DeLeone Hugh Garside, Jr. James Haller Christine Holland Catherine Moss Barbra Phillips Beverly Woolridge Chair, Appointed Member Employee-Member Retiree-Member Daniel L. Wilson Hugh W. Garside, Jr. Catherine P. Moss Term Expires 9/27/2020 Term Expires 6/30/2019 Term Expires 6/30/2020 Vice-Chair, Appointed Member Employee-Member Employee-Member James A. Rossler, Jr. James Haller Barbra M. Phillips Term Expires 11/4/2020 Term Expires 6/30/2021 Term Expires 6/30/2021 Appointed Member Employee-Member Retiree-Member Jeffrey T. DeLeone Christine D. Holland Beverly A. Woolridge Term Expires 12/5/2020 Term Expires 6/30/2019 Term Expires 6/30/2019 Advisors Investment Consultant Wilshire Associates, Inc. - Santa Monica, California Independent Auditor RSM US LLP - Cleveland, Ohio Hedge Fund Consultant Aksia LLC - New York, New York Actuary Cavanaugh Macdonald Consulting, LLC - Medical Advisor Kennesaw, Georgia Dr. Glen Borchers - Columbus, Ohio Investment Consultants and Investment Managers and Brokers' Fees - see pages 69 - 71 2 SERS Comprehensive Annual Financial Report FY2018 SERS Executive Staff Richard Stensrud Helen Ninos Joseph Marotta Joseph Bell Farouki Majeed Matthew Sanders Tracy Valentino Anne Jewel Michelle Miller Jay Patel John Grumney RETIREMENT BOARD EXECUTIVE DIRECTOR Richard Strensrud CHIEF AUDIT OFFICER Joseph Bell DEPUTY EXECUTIVE DIRECTOR LEGAL Helen Ninos INVESTMENTS Joseph Marotta Farouki Majeed ADMINISTRATIVE HUMAN INFORMATION MEMBER SERVICES FINANCE HEALTH CARE RESOURCES TECHNOLOGY SERVICES Matthew Sanders Tracy Valentino Anne Jewel Michelle Miller Jay Patel John Grumney SERS Comprehensive Annual Financial Report FY2018 3 Awards 4 SERS Comprehensive Annual Financial Report FY2018 Letter of Transmittal SCHOOL EMPLOYEES RETIREMENT SYSTEM OF OHIO 300 E. BROAD ST., SUITE 100 • COLUMBUS, OHIO 43215-3746 614-222-5853 • Toll-Free 800-878-5853 • www.ohsers.org RICHARD STENSRUD Executive Director JOSEPH MAROTTA Interim Deputy Executive Director December 21, 2018 Dear Chair and Members of the Retirement Board: On behalf of all management and staff, we are pleased to submit the Comprehensive Annual Financial Report of the School Employees Retirement System of Ohio (SERS) for the fiscal year ended June 30, 2018. We are responsible for the accuracy of the contents, and the completeness and fairness of the presentation, including disclosures. A narrative overview and analysis to accompany the basic financial statements is presented as Management’s Discussion and Analysis (MD&A); it can be found immediately following the report of the independent auditor in the Financial Section. This letter of transmittal is designed to complement the MD&A. Established in 1937 by an act of the Ohio General Assembly, SERS provides pensions and benefits to public and charter school employees who are not required to possess a certificate issued pursuant to sections 3319.22 to 3319.31 of the Ohio Revised Code in order to perform their duties. By statute, benefit plans include retirement for age and service, disability benefits, and survivor benefits that are paid upon the death of a member before retirement. A post- retirement health care program also is provided, although it is not required by law. A system of internal accounting controls ensures the security of member and employer contributions and provides reasonable, but not absolute, assurance that assets are properly safeguarded, transactions are properly executed, and financial statements are reliable. Our independent external auditors have conducted an audit of the basic financial statements in accordance with auditing standards generally accepted in the United States of America. They have full and unrestricted access to you to discuss their audit and related findings concerning the integrity of financial reporting and adequacy of internal controls. MAJOR INITIATIVES AND HIGHLIGHTS Board Finalizes COLA Changes On October 9, 2017, the Board held a special Board meeting to finalize cost-of- living adjustment (COLA) changes. At that meeting, the Board suspended COLA increases for 2018, 2019, and 2020 for current retirees, and confirmed their intent to implement a four-year waiting period for the start of a COLA for future retirees. Passage of SB 8 on November 29 gave SERS’ Board the authority to implement that waiting period for future retirees. The COLA changes enacted by the Board have been the primary reason that SERS has been able to reduce unfunded liabilities by nearly $1 billion, which increased the funded status from 66.6% in FY2016 to 70.1% at the end of FY2018. SERS Strengthens Online Security Following Portal Intrusion Attempt On January 23, 2018, SERS became aware of fraudulent activity on the online member portal. SERS immediately shut down the online portal and began investigating. The investigation determined that this was not a breach