Board member Steve Buser on STRS escrow accounts, news releases and general perceptions

Does the judge also view STRS as a fat piggy bank with $60 billion in free money? Sure hope he's not reading tabloids!

From: Stephen Buser
To: Molly Janczyk
Subject: Re: FW: STRS official impact statement re. bonus decision
Date: Sun, 06 Nov 2005

Dear Molly:

I have not double checked and thus do not want to pretend to have precise answers for any particular case. However, my general understanding regarding such matters in a typical case is as follows:

1) When STRS puts money into an escrow account, the money comes from a general operating account STRS uses for all of its collections and expenses. Thus, as you have surmised, if money had not been place in an escrow account, it would count toward general STRS assets. In a similar manner, my understanding is that whenever STRS collects money from successfully suing others, such as Enron, that money goes into the STRS general account and is credited to STRS assets.

2) I also think you are also correct when you note that money in an escrow account typically earns interest. If STRS wins a corresponding law case, the interest as well as the principal comes back to STRS. However, if STRS loses a claim, a judgment will often include an award of interest. The amount of interest in an award might or might not precisely equal the amount of interest earned money in the escrow account. Any difference would go into, or come out of, the general STRS account.

3) I am not sure if we are on the same page when it comes to news releases -- but I think we might be. In one article I noted a statement to the effect that a payment in a particular law suit would not have a material effect on the financial condition of STRS. That statement also rubbed me the wrong way. However, my understanding is that the particular language in question is standard accounting jargon and means that, for a system that measures assets and liabilities in billions, any change involving millions will show up as rounding error when the amounts are expressed in billions. Nevertheless, as Everett Dirksen used to say about the Federal Budget, a billion here, a billion there, and before you know it you're talking real money. I hope you understand that no one on the Board regards the amounts in question as insignificant even they do not affect things like the STRS credit rating.

As for the Judge you mentioned, I do not know him and do not know what he might think. However, I worry that based on what I have been reading in the popular press, some people seem to think that STRS is just a Piggy Bank with $60 billion in free money. I rarely hear anyone say that the $60 billion is only 75% of the total amount school districts owe for pension benefits earned by current retirees plus credits toward future pensions that actives have earned to date. Under authority of the legislature, STRS has supported school districts by not requiring them to fully fund pension obligations as they accrue. Nevertheless, unless STRS is repaid for its past generosity, there will come a time when STRS funding is not able to cover monthly pension checks.

The same articles sometimes talk about how "rich" the STRS system because it collects 10% from actives plus another 14% from employers. They do not mention that the employee 10%, plus 5% of the employer contribution is required to pay the cost of adding one more year to the pension credit of active teachers. That leaves only 9% of the employer contribution to pay down the obligation of school districts to make good on their continuing unfunded pension liabilities.

To the extent possible, STRS is authorized by the State to use part of the employer contribution to help pay health care bills of retirees. Under present policy, STRS uses 1% of the 9% additional contribution from employers. That amounts to roughly $100 million per year. While that might seem like a lot, health care bills for retirees in the health care system total more than $500 million per year, and the amount is growing a double digit rates each year.

As you know, STRS has raised retiree premiums for health care by extraordinary amounts. STRS has also imposed sharp cuts in operating expenses. Those cuts might not be as deep as some would wish. However, STRS just got a ruling from the Judge that one budget cutting measure was too severe. Moreover, while STRS continues to look for ways to cut costs, the entire operating budget is far less than $100 million, and thus offers only modest hope of impacting the health care funding gap to a significant degree.

In sum, I simply do not see how anyone can look at the raw numbers, health care costs of $500 million per year versus employer contribution toward health care of only $100 million per year, and not agree that additional money is urgently needed. Unfortunately, I do not see these numbers showing up in the discussion of how "rich" STRS is and how pampered our members are.

So to get back to your question about what the Judge might think. I fear he might be reading the same things I have been reading and not have a complete picture either about pension funding for STRS or about health care costs for STRS.

Steve

At 12:49 AM 11/06/2005, you wrote: The interest bearing account that was started when litigation began:

QUES: 1. WHERE DID THE MONEY COME FROM TO START THE ACCOUNT? 2. If the money had not been used to start this account, wouldn't that money be earning interest for us instead of litigation?

If the answer is it came from pension funds or interest on pension funds then it and the interest, does have impact though it may be very small. But, it wasn't donated money for this use, was it? The total truth should be given is all I am saying. It seems misleading otherwise, if in fact this fund was in any way generated by contributions or interest on them.

I wonder how thoroughly Judge Reece was informed of the retiree perspective on this matter. It would seem he was provided little opportunity to hear from the membership and since it involves us, why were we not included in the proceedings to give the other side. Retirees were unfairly burdened with costs impossible to meet without severe hardship and or reemployment for those able. Retirements were stolen and retirees were forced to save HC for now.

Let those who are ill and have to work after being promised HC second to none in STRS literature and consultants telling us we'd never have to worry about HC testify if STRS and Petro are serious about fairness. Petro should be happy to bring this about since he has publicly stated he will carry out his fight against these bonuses though he recommended partial settlement below. Seems a conflict. Is money to staff more important than relief to needy retirees whose finances have been depleted, homes sold, treatments and RX's refused due to cost? Staff should get PUNITIVE DAMAGES? What about those who are the true victims? Retirees. Did STRS as guardian of our money bring forward our needy, our ill, our handicapped , our back to work to pay for HC retirees and families? Seems only one side was heard and once again, retirees, ignored. This is what STRS found reasonable? This follows ORC:3307.15.

Seems anyone who voted yes should have taken more time to hear the other side before deciding though a few of them have no understanding of a world below their lifestyle or mentality.

WHY were we not included in these proceedings?