Molly Janczyk and Steve Buser on effects of 35 year incentive rule

From: Molly Janczyk
Sent: Sunday, January 22, 2006
Subject: ALSO: Damon: STRS BOARD: 35 Yr. incentive plan: two questions

We were told by the former OEA dominated board that $300 million was a drop in the bucket (approx the amount we found to be lavish spending) and not nearly enough to pay for HC at $1.2 million per day.

Dear Steve, I am confused. This is general and I simply want to know:

1. Does the 35 yr incentive save us money or does it cost us money? It sounds like you are saying it saves tons.

2. Has the 35 yr incentive affected the unfunded liability? What is the effect?

I realize retirees and actives benefited from the raise in % per yr to 2.2% That was equitable IF IT AFFECTED ALL RETIREES? Did older retirees get an increase?

This sounds like it did in your explanation.

3. Did every retiree get an increase to 2.2% or just those retroactive to '99 which was my impression? I retired in '99 and was to get 2.1% but got 2.2% instead and a ck to make up for the retro part. What did older retirees get?

4. ARE YOU SAYING THE SYSTEM GAINS DRAMATICALLY FROM THE ENHANCEMENT ALONE?What impact did and will the 35 yr enhancement have on STRS? Please do not tell me the study did not find out because that is beyond the pale! That is the question we wanted answered. How many STRS board members and HOW MANY Consultants does it take to get a simple answer?

Do we gain or do we lose from the 35 yr. incentive ONLY! I know the retiree part to bring up retirees cost just under the figure you stated. WHO ALL BENEFITED FROM THAT?

13th cks. were a few hundred a year; a grain of sand, now removed, compared to the 35yr incentive far too late for retirees.

WHAT DO RETIREES GET? No compounded COLA No tiny 13th cks No affordable HC IF not single No consideration of all the items we wished looked at last 4 yrs:
-20 yr minimum retirement for ALL NEW RETIREES ; 30 yrs. full retirement
-NO HC for those under 20 yrs.; subsidy only for NEW RETIREES with 20 yrs. NEW ONLY. Those currently with 15 or more to stay as is.
-Sliding scale of ALL costs beginning at 20 yrs. pays most for copays, premiums, RX's, out of pockets or to least for career teachers of 30 yrs or more.

Name one thing that has been done ONLY FOR RETIREES until this year keeping increases at 3% and RX's a bit less facing catastrophic care only in 2007.

I want some definitive answers. The answers are all over the place with attendees interpreting the info. Give it to us straight and easy.

It does or doesn't help the system.

From: Steve Buser, Sun, 22 Jan 2006

I am not Damon, but here is my take on the questions below regarding the effects of the 35 year incentive rule.

First, as a general response, I think that people who listened to the actuarial report on the effects of SB 190 might have differing impressions of the specific effects of the 35 year incentive, per se. In large part this ambiguity is due to the fact that the actuarial report did not focus on the 35 year incentive but instead examined the combined effect of all changes that were made in SB 190.

For example, SB 190 included a retroactive increase in pension benefit for anyone who had retired prior to the bill's enactment and had been paid using a benefit formula less than 2.1 times years of service. This change had nothing to do with the new 35 year rule. Yet, as a result of this aspect of SB 190, the actuary estimates that STRS has already paid out over $500 million in additional retirement benefits to members who had retired prior to SB 190. The amount of enhanced benefits is estimated to approximately double, to roughly $1 billion, over the remaining lives of those receiving the enhanced benefit.

As for the 35 year rule per se, that specific part of SB 190 increased the retirement benefit from 77% of FAS (2.2% times 35 years) to 88% of FAS for anyone retiring after SB 190 with 35 years of service. There is clearly a cost to the STRS system for anyone who would have worked for 35 years even without the incentive. However, there is a substantial savings for STRS for any member who would have retired with only 30 years without the incentive, but now works until 35 years. Note that for 30 years of service, the retirement benefit would have been 66% of FAS (2.2% times 30 years). Thus, if the member continues to work rather than retire and draw a benefit, STRS saves the amount of the potential pension for 5 additional years. If we assume that potential salary increases and retirement COLAs have roughly offsetting effects, the up front savings for STRS is 330% of FAS (5 years times 66% per year). Thus, even if we ignore the fact that STRS would earn additional money by investing the up front savings, the principle alone covers 30 years worth of incentive payments (330% divided by 11%, which is the difference between a 35 year benefit of 88% versus a 35 year benefit of 77% of FAS).

The net effect of the 35 year incentive program (question #1 below) thus depends on the number of members who will retire with 35 years now but who would have retired with fewer years without the incentive. The actuary reported that STRS experience to date indicates that the 35 year incentive appears to have had a significant impact on the pattern of retirements. The estimate of the amount saved from deferred retirements in excess of increased payments for retirees with 35 years is nearly $300 million thus far. Unfortunately, the projection of future amounts appears to have been mixed with other types of future savings and future expenses associated with SB 190. Accordingly I do not think we have a precise estimate of the complete net effect of the 35 year incentive change, per se.

It is my impression that the specific results you have identified for the unfunded liability and for the funding period combine all aspects of SB 190, including the increase in payments for those who retired prior to SB190. Clearly, the unfunded liability would be smaller and the funding period would be shorter, if SB 190 had not provided retroactive increases in benefits for existing retirees and had not increased benefits for future retirees in addition to the specific 35 year incentive. However, at the time SB 190 was enacted, the financial condition of STRS was much stronger, and benefit enhancements were regarded as a form of "dividends" to members, as were 13th checks for existing retirees.

With the benefit of hindsight, we now know the financial condition was more fragile than STRS and legislators had been assuming. In addition, I think many now wonder if the general pattern of benefit enhancements was appropriate. I.e. the dividend might have been too large for some groups and too small for others. However, if and when we are lucky enough to find ourselves in a similar situation - much lower unfunded liability and a funding period that is small (much lower than 30 years) and shrinking fast, I suspect that STRS might again turn to the legislature and ask permission to offer a dividend to STRS members. My hope is that by then STRS will have a better way to measure the impact of potential changes on different groups of members. To the extent we can identify historical inequities, I hope we can address them. In addition, once the issue of past inequities is properly addressed, I hope we can find ways of avoiding similar inequities in any future enhancements of benefits.

I regret that these observations do not directly answer your specific questions. Unfortunately I am not sure if STRS has more precise answers to provide at this point.