Molly & Steve: Clarification of SB 190

From Steve Buser, January 23, 2006

SB190 increased my pension by approx. $1500 per yr. or $140+ a month from
2.1% to 2.2% Others would have to calculate their increase/enhancements based on former formula and increased formula.

That certainly is far more than the approx. $468 per yr I rec'd ONE TIME as a 13th ck. Though nice, the enhancement we rec'd is hugely better and dropping 13th cks came about that time.

Compounded COLAS take us up a few dollars PER YEAR: Based on $30,000 pension: $27 add'tl dollars per yr. with a mini bump each year up to $50,000 earning $45 per year of $2-4 per month.

I guess I'd rather see the amounts of either the 13th or compounded COLAS go towards keeping HC down vs. to me directly. Just my opinion.

Nothing will come until unfunded liability is down to 30 yrs or less anyway. Pretend the $300,000,000 earnings from the 35 yr incentive theoretically could go to retirees with $3000 for each retiree before taxes, it won't till the unfunded liability is down as STRS says it can not give us money for anything until the liability is at or under 30 yrs. So, we should work on legislation for increasing contributions that benefit us all vs. something which is not going to happen until much costlier monetary issues are resolved.

The $3000 would be a one time issue as it is the total saved to date. $300,000,000 divided by 5 = $600,000 per yr. or $6 dollars per retiree at
100,000 retirees a year; not enough for one RX each. But, neither will happen.

Bottom line: seems futile in many ways. None of us want to lose the enhancement we received. If the 35 yr incentive starts to cost money, different issue.

From: Molly Janczyk
Sent: Monday, January 23, 2006
Subject: Steve Buser: SB 190: STRS BOARD:35 Yr. Incentive plan

Dear Steve,

Here is my attempt to clarify SB 190 based on your email below and attendees present at the presentation on this Friday. Thank you for your patience in helping me understand this and for enduring my frustration on this matter. Any STRS Board Member: Please correct/add anything in error or missing.

1. SB 190 costs $2.3 billion to implement. This included nearly $1 billion for enhancements for the older retirees who retired on a formula of less than 2.1% by increasing their benefit formula up to 2.1%. For new retirees and actives , it increased their benefit formula to 2.2% rather than 2.1% with the basis being they paid more into the system. There is not parity for some who may have paid 9.3% and still receive the 2.1% as SB 190 passed in 2000 but was retroactive to 1999. For ex., Some who retired in the 90's probably paid 9.3% in contributions but receive the 2.1%.

The remaining cost of the bill went to the 35 yr. enhancement for actives. Had the bill never been implemented, STRS would receive the savings regardless and without the costs for those working for 35 yrs.

However, Buser is saying the bill has shown that more are waiting to retire due to the bill and it is based on those numbers how much the bill saves the system. The critical number is: THOSE WHO ARE WORKING LONGER BECAUSE OF SB 190 and not because they would have anyway. To date, the study shows more are waiting to retire. This takes into account: salaries, actives paying into the system and not withdrawing pensions from it as well as STRS not paying for their HC.

The question is: Would they wait anyway because a wrench was thrown in since the passage of the bill being the soaring health care costs to retirees. Which is keeping actives in the system: Delay of paying retiree health costs and keeping their own less expensive health care or the 35 yr. enhancement. I think it is reasonable to assume BOTH.

The choice for healthy individuals is work 5 more yrs and receive better pensions to help offset HC costs or retire and go back to work with STRS HC costs. I would pick the first had it been available and I had known what was to come. But many of us did not know. Is it sour grapes or reality that we did not have this choice. For me, both. However, I do realize changes and improvements occur or we'd all be stuck back in the early ages of education. The ones who retired decades ago don't make the same pensions as newer retirees but made less and paid less into. This is not the problem for me. The only problem for me is: Does it help or hurt the system and is it equitable, NOT EQUAL, but equitable: if it helps, did it also help retirees, etc. If it helps, it helps all. If it hurts, it hurts all.

To date, the savings of $300 Million seem insignificant, however, since that is the number the former OEA dominated Board Members lavished on themselves including the palace, cars, gas, dinners, play, drinks, parties, luxury hotel rooms and trips, etc. This amount would not pay for 1 month of HC at $1.2 Million per day.

Buser does not feel the study gives a breakdown of the 35 yr enhancement as it has been mixed with other future savings and expenses and not precise to the 35 yr incentive.

2. Unfunded Liability: All areas of SB 190, including the enhancements for older retirees and newer retirees has cost $500 million to date and will cost $500 million to continue for the lifetime of those retirees who benefited. That affected the unfunded liability and then the increased benefits for 35 yr retirees affected the unfunded liability.

This bill was presented in a time a very low unfunded liability and high market gains as a way to give back to membership. Then the market fell and together with the costs of SB 190 as well as other areas the unfunded liability shot up.

From other attendees at Friday's meeting and handouts:

If SB 190 HAD NEVER been implemented which included the enhancements to all retirees and incentive for actives, the unfunded liability would be 37.7 yrs. now.

If SB 190 were stopped AND THAT MEANS THE INCREASED FORMULA ENHANCEMENT FOR RETIREES UP TO 2.1% and 2.2% as well were reversed, the unfunded liability would drop to 39 yrs.

The entire bill was factored in.

The question was:

Does the 35 yr enhancement cost or save the system. It seems it earned $300,000 million to date. Will it continue to earn or cost?

The answer is: It depends on who in the future would have worked for 35 yrs anyway with STRS receiving the benefits anyway and how many will go 35 yrs. strictly because of the incentive?

The study has no crystal ball and how can that be measured for the future as it tangles with high retirees HC costs.

Do we want yet another study and how could it be measured?

If it doesn't cost us, then ..................................we would be putting a price on trying to determine former board members motives and future STRS membership motivations. Is it worth it?

If STRS ever gets ahead again, retirees want compounded COLAS and 13th cks.

At $400 per ck for 100,000 retirees, 13th ck costs $40,000,000 annually.

Compounded COLAS x's 100,000 at $30,000 pension average = $900 for simple and then $27 addt'l for the next year. At $30 per retiree x's 100,000 = $3,000,000 for one year.

Steve:

I thought you were quoted as saying if the 35 yr incentive was to make money for STRS , actives would have to pay much more into system. Is this what you said?

Of course, if contributions are increased, actives would pay much more into system and make this entire incentive more equitable and it seems they are willing.

I hope this is a fair summary and takes all factors into consideration.

COMMENTS AND CORRECTIONS WELCOME! WE WANT TO UNDERSTAND! I have no wish to forward anything but facts and statements based on facts.

From Steve Buser, January 22, 2006

1) The 35 year rule save a lot of money for STRS ONLY for members who would otherwise retire early. For members who would work until 35 years even without the incentive, STRS would have gotten the savings without having to pay an incentive for it. Hence. for there is no gain, only cost. Based on the results for the first few years, it looks like members are delaying retirement in sufficient numbers for the savings from these members to exceed the costs for members who would have worked 35 years anyway without the incentive. As for confusion on this and other points, I am in the same boat as you. I was expecting a clearer answers. Unfortunately the actuary apparently interpreted the assignment differently than I did.

2) The effect on the unfunded liability is proportionate to the savings in #1). I.e. there would appear to be a net reduction, or improvement, in the unfunded liability as a result of the 35 year rule, as distinct from the total effect of SB 190 which was negative. Unfortunately the report did not isolate the effect of the 35 year rule, so I cannot even estimate the magnitude. But I assume it is relatively small given that the total effect of SB 190 is negative on the unfunded liability and the funding period.

3) Yes. SB 190 actually provided older retirees with a number of benefits. It retroactively increased the benefit formula for anyone who had retired based on a rule of less than 2.1% times years of service times FAS. However, as you note, for new retirees the rule is 2.2% rather than 2.1%. So SB 190 did not establish parity. In addition, SB 190 increased the benefit for any retiree whose benefit had fallen to less than 85% of its original purchasing power by virtue of the absence of COLAs and limits on COLAs for a number of years. Thus, while SB 190 narrowed some gaps in the benefit structure for older versus younger retirees, it did not eliminate gaps. On the other hand, younger retirees and current actives contribute to STRS at higher rates. Hence, some will say that at least part of the difference in benefit structure is appropriate based on differences in contributions.

4. As noted above, the gain from the 35 year rule is significant ONLY for those who would otherwise have retired earlier. Given the offsetting effect of losses from members who would have worked 35 years anyway, I do not think the net effect would be "dramatic". Nevertheless, the net effect is favorable rather than unfavorable as many have assumed.

5. With respect to 13th checks, I will have to double check. However, I think the cumulative effect of the various rounds of 13th checks amounted to $100s of millions. So I'm not sure I would agree that the effect has been small. - That does not mean 13th checks are bad. The checks help members in the amount of the payments. I am all for such help as long as the effort does not place at greater risk the pensions of actives, or the funding of HC. Unfortunately, that is why I cannot support 13th checks currently.

6. As for the other items on your list, I agree that there are many things that were not considered in the actuarial report. I too would like to see more careful and more detailed analysis of such issues. I think the Board and Damon agree that we need to develop an in house capability for analyzing such issues. We currently use an external actuary who is not based in Columbus. As a result, communication appears to be lacking.