News from STRS: STRS Ohio's Fiscal Status Continues to Improve
From STRS, June 6, 2007
On Thursday, June 7, 2007, the Thomas B. Fordham Institute is presenting a report about an analysis it has conducted of the State Teachers Retirement System of Ohio (STRS Ohio). Although we requested it, the Fordham Institute has refused to share an advance copy of the report. However, in reviewing other works done by the individuals hired to write this report, we anticipate it will include a discussion about fund solvency for retired and disabled teachers' benefits and optional health care coverage. Out-of-state report co-author Michael Podgursky took a similar approach in a paper titled "Is It Time To Rethink Teacher Pensions In Maryland?" in November 2006 for The Abell Foundation.
Once we have an opportunity to analyze the report, we will undoubtedly have comments to share about its content. However, we believe it is appropriate at this time to share some facts about STRS Ohio and to share news about our continued improving fiscal status.
STRS OHIO OFFERS THREE RETIREMENT PLAN OPTIONS TO ITS MEMBERS STRS Ohio has been providing retirement benefits to Ohio's public educators since 1920 -- long before Social Security was established in 1935. Today, STRS Ohio offers three retirement plan options to its new members:
- STRS Ohio's Defined Benefit Plan -- Under this plan, the pension amount is determined by a calculation that uses the member's age, years of service credit and the average of the three highest salary years (final average salary). Survivor and disability protection is also provided.
- STRS Ohio's Defined Contribution Plan -- Under this plan, retirement income is based on the performance of investment choices members select for the contributions made by the members and their employers. Retirement, survivor and disability benefits are limited to the value of the account.
- STRS Ohio's Combined Plan -- This plan allows members to create a portion of their retirement income through the performance of investment choices they select for their contributions, while contributions from their employers pay for a combination of service retirement, disability and survivor benefits.
Given these choices, today 85% of new members are choosing the Defined Benefit Plan, while only about 10% choose the Defined Contribution Plan and 5% choose the Combined Plan; the vast majority of public educators prefer STRS Ohio's Defined Benefit Plan.
PENSION FUND STATUS IS RESPONDING WELL TO INVESTMENT RETURNS AND PRUDENT OVERSIGHT The retirement, disability and survivor benefits paid by STRS Ohio are funded through three income sources: member contributions, employer contributions and investment earnings on those contributions. A member's contributions, plus the employer's contribution and investment earnings are expected to fund that member's benefit in retirement. Unfunded liabilities can occur in a pension plan when investment returns or actuarial experience doesn't match expectations; plan design changes can also have an impact. In STRS Ohio's case, the significant value of the funds that have gone toward health care coverage for retirees in the past 33 years is largely responsible for the current unfunded liabilities. However, the benefits of current retirees are fully funded, as the necessary reserves to fund the lifetime payments were set aside upon retirement.
The market value of STRS Ohio's investment assets on May 31, 2007, was almost $77 billion, up more than $11 billion from June 30, 2006, due to excellent returns to date. While STRS Ohio's current fiscal year won't end until June 30, 2007, we anticipate the funded position of the system will be improved and that the dollar amount of the pension fund's unfunded liabilities will again show a decline, following in the footsteps of last year's decrease of more than $688 million.
The State Teachers Retirement Board is very mindful of its pension obligations and is continually reviewing factors that affect the solvency of the fund. Examples would include annual pension fund valuation reviews by an independent actuary, an Asset/Liability Study completed in 2005, as well as a planned review of actuarial assumptions (e.g., retirement trends, benefit recipients' mortality, and payroll growth) in 2008. In short, the board and staff are managing pension fund solvency through current contributions from members and employers, continual review of factors affecting unfunded liabilities and making adjustments when necessary, and making no plan design changes that would contribute to the system's unfunded liabilities.
FINANCIAL STATUS AND PLAN GOVERNANCE PASSES THIRD-PARTY REVIEWS Independent third-party reviews of STRS Ohio continue to confirm that the system's overall direction and focus is appropriate:
- In February 2004, Milliman USA, which serves as the actuary to the Ohio Retirement Study Council, noted "Our reports confirmed that all of the (Ohio) retirement systems remain financially secure to pay all mandated pension benefits when they become due well into the future."
- In December 2006, Independent Fiduciary Services, Inc. (IFS) presented the results of its two-year study of STRS Ohio to the Ohio Retirement Study Council. The 338-page report presented the results of a comprehensive audit that reviewed investment management structure and costs, asset allocation, investment accounting, board governance, and STRS Ohio's organizational structure and resources. In the executive summary that accompanied the report, IFS noted "...the results of this review demonstrate that STRS is generally in line with best practices with regard to much of its overall governance, administration and management of its investment program." Further, the report noted that "...STRS governance policies and rules are impressively comprehensive and they cover all of the significant aspects of governance a sophisticated public pension fund requires."
- In February 2007, Standard & Poor's (S&P) affirmed STRS Ohio's "AAA" issuer credit rating. This rating is S&P's highest possible rating for an organization's ability to pay its financial obligations.
HEALTH CARE FUNDING DIALOGUE NEEDED Funding for STRS Ohio's optional health care program comes out of a separate fund from the pension fund. STRS Ohio, working with K-12 and higher education organizations, has developed a plan to fund, on a long-term basis, the health care program it provides to retired teachers and their family members, disabled teachers and survivors of deceased teachers. This plan does require an increase in contributions from both active teachers and employers. The goal in introducing this legislation is to encourage dialogue among legislators, employers and educators about the critical issue of health care and to decide if this proposal is a viable solution.
Thank you for giving us a few moments of your time to share this information about STRS Ohio.
On Thursday, June 7, 2007, the Thomas B. Fordham Institute is presenting a report about an analysis it has conducted of the State Teachers Retirement System of Ohio (STRS Ohio). Although we requested it, the Fordham Institute has refused to share an advance copy of the report. However, in reviewing other works done by the individuals hired to write this report, we anticipate it will include a discussion about fund solvency for retired and disabled teachers' benefits and optional health care coverage. Out-of-state report co-author Michael Podgursky took a similar approach in a paper titled "Is It Time To Rethink Teacher Pensions In Maryland?" in November 2006 for The Abell Foundation.
Once we have an opportunity to analyze the report, we will undoubtedly have comments to share about its content. However, we believe it is appropriate at this time to share some facts about STRS Ohio and to share news about our continued improving fiscal status.
STRS OHIO OFFERS THREE RETIREMENT PLAN OPTIONS TO ITS MEMBERS STRS Ohio has been providing retirement benefits to Ohio's public educators since 1920 -- long before Social Security was established in 1935. Today, STRS Ohio offers three retirement plan options to its new members:
- STRS Ohio's Defined Benefit Plan -- Under this plan, the pension amount is determined by a calculation that uses the member's age, years of service credit and the average of the three highest salary years (final average salary). Survivor and disability protection is also provided.
- STRS Ohio's Defined Contribution Plan -- Under this plan, retirement income is based on the performance of investment choices members select for the contributions made by the members and their employers. Retirement, survivor and disability benefits are limited to the value of the account.
- STRS Ohio's Combined Plan -- This plan allows members to create a portion of their retirement income through the performance of investment choices they select for their contributions, while contributions from their employers pay for a combination of service retirement, disability and survivor benefits.
Given these choices, today 85% of new members are choosing the Defined Benefit Plan, while only about 10% choose the Defined Contribution Plan and 5% choose the Combined Plan; the vast majority of public educators prefer STRS Ohio's Defined Benefit Plan.
PENSION FUND STATUS IS RESPONDING WELL TO INVESTMENT RETURNS AND PRUDENT OVERSIGHT The retirement, disability and survivor benefits paid by STRS Ohio are funded through three income sources: member contributions, employer contributions and investment earnings on those contributions. A member's contributions, plus the employer's contribution and investment earnings are expected to fund that member's benefit in retirement. Unfunded liabilities can occur in a pension plan when investment returns or actuarial experience doesn't match expectations; plan design changes can also have an impact. In STRS Ohio's case, the significant value of the funds that have gone toward health care coverage for retirees in the past 33 years is largely responsible for the current unfunded liabilities. However, the benefits of current retirees are fully funded, as the necessary reserves to fund the lifetime payments were set aside upon retirement.
The market value of STRS Ohio's investment assets on May 31, 2007, was almost $77 billion, up more than $11 billion from June 30, 2006, due to excellent returns to date. While STRS Ohio's current fiscal year won't end until June 30, 2007, we anticipate the funded position of the system will be improved and that the dollar amount of the pension fund's unfunded liabilities will again show a decline, following in the footsteps of last year's decrease of more than $688 million.
The State Teachers Retirement Board is very mindful of its pension obligations and is continually reviewing factors that affect the solvency of the fund. Examples would include annual pension fund valuation reviews by an independent actuary, an Asset/Liability Study completed in 2005, as well as a planned review of actuarial assumptions (e.g., retirement trends, benefit recipients' mortality, and payroll growth) in 2008. In short, the board and staff are managing pension fund solvency through current contributions from members and employers, continual review of factors affecting unfunded liabilities and making adjustments when necessary, and making no plan design changes that would contribute to the system's unfunded liabilities.
FINANCIAL STATUS AND PLAN GOVERNANCE PASSES THIRD-PARTY REVIEWS Independent third-party reviews of STRS Ohio continue to confirm that the system's overall direction and focus is appropriate:
- In February 2004, Milliman USA, which serves as the actuary to the Ohio Retirement Study Council, noted "Our reports confirmed that all of the (Ohio) retirement systems remain financially secure to pay all mandated pension benefits when they become due well into the future."
- In December 2006, Independent Fiduciary Services, Inc. (IFS) presented the results of its two-year study of STRS Ohio to the Ohio Retirement Study Council. The 338-page report presented the results of a comprehensive audit that reviewed investment management structure and costs, asset allocation, investment accounting, board governance, and STRS Ohio's organizational structure and resources. In the executive summary that accompanied the report, IFS noted "...the results of this review demonstrate that STRS is generally in line with best practices with regard to much of its overall governance, administration and management of its investment program." Further, the report noted that "...STRS governance policies and rules are impressively comprehensive and they cover all of the significant aspects of governance a sophisticated public pension fund requires."
- In February 2007, Standard & Poor's (S&P) affirmed STRS Ohio's "AAA" issuer credit rating. This rating is S&P's highest possible rating for an organization's ability to pay its financial obligations.
HEALTH CARE FUNDING DIALOGUE NEEDED Funding for STRS Ohio's optional health care program comes out of a separate fund from the pension fund. STRS Ohio, working with K-12 and higher education organizations, has developed a plan to fund, on a long-term basis, the health care program it provides to retired teachers and their family members, disabled teachers and survivors of deceased teachers. This plan does require an increase in contributions from both active teachers and employers. The goal in introducing this legislation is to encourage dialogue among legislators, employers and educators about the critical issue of health care and to decide if this proposal is a viable solution.
Thank you for giving us a few moments of your time to share this information about STRS Ohio.
posted by Kathie Bracy at 3:21 PM
<< Home