Two items from the Dayton Daily News re: STRS Ohio

Our view: Pension plan needs rethinking top to bottom
Our view: Data doesn't support study conclusions
By Dayton Daily News
Saturday, July 07, 2007

Think tanks and public pension systems aren't typically parties to street fights. But there was a rumble last month when the Thomas B. Fordham Institute released a study on the State Teachers Retirement System in Ohio.

The teachers' retirement fund fired a pre-emptive shot the day before the report's publication. The pension system complained that Fordham had refused to share an advance copy of the report — adding, by the way, that the pension system is fiscally sound, well-managed and forward-looking.

The Fordham Institute released the report the next day under the banner headline: "Ohio teacher pension system in urgent need of overhaul." It called the system "a ticking time bomb" that's "out of step with Ohio's current teacher needs, labor markets and career patterns," and that carries "$20 billion in unfunded liabilities — more than $4,000 per Ohio household."

Pension administrators shot back with their own poison press release, stating that "the report appears to be a very incomplete analysis of the system," and that it contains "glaring mistakes and misstatements."

The name-calling from each side continues to this day, and is counterproductive. The reality is that both sides have valid points, and current teachers, retirees and taxpayers would be foolish to ignore them.

The Fordham Institute is wrong to imply that the retirement system is in crisis, or that Ohio taxpayers suddenly could be saddled with huge liabilities. Such alarmist talk is factually inaccurate and does not fairly characterize what the researchers found.

The retirement system has ample assets to pay retirement benefits. There is no risk that Ohio taxpayers could be stuck with huge, unforeseen pension liabilities.

But that fact doesn't mean everything is OK. Everything is not OK — not if you are a teacher and you want to retire with health-care benefits.

Health care is the crux of the controversy and the disputed shortfall — and a source of real urgency. The teachers' retirement fund has no legal duty to offer retirees health-care coverage. Nevertheless, the pension fund's investments have been sufficient to pay a big part of their health-care premiums in retirement. That can't be sustained much longer.

Administrators of the fund ultimately have two choices: Either reduce the insurance benefit or persuade lawmakers to increase the amount that participants and school districts pay into the system. Neither option is attractive.

Here the Fordham study makes a good point: policy makers should reconsider the current system from top to bottom, thinking through whether it offers the best way to fund a secure retirement for today's teachers. Fordham correctly notes that the system has been cobbled together over many years and is the product of lobbying and politics rather than policy and planning.

Few employers in the private sector still provide "defined benefit" pensions like what teachers and other public employees receive. Instead they offer "cash balance" programs such as 401(k) accounts.

Would that kind of system be less costly, freeing up resources to help pay for health-care benefits?

Does a pension system that primarily rewards longevity unreasonably penalize teachers who want to leave the profession? Does it undermine school districts' ability to recruit mid-career professionals who want to become teachers?

If Ohio were to start over, would the pension plan look like what we have today?

These are timely questions. Public pension systems across the nation — not just the Ohio teachers' plan — have a duty to search for answers.

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From teachers' pension Fund [STRS]
Other views: Data doesn't support study conclusions
Our view: Pension plan needs rethinking top to bottom
Dayton Daily News
Saturday, July 07, 2007

These are edited excerpts from an article in the forthcoming edition of the State Teachers Retirement System's newsletters to active members and retirees:

On June 7, the Thomas B. Fordham Institute released the results of a study it conducted about STRS Ohio. STRS was not consulted by the two individuals hired to write the report. Unfortunately, conclusions were drawn that aren't validated by the report's content or any existing data.

Nevertheless, a report such as this serves as another "wake–up call" for STRS and other public pension plans. Across the country, discussions are being held regarding the pros and cons of defined benefit plans and defined contribution plans.

In some states, the discussion has resulted in either proposed or enacted legislation closing defined benefit plans to new employees and putting defined contribution plans in their place.

These two plans have distinct differences. For example, under the STRS' defined benefit plan, the pension amount is determined by a calculation that uses members' age, years of service credit and the average of the three highest salary years. Survivor and disability protection is also provided.

However, under STRS defined contribution plan, retirement income is based on the performance of investment choices members select and manage for the contributions made by the members and their employers.

In short, a defined benefit plan provides protection throughout the life of the recipient. A defined contribution plan provides income until the account is depleted.

STRS is one of only a few retirement systems in the country that offers three retirement plan options — a defined benefit plan and defined contribution plan and a combined plan. The vast majority of public educators prefer the STRS defined benefit plan.

Unfunded liabilities can occur in a pension plan when investment returns or actuarial experience don't match expectations; plan design changes can also have an impact. In STRS' case, the significant amount of additional allocations that have gone toward health care coverage for retirees in the past 33 years, plus the accompanying potential investment earnings (that weren't realized), are largely responsible for the current unfunded liabilities.

However, the benefits of current retirees are fully funded.

The Fordham report states that our funding period is 47.2 years and our unfunded liability is $19.4 billion. As of June 30, 2006, these numbers were correct.

While we would caution that these numbers are preliminary until we receive our actuarial valuation in October, it appears that our funding period as of June 30 will drop to somewhere between 30 to 35 years.

The Fordham report suggests that STRS undermines school efforts to recruit and retain high quality teachers. STRS' own research of its active members indicates that one out of two teachers plans on teaching longer — often because of anticipated health-care costs in retirement.

We continue to welcome discussion and debate with our members and legislators that are based on accurate data and objective analysis.

[You can view STRS' June 7, 2007 news release by going to http://google.com and typing "STRS Ohio responds to Fordham Institute report." It is in PDF format; if you do not have Adobe Reader 8 on your computer (which makes it easier to pull up PDF files), you may want to download it (free): http://www.adobe.com/products/reader/]