July report from STRS

From STRS, July 15, 2009

Although the State Teachers Retirement Board does not meet in July, we are issuing an update this month to provide current information on several important items to our members.

OPERS CONTRIBUTION REDUCTION PROPOSED TO HELP STATE BUDGET
On June 19, 2009, Gov. Ted Strickland proposed that the state's contribution to public employees' pensions be reduced from 14 percent to 8 percent for two years, with a payback to the Ohio Public Employees Retirement System (OPERS) to occur over the subsequent 10 years. This proposal was made as a way to help balance the state's budget. In voicing its strong opposition to the proposal, OPERS noted that reducing contributions would put OPERS outside the 30-year period required by law to fund pensions and would reduce the solvency of the fund that pays for all retiree health care to 10 years.

While STRS Ohio and the other public pension systems in the state were not included in the proposal, the executive directors of STRS Ohio, School Employees Retirement System (SERS) and the Highway Patrol Retirement System sent a joint letter to the governor and the members of the Ohio General Assembly also voicing their opposition. In it, they noted, "... if this funding reduction proposal goes forward, other public employers facing fiscal distress will want the same funding reduction. We believe this is short-sighted because if the public retirement systems cannot provide basic retirement, access to health care coverage, and safety net benefits for public employees, the costs to other state and federal programs will increase."

The proposal was eventually rejected by lawmakers and was not part of the state's final budget. Going forward, all the systems will need to be vigilant to ensure such proposals do not surface again.

SPECIAL HEALTH CARE PROGRAM NEWS ON ITS WAY TO PROGRAM PARTICIPANTS
Current enrollees in STRS Ohio's Health Care Program should watch their mailboxes for additional information about the 2010 health care program changes. A four-page newsletter is on its way that will provide details about enrollment options (including the new Aetna Medicare Plan), the new single prescription drug plan for Aetna, Medical Mutual and Paramount Health Care Plans, premiums and upcoming fall meetings around the state. This same information is already posted on the STRS Ohio Web site (http://www.strsoh.org/whatsnew/news14.html).

In late October, all current enrollees will also receive personalized information that outlines their 2010 plan options and monthly premiums in preparation for the fall open-enrollment period, which extends from Nov. 1-24, 2009.

LONG-TERM CONTINGENCY PLANNING WORK CONTINUES
In preparation for the August Retirement Board meeting, STRS Ohio staff is continuing to work on various scenarios designed to restore the pension fund to a 30-year funding period in a reasonable amount of time, while also allowing additional employer contributions to go to the Health Care Stabilization Fund and extend the life of the STRS Ohio Health Care Program. As noted in previous communications, STRS Ohio, along with pension plans around the country, has been severely impacted by the historic downturn in the markets and the accompanying recession. But before the economic downturn, STRS Ohio was already being impacted by other economic and demographic factors. For example, the life expectancy of STRS Ohio members has increased over time, but age and service requirements have not changed since 1976, resulting in pension benefits being paid for longer periods of time. Additionally, there has been steady growth in the benefit formula (including the enhanced 35-year benefi
t) over the years. Finally, improvements to already granted retiree benefits, such as ad hoc increases to various groups of retirees in 1984, 1988, 1990, 1997 and 1999, as well as supplemental lump-sum payments (often called 13th checks) from 1980 through 2000, have increased the system's liabilities over time.

Looking long term, the reduced level of investment assets, coupled with future expected investment earnings and current contributions levels, will result in a funding shortfall. Unless changes are made, STRS Ohio will eventually be unable to pay members' projected benefits.

The Ohio Retirement Study Council (ORSC), which is the legislative oversight body for Ohio's five public pension systems, directed each system in May to present board-approved plans for achieving or maintaining a 30-year funding period at the ORSC's Sept. 9, 2009, meeting.

STRS Ohio will continue to use its newsletters, Web site and e-mail news service to share the results of the board's and the ORSC's discussions in the coming weeks. In addition, once future changes are more defined, STRS Ohio will be holding meetings around the state to provide additional information to active and retired educators.

A review of the member comments received at STRS Ohio reveal a few misperceptions about the work being conducted by the Retirement Board and staff. We would like to address these below.

PERCEPTION: The Retirement Board is looking at reducing my pension benefit.
FACT: The Retirement Board is not looking at changing current pension payments.

PERCEPTION: The only option for change being considered by the board is the cost-of-living adjustment (COLA).
FACT: Although reducing the COLA is the most effective means for preserving the pension fund because it impacts both current and future retirees, the board has been looking at an extensive list of potential options since beginning its discussions in March. Other changes under consideration that would impact current and future teachers include:

- Increasing contributions from the current 10% from active teachers and/or 14% from employers;

- Instituting a minimum retirement age (none currently exists);

- Increasing the number of years used to calculate final average salary to five from three; and

- Changing the formula for calculating pensions.

In its discussions, the board has also been taking into account the impact of delaying implementation of some changes, as well as the possibility of phasing-in plan design and/or contribution increases. However, the longer it takes for changes to be implemented, the more severe they will need to be to have the same monetary impact.

PERCEPTION: The COLA is calculated on a member's final average salary at retirement. For example, if a member's final average salary is $50,000 a year, then each year in retirement, the member would receive 3% of the $50,000 or $1,500 per year. The COLA is never compounded.
FACT: The COLA is not calculated on the final average salary, but rather the member's final retirement benefit, which is based on the member's age at retirement, total years of service credit, final average salary and chosen plan of payment. It is true that the annual 3% COLA is calculated on the original benefit and is not compounded over the previous year.

PERCEPTION: A change to the COLA will affect past COLAs.
FACT: Any change to the COLA would not impact past COLAs that have already been added to a benefit.

PERCEPTION: Changing the COLA only affects current retirees.
FACT: As noted previously, changing the COLA would affect all STRS Ohio members - future, current and retired educators. But it actually has a greater financial impact on future retirees than current retirees because current retirees have already been receiving an annual COLA throughout retirement. Those increases would not be taken away. A change in the COLA would only affect future COLA payments. For members who have yet to retire, they will be financially impacted by a change in the COLA throughout their entire retirement.

PERCEPTION: Eliminating the $1,000 lump-sum death benefit is being considered by the board.
FACT: The board has not yet discussed the $1,000 lump-sum death benefit and whether to make any changes. Eliminating the $1,000 lump-sum death benefit was included on a list of possible changes that the staff of the ORSC asked all five Ohio public pension plans to consider. The ORSC list includes increases in member and employer contributions; increasing age and service requirements; changing the benefit formula, as well as eliminating the 35-year incentive that applies to STRS Ohio; changing final average salary to five years from three; eliminating the lump-sum death benefit; looking at either eliminating, delaying or reducing the cost-of-living adjustment; and increasing the number of days to earn one year of service credit to 180 from 120.

PERCEPTION: There is no need to make drastic changes; the stock market will eventually improve.
FACT: One of the first things the board looked at when it began its long-term contingency planning was the investment return assumption. This was part of an Asset Allocation Study the board recently conducted to evaluate its current allocations to different asset classes and the accompanying expected risk and return. In the past, STRS Ohio has assumed an 8% return on its investments over rolling 20-year periods. A higher investment return would result in a reduction in unfunded liabilities. The board worked with its investment consultant and examined future investment return projections. The Asset Allocation Study confirmed its 8% long-term assumption is appropriate going forward, but it cannot be increased. In short, STRS Ohio cannot "invest" its way out of the funding challenge it faces.

PERCEPTION: If STRS Ohio would just "tighten its belt," no changes would be necessary.
FACT: Reducing STRS Ohio's operating expenditures is always important - regardless of the status of the pension fund. Potential reductions - both large and small - are pursued year-round by STRS Ohio associates, as evidenced by final year-end financial reports that show expenditures continue to be reduced.

Some of the more significant and recent steps taken to reduce the STRS Ohio budget include freezing salaries for all STRS Ohio associates through June 30, 2010; implementing a standard 40-hour workweek across the organization as of Jan. 1, 2010, with no additional compensation provided to associates currently working 37.5 hours per week; limiting business travel; reducing the use of outside professional and technical services; eliminating the payment of Performance-Based Incentives to eligible Investment Department associates whenever STRS Ohio's total investment fund return is negative for fiscal year 2010 and beyond; and putting a cap on the number of STRS Ohio associates. As of July 3, 2009, STRS Ohio had a total of 589 associates, of whom 558 are full time and 31 are part time. This represents a decline of more than 140 individuals since 2003.

STRS Ohio's operating budget for this year is the lowest operating budget in four years and totals $87.9 million. It represents a $10.9 million decrease from last year's budget and a more than $2 million reduction from actual expenses last year. If all STRS Ohio associates worked for free, all communications to members was stopped, and critical member services, such as the call center, were shut down, STRS Ohio would still face a pension funding shortfall that would require the same kind of long-term changes now being considered.

STRS Ohio's unfunded liability as of July 1, 2009, is $38.3 billion. Completely eliminating all operating expenditures will not lower that number. And, if this unfunded liability is allowed to keep growing, STRS Ohio will eventually be unable to pay members their earned benefits. In short, reducing operating costs alone cannot solve the long-term issue of funding pensions and a viable health care program for future generations of teachers.