Ralph Roshong: Recommendations for STRS Board

July 8, 2009
TO: STRS Board and Staff
FR: Ralph Roshong
XC: ORSC and State Legislators

Following is a summary of STRS staff pension fund change proposals presented to the STRS Board on June 17 & 18, 2009. There are five Lever recommendations presented by staff which was the 3rd revision. I have presented an additional three Levers of my own that I feel are topics the Board should address. I have followed each recommendation with my thoughts on the particular Lever presented. Following that, I have listed some of my logic for my thoughts or position.

Please get involved in the decisions that the STRS Board will be making to the Ohio Retirement Study Council by Sept. 9th. There is a good chance these recommendations will be finalized at the August meeting (currently scheduled for Aug. 20-21). The ORSC will then review the proposals and either (1) send them back for changes, (2) send them to the Legislature as presented, or (3) change them and send the revised proposals to the Legislature for action.

WHILE READING THESE PROPOSALS, KEEP IN MIND WHAT IS OCCURRING IN OUR COUNTRY AT THE PRESENT TIME:

• Our National Debt is escalating with no end in sight
• Social Security is reducing COLA to 0%
• Medicare will be broke in about 9 yrs
• Taxpayers are overloaded
• State budgets are broke or worse
• Federal government is beyond broke and in serious depression
• Pension funds everywhere are broke
• Any delay in making serious corrections is very detrimental to the pension fund.

STRS, Jun 17, Lever I – Contributions
Staff Proposal: Additional 5% contribution rate phased in over 5 yrs beginning 2011. 2.5 member and 2.5 employer (Bd. of Educ.).

My thoughts: I feel there should be a 3% additional contribution by employees only, 1% to healthcare and 2 percent to pension. It should begin immediately, ½% increase per year for 6 years. The first two ½ % ages going to the healthcare fund.

My logic: The taxpayers are not in a mood for nor capable of paying more for educators pension and healthcare benefits. Plus, the employer is and has been paying (14%), significantly more than the employee (10%) for the pension fund. Before any increase in rates for schools ie. taxpayers, there should be a match in participation by employees. I am sure the Legislature will not pass a tax increase for school boards, another unfunded mandate.

STRS, Jun 17, Lever II – Eligibility
Staff Proposal: 35 yrs of service at any age or minimum age 60 w/30 yrs service, beginning 7.1.15

My thoughts: There has to be an increase in the retirement age. Social Security has been creeping theirs up in the last few years. With the average length of life at about 84, pensions cannot afford the lengthy retirements and short periods of paying into the fund.

Logic: Current eligibility to retire before age 60 and collect retirement equal to or longer than the number of years one has worked at an amount close to their working salary is not sustainable.

STRS, Jun 17, Lever III – Benefit formula
Staff Proposal: 2.2% formula for 1st 30 yrs/2.5% formula for yrs after 30 years and beginning 7.1.15

My thoughts: The 2.2% formula for the 1st 30 years and 2.5% for years after 30 should begin immediately. Those who are in the 31-35 years credit area at the time of implementation, would receive the 4.5% (Mr. Brooks’ recommendation) credit for each of those years completed, then revert to the new formula for any further years.

Logic: This ill-begotten formula, 35/88.5% formula, passed about 2000, was totally not thought out and could not be afforded from day one. The pension fund had a spike in interest revenues in 2000 and the Board selfishly gave themselves and thousands of others permanent raises that the pension fund could not and cannot fund. This act was under funded by $2.5 B at its inception.

STRS, Jun 17, Lever IV – Final Average Salary (FAS)
Staff Proposal: 5 yr Final Average Salary, begin 7.1.15

My thoughts: This plan should be implemented immediately in a two year phase-in, 4 year FAS the first year and 5 year FAS in the second year and thereafter.

Logic: A more rounded salary number is needed to protect the pension fund. Many play games in the last year or two to raise their salaries and inflate their FAS without paying in a commensurate amount to the fund over all their work years.

STRS, Jun 17, Lever V – Cost-of-Living Adjustment (COLA)
Staff Proposal: 1% simple COLA starting age 65,begin 7.1.15

My thoughts: The COLA must be reduced to 2% simple immediately. Those receiving a 35 yr/88.5% benefit should not be eligible for the new 2% reduced COLA. They and new retirees would only be eligible to collect under the new 1% COLA after age 65. Those retirees below the government’s Self Sufficiency Level should not be affected by any changes in the COLA.

Logic: Retirees must share in the financial contractions also. COLA is the most costly factor in the pension fund’s cost determiners. The 88.5% retirees retired at significantly higher pensions and therefore aren’t as dependent on the COLA.

My July 6, Lever VI – Staff benefits
Staff Proposal: None, remain as is

My thoughts: All STRS staff should also participate in healthcare retractions similar to what are being imposed on the retirees.

Logic: Staff’s compensation funds should reflect the same fallbacks that the retiree’s healthcare and pension funds are going to experience. To be providing our reduced services and not realize that they are aboard the same ship as the retirees is foolish and unacceptable.

My July 6, Lever VII – 13th check
Staff Proposal: None currently in existence

My thoughts: Should the pension fund find itself back in a favorable light financially and some positive balances start appearing, the first action should be to reinstitute the 13th check to reduce any surplus balances.

Logic: No future permanent increases should be considered, only temporary 13th checks. This should have been done back in 2000 rather than permanent increases in the formula.

My July 6, Lever VIII – Investors' Bonus Program (PBI)
Staff Proposal: Reinstate as modified

My thoughts: The PBI (Investment bonus program) program needs revamping from top to bottom and left to right as soon as possible. The lengthy policy explaining the procedures for bonuses is about four pages long and that is about 3 and ½ pages too long. Make it much shorter, simpler, relevant and appropriate. There is probably a need for some type of bonus program, but the current one is totally inappropriate.

Logic: Paying out these potential bonuses in light of the losses and reductions is totally unexplainable. In my opinion, the lengthy policy only includes a lot of scenarios so as to guarantee bonuses no matter what the performance of the market. The total package of compensation and benefits available to our investment staff is superior enough that there will not be an exodus of staff and if so, there is a large pool of financial talent available throughout the country.