Results of special STRS Board meeting, September 1, 2009

From STRS, September 1, 2009

Today, the State Teachers Retirement Board held a special meeting. Following board meetings, a report titled "Board News" is posted on the STRS Ohio Web site, as well as mailed to a number of members and education organization representatives who have requested it. As a member of STRS Ohio with an e-mail address on file, you will also receive this report whenever it is issued.

RETIREMENT BOARD ADOPTS PLAN FOR PENSION DESIGN AND CONTRIBUTION CHANGES
Following many months of discussion and after receiving significant input from STRS Ohio members, the State Teachers Retirement Board unanimously approved a multifaceted plan today to strengthen the financial condition of the retirement system. In approving the plan, board members cited the difficulty in making the decision, noting that these changes impact all STRS Ohio members. The plan includes an increase in contributions; an increase in final average salary years; a change in eligibility for retirement; a change in the benefit formula; and a reduction in the annual cost-of-living adjustment.

STRS Ohio, along with Ohio's four other public pension systems, will present their plans to the Ohio Retirement Study Council (ORSC) on Sept. 9 for either maintaining or returning to a 30-year funding period. The ORSC is expected to weigh in on the plans and then work with the systems to draft a bill. Once legislation is introduced, the normal legislative process begins. The proposed changes require legislative action by the Ohio General Assembly and the governor, as all the requested changes require changes in existing statute.

Before the market downturn, STRS Ohio had a funding period of 41.2 years, exceeding state statute's 30-year maximum funding period. Factors, such as members living longer, caused a reduction in available funds to pay off accrued liabilities over time. The unprecedented decline in the global markets and the accompanying recession, along with the projected gradual economic recovery, significantly accelerated the need for STRS Ohio to make changes. Without these changes, STRS Ohio would eventually be unable to pay future benefits. This plan enables the Retirement Board and staff to meet their fiduciary responsibility to help ensure the long-term solvency of STRS Ohio for future generations of teachers.

STRS Ohio staff projects that these changes would save $8.99 billion in future liabilities and would bring the pension fund to a 33.4-year funding period from its current status of infinity. Further, the current 1% employer contribution to the health care fund continues.

INCREASE IN CONTRIBUTIONS

- Increase member contributions by 0.5% per year beginning July 1, 2011, to a total of 2.5% on July 1, 2015.

- Increase employer contributions by 0.5% per year beginning July 1, 2016, to a total of 2.5% on July 1, 2020.

Currently, STRS Ohio members pay 10% of their salary to STRS Ohio and employers pay 14% of total teacher payroll in lieu of paying into Social Security. This plan component increases member and employer contributions by a total of 5% by July 1, 2020. The member increase would be phased in at 0.5% per year, beginning July 1, 2011, until 2.5% is reached on July 1, 2015. The employer increase would be delayed for five years, when it would be phased in at 0.5% per year, beginning July 1, 2016, until 2.5% is reached on July 1, 2020. Ultimately, STRS Ohio members would contribute 12.5% and employers would contribute 16.5%. This phased approach allows time for the economy to improve and also helps employers with budgeting.

INCREASE IN FINAL AVERAGE SALARY (FAS) YEARS

- FAS calculation to be based on five highest years of earnings beginning Aug. 1, 2015.

Pension benefits are determined by a member's age, years of service and FAS. Under the recommended plan, the FAS would be based on the five highest years of earnings versus the current three years, beginning Aug. 1, 2015.

CHANGE IN ELIGIBILITY FOR RETIREMENT

- Increase years of service required for retirement, beginning Aug. 1, 2015.

The recommended change increases the number of years required to be eligible for retirement. Beginning Aug. 1, 2015, members can retire at any age with 35 years of service; at age 60 with 30 years of service; or at age 65 with five years of service. (Members may retire earlier with an actuarially reduced benefit at age 55 with 30 years or at age 60 with five years.) Members who meet age and service eligibility for service retirement as of July 1, 2015, under the existing rule retain their eligibility.

CHANGE IN BENEFIT FORMULA

- New formula would be 2.2% per year for the first 30 years of service; 2.5% per year thereafter, beginning Aug. 1, 2015.

The 35-year enhanced benefit is no longer needed to encourage teachers to work longer and is eliminated. Those who have 30 years of service; who are age 55 with 25 years of service; or who are age 60 with five years of service as of July 1, 2015, receive the greater of:

(a) The benefit as of July 1, 2015, under the current formula; or

(b) The benefit upon retirement under the new formula.

In short, members who are eligible for service retirement will receive no less of a base pension benefit than they could have received on July 1, 2015. Under the new formula, at the end of a 35-year career, teachers would receive 78.5% of their final average salary; teachers who retire at age 60 with 38 years would receive 86% of final average salary.

REDUCTION IN COST-OF-LIVING ADJUSTMENT (COLA)

- Beginning July 1, 2011, current retirees would receive an annual 2% COLA; members retiring on July 1, 2011, or later would receive a 1.5% COLA each year.

Currently, the COLA is 3%. Without a change in the COLA, a viable Defined Benefit Plan cannot be sustained.

Overall, this plan accomplishes the following:

- Preserves the Defined Benefit Plan for Ohio's public educators. STRS Ohio members do not have to worry about outliving their benefits. These pension benefits can continue to support local economies (more than $3.6 billion in benefits are paid to Ohio residents alone); the taxes paid on these benefits can also continue to support local, state and federal governments. A viable Defined Benefit Plan also reduces the likelihood that STRS Ohio members will have to turn to public assistance, Medicaid or social services in retirement, thus relieving taxpayers of future obligations.

- Continues to offer a retirement plan that will help Ohio's public schools, colleges and universities recruit and retain quality educators.

- Allows for current and future active members, retirees and employers to collectively contribute to a solution.

- Provides a transition period for those teachers who are close to retirement, while recognizing that those further out from retirement have more time to plan for their future financial security.

- Allows members to continue to control their retirement decisions and not be "forced" out. This mitigates a potential "stampede" of members who want to retire before changes go into effect, thus preserving retirement patterns for STRS Ohio and protecting employers from veteran teachers leaving all at once.

- Preserves all past cost-of-living adjustments (COLAs) and ad hoc increases for current retirees.

- Allows retirees' pensions to continue to grow in the future, but at a slower rate.

The board will continue to annually review the actuarial valuations of the pension fund and the health care fund to monitor both funds' progress over time.

The board will also continue working with constituent groups as discussions continue with the Legislature. In addition, STRS Ohio will be scheduling meetings around the state to provide additional information to active and retired educators. Progress reports on the legislation will also be provided. Future STRS Ohio newsletters will provide more information.