June 3, 2009
TO: STRS Board Members and Officers
FR: Ralph Roshong, 1991 STRS Retiree
XC: State Legislators
RE: Perspectives on Possible Pension Fund changes
The State Teachers Retirement System of Ohio (STRS) staff at the previous two or three monthly board meetings, have provided board members and visitors some extremely dire financial projections for our pension fund. Basically and simply, our fund, if drastic changes are not made immediately, will go broke. In fiscal 07-08, the fund paid out benefits of $5B and contributions of $2.8 B. So far the fiscal year 08-09(10 months, benefits paid was about $4.4B and total contributions about $2.3 B. The difference is usually made up from investments, but we all know where investments have been the last 18 months. Obviously, this situation cannot be maintained for very long. The STRS staff provided the two Sample Scenarios below at the last two monthly meetings suggesting the effects of potential changes to our retiree benefits and formulas for retiring. Their objective is to get our pension fund to a funding period of 30 years, which is the common standard for public pension funds. The funding period of a pension fund is the period of time to pay off the unfunded accrued actuarial liability, and the shorter the period, the better the financial condition of the fund. STRS Sample Scenario (April) can do that, but Sample Scenario(May) cannot accomplish the 30 year funding period.
STRS Sample Scenario (April)
Benefit Change Proposal
1. Additional 4% contribution rate phased in asap.
2. Minimum age 60 with 30 years of service implemented asap.
3. Five-year final average salary implemented asap.
4. Flat 2.2% formula for all years of service implemented asap.
5. 2 % Cost of Living Adjustment (COLA) deferred to age 65 implemented asap
The above potentials and projections would allow the Pension Fund to reach a funding period of 30 years.
STRS Sample Scenario (May)
Benefit Change Proposal
1. Additional 2% contribution rate phased in over four years beginning July 1, 2012
2. Minimum age 60 with 30 years of service beginning July 1, 2015.
3. Five-year final average salary, FAS, beginning July 1, 2015.
4. 2.2 % formula for first 30 years/2.5% formula for 31st year and after effective July 1,2015.
5. Retirees as of July 1, 2011; 3% COLA through July 1 2015; 1.5% COLA after July 1, 2015. Retirees after July 1, 2011; 1.5% COLA
The above Scenario (May) potentials and projections would allow the Pension Fund to have a funding period of 51.6 years. This is far from the goal of 30 years.
MY THOUGHTS AND COMMENTS TO THE BOARD
My opinion is our STRS pension fund must make immediate recommendations to the legislature that are more in line with Scenario (April). We do not have the luxury of time, phasing, delaying, arguing, or dilly-dallying one iota. Our dramatic funding shortfalls, as succinctly presented and explained by the STRS staff, must be corrected IMMEDIATELY. Whatever recommendation is sent to the Legislature, the Legislature will then take a period of time to act upon them. Implementation, if the recommendations are handled by the Legislature expeditiously, could hopefully be in time for a July 1, 2010 effective date. The more thought out and appropriate the changes presented to the Legislature are, the more expeditiously the state body will be able to address them and pass the measure.
THE CHANGES I SUGGEST FOR THE PENSION FUND ARE:
1. There needs to be additional funds brought into the pension and healthcare funds. My suggestion is to increase the employee contribution from 10% to 13%. I feel the 4% increase, used in the April Scenario, is a little too severe and the 2%, used in the May Scenario, is not effective enough for both funds. One percent should go to the healthcare fund and 2% into the pension fund. This should be done ½% each year for six years with the first two year’s increases going to the healthcare fund.
2. Minimum retirement age of 60 must be implemented effective July 1, 2010.
3. Five year FAS, final average salary, effective July l, 2010.
4. Flat 2.2%/year formula for retirement for each year of service. One exception, any employee who is currently in the 31-35 year range, can get the percentage/year suggested by Board Member Brooks at last month’s board meeting. I believe that was 4.5% for any of the years the employee has currently worked. Thereafter, each year is 2.2%.
5. Retirees must share in the contractions also, and the COLA must be reduced to 2%. COLA is the most costly factor in the pension fund’s cost determiners.
6. If, and when, the pension fund returns to a healthy level, the 13th check must be reintroduced to retirees. Positive investment returns must not be used for permanent formula increases.
MY HEALTHCARE FUND CHANGE SUGGESTIONS:
1. I feel that any of our present retirees who are receiving a benefit that is below the government’s Self Sufficiency Level (currently at about $20,000) should be held harmless from any healthcare increases. It is my understanding that about 700+ retirees are in this circumstance.
2. As mentioned above, I would suggest that an additional 1% contribution increase to the healthcare fund by contributing educators with ½% being added each of two years. It is absolutely necessary to have a pool of able bodied participants providing a flow of funds into the healthcare fund. The fund cannot be sustained by just the older pool of retirees who are accessing the funds at a higher and higher rate.
3. I agree with the other changes being proposed by the STRS Healthcare Staff to attempt to contain costs to the fund.
The above changes will present a most difficult challenge as the costs of medical care are increasing drastically to a segment of the population that most takes advantage of these services. If there are any wellness services that can be required to aid in cost savings, they should be required of members to take advantage of them.
I feel there should be a third level of health coverage created, of which, participants can have an opportunity to access, if their situation might warrant it. The three programs would have varying levels of deductibles and rates.
STRS staff medical plans should be altered in similar manner as those of the STRS retirees. It hardly appears appropriate that the parties handling our rate increases and service reductions should not participate in the same process. After all, we are in somewhat the same boat.
Our STRS investment department must receive a total top to bottom and left to right in-depth evaluation. I am not sure who is overseeing the whole program. It is my opinion, in light of the severe losses we have sustained in the previous 18 months, that something is not right in this area. With 95-100 staff, it is boggling to our retiree membership how some foresight was not available to make drastic changes along the way to soften these severe financial losses. I do not know why our outside investment advisors or consultants have not offered some evaluation as to why these results should be considered just the way the market goes.
If we do not get these immediate changes right and to the Legislature as soon as possible, the Legislature will act on their own to bring our fund into alignment with obligations; and we may not like the way they would do it. Remember, they already have a bill introduced to take action on investment bonuses because we did not get it right ourselves.
Thank you very much for taking the time to read my thoughts and the very best of our thoughts to you in your deliberations and actions.
1991 STRS Retiree