Laura Ecklar responds to Tom Curtis re: 35/88 rule

From Laura Ecklar, February 1, 2010
Subject: Response to E-Mail

Good afternoon, Mr. Curtis. I am responding on behalf of Mr. Slater regarding your recent e-mail. Below, I have included a response to questions that we have received in the past about the 35-year benefit. This excerpt appeared in the August 2009 “Update From STRS Ohio” that was sent out via our e-mail news service and posted on our Web site. (The complete newsletter can be found on our Web site.) As you requested, I am also mailing to you a copy of the July 1, 2009, actuarial valuation conducted by PricewaterhouseCoopers. References to “accrued actuarial pension liabilities” represent the present value of future payments related to benefits for both active and retired members and are based on actuarial assumptions about the future. At the June 2009 board meeting, Mr. Slater noted that if the 35-year enhanced benefit did not exist, the accrued actuarial pension liability would be reduced by approximately $940 million as of July 1, 2008. As you know, the Retirement Board’s proposed pension plan changes call for the elimination of the 35-year enhanced benefit. I hope this information is of value to you.

Perception: If STRS Ohio had never offered the enhanced 35-year benefit, these changes wouldn’t be necessary.

Fact: The 35-year benefit has contributed to increased unfunded liabilities, but so have the other components of S.B. 190 that included changes to the pension formula for active teachers; recalculation of the base benefit for many retirees; and a one-time increase for all benefit recipients who needed a raise to restore their benefit to at least 85% of its original purchasing power.

Over time, there have been a number of factors that have impacted funding for pension benefits — not just S.B. 190. These include other improvements to the benefit formula and to various groups of retirees; more than $711 million in “13th checks”; allocations of more than $5.4 billion to the separate health care fund; and legislation setting the COLA at 3% in 2002. Increased life expectancy among STRS Ohio members and lower-than-expected payroll growth among active teachers have also had an impact.

To address these growing liabilities, STRS Ohio took several steps over the years, including increasing members’ contributions; lowering the annual interest rate paid on member withdrawals; stopping the 13th check; decreasing the amount of employer contributions put into the health care fund; reducing the match on reemployed retirees’ lump-sum payments or monthly annuity benefits; and adjusting investment asset allocations and accompanying expected returns.

Even with these changes, the funding period for the pension fund stood at 41.2 years on July 1, 2008. This means that based on the value of investment assets at that time, we expected to pay off all unfunded liabilities over the next 41 years by achieving an 8% annual rate of return and meeting all other actuarial assumptions. However, due to the recession, the market value of our investment assets declined by about $24 billion over the past two fiscal years. As a result, STRS Ohio’s unfunded liability almost doubled in just one year and the funding period now stands at “infinity.” Much more significant changes are needed to enable STRS Ohio to meet its funding challenge.

From Tom Curtis, January 29, 2010
Subject: 012910 Re 35 Year Rule Cost To STRS

Hello Fellow Stakeholders,

I received the following comment after my letter to Rep Wachtmann. I have written Bob Slater twice, asking for clarification, but have received no response to date.

Consequently, can any of you verify my comment, that the 35-year rule has cost the STRS 1 billion to date?

In the interest of accuracy, the 35 year enhanced benefits have not "cost the STRS $1 billion to date" as you stated in your letter to Rep. Wachtmann. What Bob Slater reported was that IF nothing was done, over the next thirty years those additional benefits would cost the system around $1 billion. (To put it in perspective, if we don't get the other changes we recommended to the Legislature, our unfunded liability would grow from our present $38 billion figure to around $80 billion.) The realization that STRS mortality assumptions were too high and increasing HC costs were the primary reasons those 35 year benefits no longer fit the "break-even" status that was believed to be the case when the changes were proposed in the 1990's. The view that those benefit enhancements did not add to the unfunded liability was reaffirmed by the Board's actuary (Buck Consultants) in 2005.

Or, do you agree with the statements above?

Tom Curtis