Bob Buerkle to STRS Board, March 18, 2010: Another plan to consider

What other Contingency Options could STRS and the Legislature consider?

STRS Pension rules when I began my career have undergone many changes in 43 years.

In 1967-68 the STRS Retirement Rules I began under were the following:

1. A 35 year service requirement at any age, with

2. A 1.75% credit formula per year, using

3. A 5 year FAS requirement and

4. Paid a 61.25% of FAS pension with 35 yrs.

5. No COLA in pension law. In 1968 retirees received ad hoc raises of 2-24%. (A simple COLA of 1.5% of the original base pension after 3^rd year of retirement was created in 1971. In 1974 another ad hoc raise of 5-33% to make up for lost purchasing power due to high inflation. In 1979 the COLA was increased up to 3% if the CPI was 3% or more.)

Changes in pension laws: Formulas were improved from 1.75% in 1967 for a 35 year career to 2.2% for a 30 year career in 1997. A new enhancement was put into effect during the 1999-2000 fiscal year. Teachers who earn 35 years of Ohio earned service credit qualify for an 88.5% pension formula at retirement. The current 3% simple COLA guarantee became part of Ohio Law in 2002. These improvements are guaranteed to vested retirees under current law.

STRS had no subsidized Health Care plan until 1974, and then it was free for 19 years for both the member and their spouse. In 1993-94 STRS started charging for health care and by 1/1/2004 had phased out all subsidized health care for spouses. Health care isn’t guaranteed by Ohio law.

STRS began offering a supplemental 13^th check to retirees in 1980. This continued for 20 years until it ended in 2000. These annual checks averaged around $500-$600 per retiree and resulted in total payments of $711 million over the 20 years. Nearly half of the current retirees have never received a 13^th check. The 13^th check was never guaranteed by Ohio law.

In 2009-10, the current retirement rules in law since 1999-2000 are:

1. A 30 year service requirement at any age, with

2. A 2.2% credit formula per year, based upon

3. A 3 year FAS requirement and

4. Pays a 66% of FAS pension with 30 years,

5. *Pays an 88.5% of FAS pension with 35 Ohio service years,

6. STRS pays a simple COLA of 3% of original base pension and

7. **STRS offers members a non-guaranteed subsidized HC plan with no subsidy for spouses

*This formula would end on 8/1/2015 if current proposals change the law for future retirees.

**Not guaranteed by the Ohio Revised Code

I have an alternate plan that would affect only new STRS members, except for contribution increases, and it would save as much money as the STRS Contingency Plan. And it’s simple. All new hires would start their careers under new rules requiring 35 year career lengths at any age or 30 years at age 60, a 1.8% to 2.0% per year retirement formula, a five year FAS requirement and no COLA until future earnings assumptions and reserves can support it. (*)

(*) According to Pamela Pharris, executive director of the Georgia Employees Retirement System, the legislature passed a law last year that ends the cost-of-living adjustments for newly hired employees when they retire. “If you’re coming in the door and you know you won’t get a COLA when you retire, you won’t be planning on it,” said Pharris.

My plan would have a similar “Normal Cost” to the 11.62% projection assumed in the STRS Plan. This new Plan would resemble the New York changes where four “Tiers” have been implemented over the last 40 years. Just recently New York also increased the retirement age from 55 to 62 but for new hires only.

A new Tier lets new STRS members know the rules when they are hired, while current employees and retirees are allowed to maintain the benefit structures that they have been promised. My plan takes the pressure off the system and returns the STRS to a funding period of about 30 years, just like the current STRS Contingency Plan.

One concern expressed about this plan is that future employees could qualify for a pension benefit that would be worth less than the “Normal Cost” for the pension they could receive. This same concern was expressed by the STRS Actuary to the Board at the 8/20/09 meeting about the STRS developed Contingency Plan. The only way that would be true with either plan is if the additional 2.5% in member contributions goes into effect and, at the same time, no benefit improvements are able to be put into effect before they can retire in the next 30-35 years! Since part of what STRS is considering is that new members would not be vested for 10 years, STRS has at least that long to begin to improve pension benefits for new members. After that and over the next 20-25 years of their careers more improvements can be implemented, when investment returns can support them, as has been done in the past.

Texas, Nevada, New Jersey, New York, Georgia and Kentucky are some of the states that are changing formulas, increasing the number of years used to compute final average salary, and/or raising age and service requirements for retirement – but only for new plan members!

A few states have attempted to reduce the benefits of current workers and vested retirees and they are already in litigation. The Colorado Retirees and members are represented by a large Pittsburgh law firm which filed a class action lawsuit on their behalf in late February, 2010. The firm claims that changing vested COLA benefits for retirees from the promised 3.5% at retirement, to 2% going forward, violates both the U.S. and the Colorado Constitutions. (**)

(**) According to Ron Snell, Director of the State Services Division at the National Conference of State Legislatures in Denver, state constitutions and statutes generally protect pension benefits, and judges frequently have held that states cannot modify pension contracts with existing employees. “Once granted, a pension is a contractual obligation of the employer, so that in most states it is impossible to cut the promise of a future benefit.”

Submitted by Bob Buerkle, Cincinnati Public Schools retiree and 43 year teacher