Senator Faber: E-mail/Response

From Mario Iacone, March 14, 2010

The following lists an email I sent to Senator Faber, member of the ORSC Board. Below my email is Senator Faber's prompt, courteous, and thoughtful response.

Dear Senator Faber,

I would like to respectfully address a response you made to a recent inquiry from an STRS member.

I would like to comment on the following excerpt from your response.

You stated, “Even with all of theses changes within STRS, they need nearly a $9 billion reduction in liability and that liability comes from the members. This is why a lot of the proposed changes put forth affect the members.”

I would like you to consider the impact on the STRS fund from TWO SEVERE INVESTMENT LOSSES incurred over the last seven or eight years.

LOSS NUMBER ONE Prior to severe losses during a period in 2001-2002, the Funding Period was 27.5 Years. After STRS suffered losses from a high approaching 60 Billion to a low approaching 40 Billion, the Funding Period rose to 55.5 Years.

LOSS NUMBER TWO At the end of fiscal 2007, the Funding Period was 26.1 Years. After STRS suffered losses from a high of nearly 80 Billion to a low of around 47 Billion, the Funding Period became Infinity.

RISK MANAGEMENT Since it appears obvious that Investment Losses are the biggest lever which impact the STRS Fund, I would humbly ask you to consider including in the forthcoming pension legislation reasonable and effective mandates requiring Risk Management policies that would protect STRS members from future severe losses that would further endanger our benefits.

Risk Management measures that would protect gains and limit losses.

As you are probably aware, the Federal Reserve has imposed Risk Management requirements on Investment Banks. Please consider the prudence of doing likewise for our State Pension Systems.

SUBMITTED DATA The Funding Period information submitted was obtained from STRS data, specifically, the following chart: [Click to enlarge]

Respectfully,

Mario Iacone
STRS Retiree

SENATOR FABER's RESPONSE FOLLOWS

Thank you for your note. In the future it is always helpful to place your address in the email so we can respond from the Statehouse.

Based upon the detail of you comments, I presume that you have forwarded your thoughts to the STRS board. It is my understanding that Ohio law gives them discretion in their investment strategies consistent with their fiduciary responsibility as prudent managers. While I will forward your comments to STRS with regards to the loss mitigation issues, it is my understanding that they have policies in place to mitigate against loss. They may need to update these policies. While I am very concerned with some of their investment strategies and their overall return competiveness, they must weigh the down potential with the upside potential. It is my understanding that while they are not the best, they are fairly competitive in their risk/return ratio to similar funds. It is the market upside that yielded the lower funding periods in each time you referenced. Overall the trend (barring a large bull market) is toward lower expected annual returns. While market variation is a key factor in asset valuation, other important changes (like changing life expectancy, health care costs, and the like) are also impacting the long term financial stability of the funds. These are reflected in the ever increasing “Unfunded Actuarial Accrued Liability” referenced in your chart.

While I am not sure of the correspondence you are referring to, (it would be helpful if you let me know who the letter was sent to) it is fair to say that the Ohio retirement plans will need changes to be financially viable in the long term due to the factors mentioned above and consistent with both the expectations of the members and of the taxpayers. At this point, other than the suggestions from the plans themselves, NO…let me say this again, NO legislation is pending yet in the Ohio Senate. In the Senate, we will continue to gather information, suggestions and options for reform to the plans. The Senate will continue to seek information and input from the interested parties before we move forward with reforms. As I have said in the past, and as I showed with the SERS reform bill with I sponsored, it is important to keep the commitments to retirees and preferable when possible to grandfather existing employees into any changes. This becomes more important as employees get closer to the retirement age. If anyone tells you there is a “plan” please direct them to me.

Thank you again for your thoughts and please send your address so that my office and/or STRS can more directly answer your concerns and obtain your comments.

Keith