Nancy Hamant responds to Laura Ecklar

From Nancy Hamant, August 24, 2010

Laura Ecklar, Director, Communication Services
State Teachers Retirement System of Ohio
275 East Broad Street
Columbus, OH 43215-3771

Dear Ms. Ecklar:

I have received and reviewed the information that you forwarded regarding the proposed COLA changes to the STRS Pension and to my public participation comments on August 2010. I have several questions about the information, however, before I address those questions, I want to be eminently clear that I feel it is absolutely necessary to resolve the STRS Pension fund unfunded liability problem. I also believe that any solution must be completely equitable to all STRS members.

The following assumptions were used for the development of the August 2010 public participation comments:

a. Changing the STRS Pension Fund is a complex issue with multiple variables;

b. STRS membership numbers are not static: total; actives; retirees are not static--teachers enter the system, leave the system, retire, and die, annually;

c. STRS membership numbers are relatively stabile: total--400,000 plus; actives--300,000 plus; and retirees--100,000 plus;

d. COLAs are only paid to STRS retirees per Ohio Revised Code, therefore reducing COLAs will only affect retirees financially;

e. The five "levers" proposed by the STRS Board to address the unfunded liability (which is at infinity) are: an increase in contributions; an increase in final average salary years; a change in eligibility for retirement; a change in the benefit formula (benefit enhancement); and a reduction in the annual cost-of-living adjustment;

f. Each of the five levers is a variable, containing multiple variables within each; and subject to more variability when another factor is applied to the lever, such as time. Hence, starting the reduction of COLAs in 2011 will have an immediate impact on the unfunded liability. Waiting until 2015 to increase Final Average Salary (FAS) years; change eligibility for retirement; and change benefit formula will postpone and forestall for four years the impact of these levers on reducing the unfunded liability;

g. The eight newspaper articles published the week of June 20, 2010 reported proposed savings totals for three of the levers to be "pushing retirement to 35 years and eliminating the 11.5% bump will each remove nearly $1 billion from the $40 billion in unfunded liabilities. The COLA reduction would be huge cutting another $8 billion." (This was the first time many STRS members and Ohio citizens read about the $ impact for three of the proposed levers. Total proposed savings had been mentioned at STRS Board meetings and are contained in the booklet recently forwarded to me, The STRS Ohio Long-Term Fiduciary and Financial Contingency Planning Process, page 9 "these changes would save $8.99 billion in future liabilities" and on page 11 "STRS Ohio staff projects the proposed changes would save almost $9 billion in accrued liabilities".)

Ms. Ecklar, in the second paragraph of your letter you commented "The $8 billion savings in liabilities noted in the newspaper is NOT just a result of reducing current retirees' COLA by 1% going forward." In developing the August 2010 presentation, it was clearly evident to me that the proposed COLA reduction would affect today's retirees, those who retire in 2011, 2012 and retirees in to the future. I reread the August 2010 presentation and confirmed that "current" was not used anywhere in the document to describe retirees. In fact, the first sentence stated "a matter of deep concern to all STRS members", so there was never any confusion for me. Also in paragraph two of your letter is the following statement "this proposed change has such a big impact on the unfunded liabilities--it includes active members and retirees". Stating "includes active members and retirees" is confusing the time table in which these STRS members will be affected by the COLA reduction. Members cannot receive a COLA until they are retired, so the savings of a reduced COLA toward the unfunded liability will not occur until the active member retires. A suggestion would be to state "current and future retirees" in connection with COLA savings. In addition, it is imperative that STRS provide the actuarial data to active STRS members so that the impact of the COLA reduction on their future retirement can be fully and easily assessed. To do otherwise, might be similar to having active teachers give up a portion of their pension as in a "prenuptial agreement" without the advice of a lawyer. Current retirees would also appreciate actuarial information as to the impact of the COLA reduction annually and over their remaining lifetime. And I know this information varies.

In paragraph three of your letter, the following is stated "we often see errors in some of the newspaper articles. For example, the $8 billion figure quoted in the paper is wrong; it should have said $6 billion." I am confused. Does the $8 billion cited in both paragraph 2 and 3 refer to the total amount to be saved by all five proposed changes? Or does the $8 billion refer to the amount to be saved through the proposed COLA reduction? Or does the $6 billion refer to the amount to be saved through the proposed COLA reduction?

All STRS members want any solution to the unfunded liability of the STRS Pension Fund to be equitable. Calculating the average impact for each STRS member provides a snapshot of the equity of proposed changes. As noted in the previous paragraph, there are questions about the figures in the newspaper and the recent letter to me. However, based on the figures from your letter and the pamphlets, I am providing some averages (meaning some members will be impacted more and some members less--these averages do not show the cumulative effect of the COLA reductions, actuarial calculations would do that):

If the total saved is: $9,000,000,000 ÷ 400,000 total members=$22,500 average*

If the total saved is: $8,000,000,000 ÷ 400,000 total members=$20,000 average*

If the total COLA saved is: $6,000,000,000 ÷ 100,000 retirees=$60,000 average*

If the total COLA saved is: $8,000,000,000 ÷ 100,000 retirees=$80,000 average*

If total saved (other 4 levers) is: $3,0000,000,000 (divided by) 300,000 actives = $10,000 average (COLA impacts actives financially when they become retirees)*

If total saved (2 levers - as in newspaper) is: $2,000,000,000 (divided by) 300,000 actives = $6,666 average (COLA impacts actives financially when they become retirees)*

*Both retiree and future retirees need to be provided the actuarial data that indicates the amounts being lost annually and in lifetimes by the proposed COLA reductions. STRS should also provide all members with the total amount be saved via all five levers and provide a breakdown of the amount to be saved for each of the five levers, including timelines for the savings.

Ms. Ecklar the two pamphlets sent to me show the use of actuarial data throughout the STRS Board process and that the actuarial data was provided continuously. STRS needs to use the data to counteract the impact of the eight newspapers' recent articles. The articles have affected all Ohioans' and STRS members' perception of the five state pension funds and in particular, STRS Ohio. Overnight, whether anyone likes it or not, educators are now believed to be greedy, double-dipping and wanting all taxpayers to bail out their pension funds. The newspapers have thrown down the gauntlet with their lawsuit for information, implying that the pension funds are hiding information and in another article, that the pension funds are spending millions for lobbying, thereby implying that the pension funds cannot be trusted.

Only hard-hitting data from actuarial studies will combat these perceptions. And I do believe that such data needed to be generated immediately after the articles were printed. To wait until after the November elections may very well be too late, because the newspapers' focus and implications are day-by-day being embedded in Ohio citizens minds. And undoubtedly, the newspapers will come back with another round of articles. STRS Ohio needs to be ready with hard-hitting facts and figures.

Sincerely,
Nancy B. Hamant

xc: Michael Nehf, STRS Executive Director, STRS Board Members

Attachment: Ecklar Letter--Aug. 13, 2010