Wednesday, November 24, 2010

Y'all have a nice Thanksgiving! (Plus a timely message from a former STRS Board member)



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From Dennis Leone, November 24, 2010
Subject: Re:
Change is needed NOW !
There it is John…………….the ultimate proof of how naive the board has been in prior years. The STRS Board needs to:
1. Immediately eliminate the ill-advised 88%/35-year enhancement, or at least drop it completely by 2014.
2. Change the 3-year Final Average Salary calculation to a 5-year FAS calculation, effective 2014.
3. Immediately raise the active contribution rate to 13%.
4. Immediately reduce the unrealistic assumed payroll growth of 4.0% to 3.0%.
5. Immediately reduce the insane assumed stock market return of 8.0% to 7.5%.
6. Immediately raise the assumed mortality rate of retirees.
7. Immediately reduce the assumed number of active members per year, which has dropped 4,000 since 2003.
8. Raise the minimum retirement age to 55 effective 2114, then phase in a minimum retirement age of 60.
9. Immediately reduce the COLA for new retirees to 1.5% annually, if the COLA is reduced to 2.0% for all other existing retirees.
WHY IN HELL IS THIS SO HARD TO UNDERSTAND………………it is because OEA doesn't want to see those happen so fast, if at all. And even with the changes above, STRS still will not be solvent in the future, but these things STILL need to occur.
Dennis Leone
STRS Board Member between 2005 and 2009
From John Curry, November 24, 2010
Subject: In case you were doubting the miserable shape STRS is really in then....read this!
Below you will find a scan of the October 2010 STRS Board minutes. Take some time to carefully read this page...it sure runs contradictory to the former "everything is beautiful" mantra that we were fed in previous STRS newsletters, doesn't it? We are now in "crunch time."
John
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Mr. Roy reported that the unfunded accrued liability is $38.8 billion. As a result, the funded ratio as of July 1, 2010, decreased from 60% to 59.1%, and the amortization period for the unfunded pension remained infinite. Mr. Roy stated that the employer contribution rate would need to increase to 25% to have a 30-year funding period for the current unfunded liability. PwC also noted that if the DB Plan was frozen and there were no future benefit accruals, the funded ratio would still only be 66.2%.
Mr. Gamzon cautioned the Board that, based on current contribution rates, STRS Ohio will not be able to meet its pension obligations at some point in the future. He also said shifting to a Defined Contribution Plan does not fix the plan because the existing liabilities still have to be paid. He indicated that the only way to fix the problem is through increased investment returns, additional contributions or reduced liabilities. Mr. Gamzon concluded that current benefits are not sustainable.
In January 2010, Milliman presented its findings of the actuarial audit to the Board. While Milliman found the actuarial procedures and practices of PwC to be of high quality and in compliance with all major aspects of applicable actuarial standards, a few recommendations were made. PwC updated the Board on its responses to those recommendations.
The first recommendation was to revise the mortality assumption. Milliman recommended using a projected mortality table as opposed to static mortality tables used by PwC. Mr. Garnzon explained the difference between the two types of mortality tables and stated ~hat the mortality table is generally updated every five years in conjunction with the experience review. PwC recommended maintaining the current mortality assumption. At this time, the mortality tables used by PwC are more conservative and appropriate.
Milliman also recommended monitoring the investment return assumption and reducing the 8% net rate of return assumption to 7.5% to provide a more neutral estimate of future returns. Mr. Garnzon pointed out that, based on a study by NASRA, the majority of public pension plans assume an 8% investment return. PwC believes this is still a reasonable assumption for STRS Ohio, based on the asset mix. However, a growing trend among other public plans is to lower their assumption. If the investment return assumption were lowered, the accrued liability and employer normal cost would increase. PwC and STRS Ohio· will continue to monitor this assumption.
Finally, Milliman recommended increasing the prior year annualized salary by a full year of payroll growth and adding one-half year of interest to better reflect actual experience when determining the normal cost rate. PwC agreed with this recommendation and the changes are reflected in the July 1, 2010, valuation results.
Next, PwC reviewed the proposed GASB standards for pension accounting by employers and STRS Ohio's response to the Preliminary Views.
PwC also provided the Board with information on the interest rate paid on money purchase benefits and withdrawals. PwC recommends maintaining the current interest rates for both options - 5% for the money purchase benefit and 2% or 3% for withdrawals based on years of service.
Larry KehresMount Union Collge
Division III
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