Dennis Leone: Letter to the STRS Board on Upcoming Board Decision: Truth and Reality

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Upcoming STRS Board Decision: Truth and Reality

By Dennis Leone
January 24, 2011

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Perhaps, since the STRS Board has learned that an increased employer contribution is simply not in the cards (no real surprise there), an opportunity now exists for the Board to correct some mistakes that it made with its first attempt to adopt a pension solvency plan last October.

Of course, the STRS Board almost never admits that it makes a mistake. Since I began researching Board actions in 2002, and while I served as an STRS Board member between 2005 and 2009, I can recall only twice when such an admission was made. The first was former STRS Board member Michael Billirakis (a former OEA president), who admitted publicly in 2004 that the Board should never have spent $875,000 on sculptures. In 2005, new STRS Executive Director Damon Asbury also made an astonishing admission in public: "The Board and the staff have fallen out-of-touch with the membership." It is interesting that such a statement was made in 2005, because 6 years later the same problem has re-surfaced. The current Board is disconnected from retirees like it was in the early 2000s, and this is a fact irrespective of: (A) How the Board interprets its own self-serving member surveys; (B) What the Board hears from an STRS cheerleading club called ORTA; and (C) What the Board is told by a look-the-other-way union called OEA.

The Truth:

1. The Board's decision last October NOT to separate each item for voting purposes was ill-advised and just plain wrong. Decisions pertaining to the solvency of a pension fund affecting hundreds of thousands of members deserve separate votes on each issue so the membership can see precisely where the voting Board members stand. It also was ill-advised to permit an OEA-driven group (which calls itself HPA) to be able to place its desired plan on a formal board meeting agenda for action. This forced Board members to specifically vote yes or no on a plan developed by an outside group. I wonder if the board will allow a group called CORE (Concerned Ohio Retired Educators) to have a formal agenda item that will force the board to vote on a plan that will better protect the oldest retirees who have the least. No, I don't think that will happen.

The truth is that no board - not a school board, not a college board, not a corporate board - allows an outside group to put something on a formal board meeting agenda that will force the board to specifically vote on it yes or no. Discussion items from outsiders are fair game, but certainly not items requiring a vote.

2. The Board's action last October pertaining to a member's Final Average Salary (FAS) calculation was extremely inappropriate. To refresh your memory, instead of the Board specifically voting to raise the FAS calculation from 3 years to 5 years, the Board decided to request language from the Legislature that will permit the Board to alter (without legislative approval) the FAS calculation in future years. This was a meaningless action on the Board's part. All it did was give OEA more time to push for a delay in the activation date for any such change in the future. The Board's upcoming new plan needs to specifically change the 3-year FAS to a 5-year FAS, and the activation date needs to be immediate (2011) instead of phased-in. Don't dare tell me, as Jim McGreevy told retiree Molly Ganz in an 10-18-10 email, that "the (implementation) delays are an attempt to treat teachers nearing retirement in a way that is fair to them as individuals." What did I just read, from an elected retiree rep on the Board? Has the Board always treated retirees fairly?

Never mind that the current Board supports an immediate cut in retirees' COLA and that previous boards immediately dropped retirees' benefits (like spousal health insurance) with no warning what-so-ever and no phase-in period at all. It is a stunning insult to all retirees for the Board think it's okay to have phase-in periods for changes affecting teachers at the same time the Board is seeking an immediate cut in the COLA. It also is an insult for the Board for look the other way about prior injustices imposed on retirees with an attitude of "Oh well, we're not responsible for what previous boards did."

3. The famous "drops in the bucket" position of former Board member Jack Chapman is once again alive and well with the current STRS Board. For those board members who lack STRS history, Mr. Chapman -- in response to retirees who were outraged over their pension money being spent on parties, booze, multiple board trips to Honolulu, and giant bonus checks going to 300 non-investment staff members at STRS - said publicly that such were merely financial "drops in the bucket" for a pension system that has billions in assets. (Chapman, like Billirakis and former Executive Director Herb Dyer, was later convicted in court on state ethics violations.) Current board members apparently believe that since changes like the needed FAS alternation noted above represent a "drop in the bucket" that such aren't as important and can be put off. Not doing what is right because it represents only a "drop in the bucket" in terms of savings is another insult to retirees.

4. The Board also refuses to have STRS employees live by the same health insurance decisions it imposes on retirees. The cost savings to STRS, some Board members insist, would be so minimal that it wouldn't significantly impact the system's solvency. As well, the Board is stuck in a fantasy land belief that in order to "attract and keep the best and the brightest" employees, top drawer benefits must be offered. This is pure nonsense and unrealistic. Freezing wages and causing STRS employees to pay more for their benefits often was one the most difficult tasks I had when I served on the board. There were times that motions I made -- like freezing wages and bonuses in years STRS lost money in the stock market -- died for the lack of a second. It was only until legions of retirees (mostly associated with CORE) complained loudly that anything changed and such actions occurred.

5. The Board is making a huge mistake if a decision is made NOT to stop all COLA payments for new teachers who become part of our pension system after 7-1-11. It does not matter if this will not, in the eyes of board members, produce enough cash savings to correct the solvency problem. It is simply the right thing to do financially. Funny, isn't it, that so many other states are moving in this direction, irrespective of whether it represents a "drop in the bucket." In fact, I will take this argument one step further: If our Legislature, in its infinite wisdom, does something horrible like eliminate the COLA entirely for all current retirees, the STRS Board has no one to blame but itself for such a mess. Why? Ultimately, our future solvency problem could be largely corrected by eliminating the COLA for all future NEW retirees. Oh no, active members on the board like Tim Myers would say. Not us. Don't "take away" something, some Board members believe, that active teachers feel they are entitled to receive. Never mind that the current 175,000 active educators in Ohio have never received a COLA. Some Board members and OEA will argue that it wouldn't be fair if current retirees receive a COLA in the future but new retirees do not get to receive the same COLA.

6. Some Board members think it's their business to point out that 8 out of 10 retirees are currently working (at least part time). This, they think, makes a COLA not as imperative. Board member Jim McGreevy even wrote recently: "I do not buy into the notion that pre-1999 retirees are more needy than post 1999-retirees." Really, Jim? What planet have you been living on? Have you checked to see how low the annual pensions are for those who retired before 1999? No Board member seems to acknowledge that active educators, unlike retirees, are in position currently to build up their future retirement. Board member Tim Myers also recently came up with a unwise idea to eliminate the 1% set-aside dollar amount that exists for health insurance. This is the same Tim Myers, who at my last board meeting in 2009, made a formal motion to stop any and all discussion of the bonus check question. The motion failed, but other OEA teachers on the Board were quick in their attempt to support what Myers recommended.

7. The Board majority seems to be obsessed with cutting current retirees' COLA, and to do so immediately. The Board majority also seems to be committed to keeping the active teachers' increase, phased in, at 2.5%. This is extremely shortsighted on the Board's part. The active teacher contribution rate must be increased at a level of not less than 3.0%, and it needs to be increased immediately. It also is silly for Board members to believe that because a phased-in 2.5% increase would cause an immediate 0.5% increase in 2011 for active members; this makes their situation equal to that of retirees. Furthermore, the ill-advised and very costly 88%-35 year benefit - which never should have happened in 2000 - needs to go, and it needs to go now. It will defy logic if the Board adopts a plan to immediately cut current retirees' COLA at the same time it slowly phases out the sacred 88%-35 year benefit. The 88%-35 year benefit needs to be eliminated now.

The Reality:

The day may come, unfortunately, when our lawmakers review and understand the attached document entitled "Factors Driving STRS Planning Assumptions." The revelation of what the charts say may not occur for several years. When it does happen, they will realize -- and it will be painfully obvious -- that more should have been done in 2011 by the STRS Board to correct the future solvency problems, like changing the FAS calculation from 3 years to 5 years immediately, like increasing active teacher contributions by at least 3.0% immediately, like dropping the 88%-35 year benefit immediately, and like eliminating the COLA for new teachers (and even, perhaps, for all future new retirees) immediately. Why do I write this?

1. STRS Investment Returns - For everything to work (and for our unfunded liability to get below 30 years), STRS is counting on receiving a + 8.0% return on its stock market investments per year. The attached chart shows that over the past 9 years, the average return has been + 5.01% per year. The chart also shows that for the past 7 years, our average return has been + 5.44% per year. At one recent STRS Board meeting, the Board was advised by a paid consultant that it might be wise to lower this revenue assumption to + 7.5%. The Board hasn't done this. It makes me feel that the Board wants to pretend that an + 8.0% assumption is realistic. It is not. Does anyone really think we will receive an average stock market return of + 8.0% for the next 30 years? Isn't going to happen! Is there anyone who does not believe there will be external events that will cause the stock market to drop significantly again?

2. Active Member Payroll Growth - In this category, STRS is banking on receiving increased revenue that assumes an average payroll growth of 4.0% per year in the future. Prior to 2009, the STRS Board even used an assumption of 4.5% in this category. What are the facts? For the past 9 years, the payroll growth of active members has been an average of 3.31% per year, and - worse yet - the payroll growth for the past 7 years has been a dismal 2.65% average per year. Yet we are banking on receiving at least an average of 4.0% per year. It isn't going to happen. Hundreds of school districts are currently freezing base raises and are permitting only experience "step" increases of about 2.0% to occur. Some school districts, like the Cincinnati City Schools, also have recently eliminated the automatic "step" increases that teachers expect to receive. Times are changing, and the STRS Board's thought process about payroll growth needs to change too.

3. Total STRS Active Members - Between 1927 and 2003, the number of active members in STRS increased consistently each year. Something happened in 2004 that no one wants to talk about. The active membership started declining, from its peak of 179,944 in 2003 to 173,327 in 2008. In that five-year time span, active membership at STRS dropped by 6,617 persons. In 2009 and 2010, the active membership at STRS climbed by 2,515, causing some Board members to think that this category is on the rebound. The board needs to be made aware of the fact that the slight rebound of the past 2 years likely will be short-lived. To begin with, the increase of 2,515 likely was driven by increased numbers of charter school teachers (who are generally paid less than their public school counterparts), by part-time public school employees, and by university employees. There is nothing to suggest that the number of public school active members will be increasing in the immediate future. The opposite is true. In fact, the Ohio Department of Education is acknowledging for first time that there is an overall decline in the number of public school students in Ohio.

4. Total STRS Retiree Members - This is the one category where things are extremely consistent. In the past 9 years, the number of STRS retirees has grown by 27,803. The data shows that yearly, the number of new retirees increases about 3,475. There is no reason to believe this will change. The scary part of this picture is the fact that in 2003, there were 108,294 retirees and 179,944 active members, which meant that retirees represented 37.6% of the combined total. In 2010, retirees represented 43.1% of the combined total. This trend, assuming that it continues (and there is little to suggest that it won't) is a recipe for future significant financial decline at STRS. If these two charts ever meet, and the number of retirees starts surpassing the number of actives, we are in big trouble.

In March of 2007, after the Board and STRS staff published reports announcing that "pensions are secure" and that the desired 30-year unfunded liability likely would be achieved by 2009, I published my disagreement and opposition to such statements. My comments were met with distaste by my fellow board members and staff. Even OEA President Patricia Frost-Brooks later criticized me publicly at a Board meeting for not being an STRS team player. Ten months before the collapse of the stock market, I wrote:

"My point simply is this: Absent a continuation of great investment returns, we will not be able to offset the realities - if they continue - of the other three areas (active member payroll growth, total active membership, and total retiree membership) shown above. I am hopeful my fellow board members will be agreeable to approve a contingency plan to minimize the negative impact of a significant stock market downturn."

The Board didn't want to hear this. Recently, Board member Jim McGreevy even wrote: "We were happy to accept the pre-2008 reality was sustainable." Someone needs to ask Jim who he means by the word "we." The bottom line, it appears, is that what the Board pretends to be reality becomes reality, even when it later proves to be massively flawed. McGreevy also recently wrote: "Individuals who are retired, to this point in time, contributed to the unfunded liability by not making adequate contributions." That's right, Jim, blame retirees, not the decision makers - the STRS Board and the STRS Staff.

It is interesting that recently, Board member Bob Stein wrote: "I know we would be dealing with a more sympathetic executive and Legislature if educators and other public employees had been more attentive and active." Wow, what a statement! Is that the responsibility of Susie Smith, a 25-year-old teacher, or her union leaders and the OEA-dominated STRS Board? CORE tried, Bob, month after month at Board meetings, to wake people up. Had you been there, you'd know. I tried too, Bob, in early 2007, ten months before the stock market downturn, but no one wanted to listen - not my fellow STRS Board members, not the STRS staff, not ORTA, and not OEA. It was more convenient to pretend that things were getting better, even when the facts (see the attached charts) suggested a different story.

Things can be fixed now, but not until the STRS Board understands how important it is for the final plan to increase the 3-year FAS to a 5-year FAS immediately, to increase the active contribution by at least 3.0% immediately, to dump the 88%-35-year benefit immediately, and to eliminate the COLA for newly hired teachers (and possibly for ALL future new retirees) immediately. The future and the realities of the 4 attached charts mandate that the final Board plan contain these elements.

Dennis Leone
STRS Board Member, 2005-2009

See tables below.
(Click image TWICE to enlarge.)

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