Dennis Leone: 3/9/11 Testimony before the Ohio House Health, Aging, Retirement and Pensions Sub-Committee

Testimony Before the Ohio House Health, Aging, Retirement, and Pensions Sub-Committee

By Dennis A. Leone
March 9, 2011

TOPIC: Proposed House Bill 69 (State Retirement Systems)

Chairman Kirk Schuring and members of the Ohio House of Representatives, thank you for providing me with an opportunity to speak on a topic that is very near and dear to my heart. I am speaking today as a retiree of the State Teachers Retirement System (STRS) and as a former elected member of the STRS Board. I served on the STRS Board until 18 months ago when my term expired. My remarks today pertain only to what has been recommended to you by the current STRS Board, and the provisions of House Bill 69 that involve STRS.

To begin with, I wish to state that I hope that the emotions associated with the collective bargaining bill will not detract from the need for lawmakers to move forward decisively with this bill, and I also hope that external union pressures will not cause a softening of the key components of this legislation. What do I hope you will do? I hope you do everything you can to protect the current 133,000 STRS retirees. Permit me to explain further:

1. In order for STRS to be financially solvent for current and future retirees, this legislation must include the requested 3% increase in the annual contribution rate of active STRS members. Do not allow OEA and OFT to convince you that this is unfair or too much. In fact, be aware that there is a piece of the proposed STRS Board plan that is rather weak in nature. The STRS Board seeks your authority - but not a legislative mandate - to raise the contribution level of active members at some undetermined year in the future by another 1% (on top of the proposed 3% increase). Believe me when I say that if you do not mandate a total 4% increase for STRS active members by a certain date in the future, it will not happen due to union pressure that the STRS Board will not be able to handle. The five active teacher members on the current STRS Board came very close a few weeks ago to stopping even the 3% increase recommendation that you have before you. And in case you are not aware, raising the active contributions by 4% would bring the total active contribution level to 14%, which would match the current 14% that school boards pay.

2. The STRS Board plan seeks to change the Final Average Salary calculation from a 3-year calculation to a 5-year calculation (which would return it to what it was some years ago). The problem with this provision of the STRS Board proposal is that the requested implementation year is not until 2015. While I am not saying that it would be fair to require this change as early as this year, it certainly should occur in either 2012 or 2013. In fact, I think an argument can be made - in the spirit of creating long-term pension solvency - for the Legislature to mandate a new 5-year Final Average Salary calculation for 2012 or 2013, then require that STRS go to a 7-year Final Average Salary calculation several years later, perhaps in 2018. Trust me when I say that it definitely will be needed in the future.
3. The costly 88%-35-year retirement benefit at STRS has been in effect since 2000. It was wrong then, and it is wrong now. It has contributed to the unfunded liability problem that exists today at STRS. It has created a two-tiered system of the "haves" and the "have nots." The STRS Board plan calls for it to be eliminated in 2015. This benefit, as well, needs to go far sooner, in 2012 or 2013. It should have never, never happened in 2000. There is probably not a single STRS Board action that upsets STRS retirees who retired before 2000 more than the current 88% benefit.

4. The STRS Board is requesting a new age-60 requirement for retirement, but the plan has an overly generous 12-year phase-in period. It does not become fully implemented until 2023. In other words, the plan protects a teacher who is currently 48 years old. OEA and OFT officials say how wrong it would be to have a quicker phase-in period. But let me tell you about a little secret that I learned 2 years ago as an STRS Board member: Guess what the average age of retirement is now for STRS retirees? It is 59.1 years old. Let me repeat that: 59.1 years old. In other words, it already is nearly what is being requested as a requirement in the STRS Board plan. The facts in this situation put a dent in what OEA and OFT claim is unfairness and insensitivity. Please remember what I've told you here today in this area.

5. The STRS plan immediately cuts retirees' Cost Of Living Adjustment (COLA) by 1%. Interesting, isn't it, that whenever STRS decides to do something that adversely affects retirees, like requiring them to pay more for their insurance premiums, like completely taking away health insurance for their spouses, or like cutting their COLA - those things need to happen "right now." There is no phase-in or phase-out period to protect retirees in the STRS Board plan, but you sure see such protection in the STRS plan for active members. I am asking today that you please do everything you can to make sure that the COLA for retirees is not cut more than 1%, as the COLA is the only possible way that retirees can even hope to keep up with increased health insurance costs. Also please be thinking of the reality that the COLA is a statutory requirement for current retirees of STRS. It certainly is something than can be dropped legislatively for future retirees - and indeed the STRS Board plan calls for new retirees to go without a COLA for 5 years - but taking away something now that STRS retirees have statutorily could produce a legitimate legal challenge. You might want to look into this.

6. Please be aware that states in this country already have adopted legislation to drop the COLA for new retirees, and many states have decided that brand new teachers who are contributing to the retirement system for the very first time will not be eligible for a COLA upon their retirement 35 years later.

7. A shameful omission in the STRS Board plan - a provision that definitely needs to be there - is language that would better protect the oldest STRS retirees who have the least. There are 30,000 STRS retirees (23.7% of the total) who have annual pensions of less than $30,000 per year - which is very close to the new U.S. poverty level. Most of these retirees are between 85 and 100 years old. It would seem that if the changes that I am suggesting here today were made to improve pension solvency, then these oldest and most-needy retirees also would not need to have a 1% COLA reduction.

8. Please recognize that in terms of pension solvency, the current required 14% contribution for school boards cannot be lowered. Reducing the 14% would be massively destructive to STRS in the long run. The STRS Board, to its credit, has responded to the mandate it was given to prepare a solvency plan that does not increase a school board's required contribution. Increasing the required employer contribution, while part of the STRS Board's original plan, is now off the table. Please do all that you can to help your colleague legislators understand how reducing the required employer 14% contribution would likely translate into 133,000 retirees seeing both their COLA and their current pensions cut.

My final point today pertains to the attached chart, which contains 4 tables for your review. If there is a single document that illustrates the need for the Legislature to take the STRS plan a little farther, as I am suggesting today, it is this chart. For the recommended plan to reduce the pension system's unfunded liability to the desired 30 years, the STRS Board is banking on certain other assumptions occurring. This is extremely important to fully understand. Take note that the STRS Board is assuming an average yearly 8.0% positive stock market return over the next 30 years, plus an average yearly 4.0% positive payroll growth of active members over the next 30 years. While I suppose it is possible, absent another downturn in the economy, that STRS could see stock market returns exceed 8.0% per year (which they have six times in the past nine years), I am nervous that external factors beyond everyone's control will suddenly drive the stock market south significantly. I am even more nervous that the assumed 4.0% payroll growth for active members simply is not going to happen. As you can see, the average payroll growth in the past 7 years has been just 2.65%. How in the world, with all that is happening, can the payroll growth suddenly increase over what it has been for the past 7 years.

In conclusion, please recognize how important it is not to soften the pension solvency plan due to emotions associated with the collective bargaining bill. Please recognize how critically important it is, to better ensure pension solvency long term, that the STRS Board plan go deeper in the areas that I have suggested. Please recognize that the reality of the attached 4 tables will make the changes I am recommending an absolute necessity. And please make a slight adjustment in the final plan so that it will better protect the oldest STRS retirees who have the least.

Thank you.
[Click image TWICE to enlarge.]

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