Wednesday, January 29, 2014

Future of STRS: some perspectives from a school board member

From: (xxx)
Sent: 1/19/2014 
Subject: Future of STRS
I'm a long-time follower of your blog, and we've communicated once or twice in the past.  I've just been elected to a second term on the School Board for (xxx) City Schools. I feel  have a better than average understanding of finance in general, and school economics in particular.
I've written several articles in my own blog about the woes of STRS, including one last week after the revelation of the "programming error" was written about in the Dispatch. 
The message from Dave Parshall that you posted was a good one, and requires a response I believe:
1. Relying on extraordinary investment returns from the stock market is what got STRS into trouble in the first place. The 88% enhanced benefit came to be because it looked like the retirement fund was building up a balance much larger than required to fund the benefits in place at the time. Then the market crashed, as it does periodically, and it will again. Here's a chart worth looking at, plotting the Price-Earnings ratio of the S&P 500 stock market index over the years. Notice the similarity between the recent years and the 1930s. I think there's a very high probability that when our government quits tinkering with the stock market via this 0% interest experiment, there will be another slump, if not outright crash, in our future. 
Bottom line is that it would be foolish to depend on a perpetual rise in the stock market to fix things. The solution is for STRS to pay out less, not to count on making more.  
2. I think it makes a lot of sense for STRS to protect its retirees at the low end of the scale. A good friend of mine retired just a few years ago from an Appalachian district. She has a Masters+ and 33 years of experience, but her FAS was only $42,000.  Her retirement benefit is $30,000, and she's working fulltime to try to make it.  Compare that to another teacher friend who retired last year at an FAS of $91,000, and eligible for the 88% enhanced benefit. Her pension is over $80,000/yr. Wish I had that.  
3. School boards, ie the taxpayers, have funded enough over the years. While active teacher salaries have skyrocketed, our contributions has risen with it (ie the percentage is constant, not the dollar amount). The financial trouble STRS is experiencing has to do with poor management/investment decisions - including the 88% payout - not inadequate funding. Meanwhile, the rest of us boomer retirees are trying to figure out how we're going to survive without pensions at all. Every additional dollar I pay to bail out STRS is a dollar subtracted from my own retirement fund, which is suffering mightily from this 0% interest rate environment (created to bail other folks who made bad decisions). 
Thanks for listening.
Larry KehresMount Union Collge
Division III
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