Here's one we missed in February: Teacher pension update points to problems

http://www.thenews-messenger.com/story/news/local/2017/02/21/teacher-pension-update-points-looming-problems/98151878/

Teacher pension update points to problems

John Damschroder, Columnist

Published Feb. 21, 2017

 

John Damschroder

In a classic late Friday afternoon bad news dump, the State Teachers Retirement System of Ohio announced plans to cut its investment return assumptions from the 7.75 percent annual projection currently used. The teachers now join the Ohio Public Employee Retirement System and the Ohio School Employees Retirement System in trimming a half percent from investment return assumptions. (www.strsoh.org/news/board-news/2017/february-board-news.html)

The combined holdings of these Ohio public pension funds is $170 billion, so the half-percent adjustment means the state acknowledges an $850 million additional annual increase to the unfunded liability of the retirement systems.

Ohio is not alone in recognizing the futility of the financial assumptions they’ve failed to meet for a decade. But unlike most states, Ohio is maxed out on pension contributions unless the legislature changes the law and forces municipalities and school districts to pay much more to cut the increased deficit.

That’s not what’s going to happen. Instead, STRS, which increased teacher pension pay-ins from 10 percent to 14 percent of salary, is going to close an additional $11.5 billion gap between assets and obligations over the next 30 years, by “changing the benefit design plan.” That is how bureaucrats announce they are going to cut benefits. This follows a 2012 pension reform plan that cut $18 billion from state liabilities by charging employees more and delivering less.

The politicians and bureaucrats are crafting a storyline that blames increased life spans of retirees for the problem, with STRS's Friday announcement saying a new study recommends "adopting updated mortality tables that account for increasing lifespans among benefit recipients." But our public employment retirees don’t need to feel guilty for ducking death on the state’s timetable. The real problem is an asset allocation strategy that has been an abject failure.

Ohio’s emergence as the largest source of alternative investment funding has made Wall Street wizards rich on annual fees that totaled $734 million last year alone. STRS and OPERS both earned less than 1 percent last year and ended the year with less money than they started with. To compound the irresponsibility, leadership of both retirement systems wrote to this newspaper professing financial strength, while these sub-par results were known to them but still unknown to us.

How different things could have been if Ohio had not changed state law to allow the exotic investments that first brought losses to the Ohio Bureau of Workers Compensation and have now inflicted a much bigger calamity upon the entire state retirement system. Relying upon a 60-40 stock-to-bond investment fund, Ohio would have earned 8.63 percent last year and would have returned an annualized 10.67 percent over the last eight years. Going aggressive with a broad-based stock-only program like the S&P 500 would have returned 11.96 percent last year and 14.88 percent annualized for the last eight years.