Bob Buerkle on the STRS funding crisis

From Bob Buerkle, March 21, 2017 

Written by Bob Buerkle in January, 2017

 I've been following the latest discussions at STRS about their funding since last spring.  Everything that they have been proposing is going to be so costly that there is no chance that STRS can be under 30 years of funding unless they steal more money from the retirees again. 

First it was to try to manipulate numbers wherever necessary in order to be able to claim that the Health Care Fund, (which isn't even a pension plan requirement), could be solvent for 65 years. If this becomes a reality, which it should not, then the health care cost sharing will be reversed from 20 years ago. Retirees will pony up 90% of the cost and STRS will kick in the other 10%.  SOLUTION: Drop this 65 year plan.  Since STRS is phasing in the age 60 with 35 years requirement, the health care plan will only be necessary for 0-5 years before retirees must go on Medicare.  This compares with up to 15 years of pre-Medicare coverage that STRS provided in the past.  

Next it was actuarial psycho-babel known as "Closed Funding" so they could possibly survive another "once-in-a-100-years" Great Recession.  I think the chances of this happening again in this century are about as likely as seeing Halley's Comet again in the next 20 years.  This is an impossible goal to achieve without more pension benefit take backs in the future.  SOLUTION:  Take appropriate action if another Great Recession ever does return.  Penalizing retirees for something that may never happen again is not in the best interests of our pension recipients.  If our STRS investment experts could lose less money than the general market during large pullbacks that would be most helpful.  Better yet, invest 10% of our money in Government Bonds and everything else in Warren Buffett's Berkshire Hathaway stock which has returned over 20% per year for 50 years, including all the ensuing recessions.  Just investing in the S&P 500 Index would also have satisfied all of our actuarial needs. 

Most recently STRS now wants to lower the earnings assumption from 7.75% to 7.5% or even as low as 7%.  Such a change would immediately propel the STRS funding ratio close to or at infinity again.  By doing this the STRS Management and Board can say "we now have to drop the COLA again" so they can right the STRS Ship.  SOLUTION: Leave the earnings assumption alone.  They already reduced it from 8% to 7.75% which cost us about 15 more years tacked on to our funding period and eliminated our COLA for a year, followed by a one-third reduction for as long as it might take for humans to populate another planet.

I believe the following statements are all accurate.

Retirees are the ones paying for STRS Investment mistakes

No usual and ongoing demographic changes caused this problem

The 3% simple COLA did not cause this problem

No service formula benefits of any kind caused this problem, including the 88.5% for 35 years

The combined effect of all of the above did not cause this problem

ONLY EXTREME LOSSES BY IN-HOUSE STRS INVESTMENT EXPERTS CAUSED THIS CRISIS

Bob Buerkle

Points made by Bob Buerkle in his February 2017 speech to the STRS Board

From Bob Buerkle, March 21, 2017

Kathie,

Here are the points I tried to cover at the February STRS meeting and you can post them.

As usual, the 3 minutes of time that STRS allows speakers goes by so fast that you can never get through all of you points, let alone any in-depth understanding of our suggestions.

Here are a few of the points I brought up.  I did not give the STRS a written copy of my speech.

1. I gave the Board the history of the last 50 years of their actuarial assets, unfunded liability, the funding period in years (which have ranged from 14 years to Infinity) as well as the funded ratio which has ranged from a low of51% in 1979 to a high of 92% in 1999 & 2000. What this showed is that STRS was over 30 years of funding in 26 years (plus 4 more when we were at infinity).  It also showed that STRS had a funded ratio of 56% in 2012, the year new pension system legislation was passed.  However, in 4 other years STRS had a lower funded ratio and they were not considered to have a funding period at Infinity.

2. I also presented a revised copy of what has become known as the “COLA Tree” that visually explains how the COLA benefit adds up over the years.  In example #1, it shows that up until 01/07/2013 the Ohio Revised Code 3307.67 said that “The State Teachers Retirement Board shall annually increase each allowance or benefit payment …by 3%”.  I told the Board that because of the changes affecting retirees and active teachers, STRS is not, and can no longer be considered, a top quartile pension system.  Example #1 also shows that, in the past, a teacher fortunate enough to live 33 years into retirement would live to see their original pension double.  As my Example #2 COLA Tree shows however, is that retirees have lost over one third of their original COLA benefit and for those retiring beyond 08/01/2013 who receive no COLA for 5 years will never the 55 years required to double your original pension.  It also shows that all of the newest retirees with a $50,000 pension will lose $519,000 due to their shortchanged pension payments if they live 33 years after retiring.  That equates to over 10 times their original $50,000 pension benefit.  That’s exactly the same as having no pension for 10 years.

3. I did not have time to explain 5 reasons that retirees from 40 years ago received much better benefits than today’s retirees, including structurally, financially, kept promises and benefit improvements.

4. I also have ideas that I could not get to that could significantly improve their funding period and funded ratio.

Bob Buerkle

Bob Buerkle's speech to STRS Board, March 16, 2017

To STRS Board Members and 512,583 other STRS Members:

Everybody can understand that when your investment experts did not prevent the loss of 48% of our pension fund during the "Great Recession," some long term repair had to be put in place.  The STRS Board took the easiest way out.  They hit the easy button.  First they killed the COLA for a year for retirees.  They also killed the COLA for five years for retirees after July 1st, 2013.  Then they reduced the COLA by a third thereafter for every retiree.  Now the STRS Board is seriously looking at a vote to cut the 2% COLA by another 50% to 100% at their Board meeting on Thursday, March 16th, 2017.

STRS claims that they are acting as our fiduciaries.  A fiduciary is supposed to have your best interests foremost in their mind.  They should use every option available to them in order to deliver on the promises they have made and which deliver on our expectations regarding our financial needs.  They did not!

Question: How could it be possible that retroactively reducing promised pension benefits was in our best interests?  This funding crisis could have been solved using the same strategies that New York, Georgia, Colorado and 29 other state pension systems used to solve their financial problems.  For the most part their rule changes applied only to new hires, while they left the promised benefits to retirees and current workers intact. These options were explained to the STRS Board by Bob Buerkle and others but the Board ignored their recommendations.  Bottom Line:  STRS had tools available to them that they never considered using.

As an STRS Board member your job is to be the best fiduciary you can be and represent all current teachers and all retired teachers.  It is not, and never has been, your job to be a fiduciary to anyone who is not a member, anyone who has never been a plan participant, anyone who has never paid the required STRS contributions from their paychecks.  It is also not your job to be a fiduciary to any “maybe I want to be a teacher when I grow up” third grader.  Those future new hires will have to be offered a new pension plan that STRS can afford after the promises to current workers and retirees are fulfilled.

The only fiduciary obligation you have is to the current vested members working towards retirement and the current retirees who are already there.  You might very well think that you are doing the best thing for our members and they should be appreciative of your efforts.  Instead, current workers, who are looking at the additional 5 to 8 years of required work before they can get an unreduced pension, coupled with all of the COLA betrayals for future and current retirees, think differently.  The STRS solution choices have also created great animosity between actives and retirees as well as Employers who must now budget for 5 to 8 year career extensions for their highest paid teachers.  STRS actions, if not reversed, will force every Ohio School district to find taxpayer support in the form of new levies that STRS has forced them to seek.

The 2008 “Great Recession” was a once in a hundred years “Black Swan” event, but you act like it will soon occur again.  Thinking like that is wrongheaded and unnecessarily punishes all STRS Members.

STRS needs to rethink, rework and undo the damage being done to all current and retired workers, as well as with every school district in Ohio.

Instead of voting on more carnage towards our members, stiffen your backbone and stand up to Legislators for us.  Table any proposed changes and direct the Actuary and your Investment advisers to develop a 30 and a 35 year Investment return plan to mirror the S&P 500 returns, along with a new retirement plan for new hires.  As fiduciaries for our members, any plan that does not restore all lost COLA benefits within 3-5 years should be considered unacceptable to the STRS Board.

Submitted by Bob Buerkle 

2003 Cincinnati Retiree 

Former CFT Retirement Chair

(Click images to enlarge)

Dean Dennis’ speech to STRS Board February 16, 2017

Members of the Board, 

On February 16, I drove from Cincinnati to present before the Board. Having paid into the STRS Defined Benefit Plan for 35 years, I was quite upset over the mismanagement that caused the 1% deduction in the COLA for retirees who planned on the 3% promise. Worst was the COLA freeze teachers now retiring will have to endure, not to mention the entire revamping of the retirement schedule. It was my understanding that under the Defined Benefit Plan, STRS assumed all the risk. Changing the language to effect benefits after one retires I believe to be illegal. I'll share my wife also taught for 35 years. We were not expecting to lose half-a-million dollars in our retirement; especially after a combined 70 years of funding our pensions. The expectation under the Defined Benefit Plan, especially once retired, is that a benefit would stay the same, or increase, but would never be reduced (ORC 3307.67 states COLA's shall increase 3% annually). I believe past practice also establishes this. That said: 

On February 16, I presented before STRS. It is my very strong belief that over the years our Board's have allowed a smaller and more efficient investment staff to grow and become a bloated less efficient financial operation. We also are spending unnecessary monies on consultants as a result. From a person who understands investments, STRS has become upside down. Instead of managing the investment department, you now are reacting to their inefficiencies. They need to be reacting to your management. Due to their mismanagement, you are once again considering cutting member benefits. Don't over react too soon. You need to give the market time to recover. We set our goals for 30 years, why do we not trust the 30 year market cycles? 

Please listen; if you see a team that sets a benchmark goal that shoots for less than 8% annually, then you don't need that team. It shouldn't take a staff of 70 plus investment professions to find the symbols (VOO), (SPY), or (VFINX) and invest in the S&P 500 index. You are tolerating too many unnecessary investments using target assumptions that underachieve our benchmark needs. With 8% returns we can easily meet our funding goals. We should not be using the monies of our members to pay people to experiment by trying to beat the market indexes. It is very well documented that over 66% percent of money managers consistently under-perform the S&P 500 index. Employing over 70 people, paying them, and then giving them bonuses to under perform an index that has been around since 1926 is both irresponsible and reckless. I'll share again what I shared at the meeting (with3 minute time restraint). I'll state it in bold. 

There has never been a 30 year period in the long proven history of the S&P 500, where the S&P 500 index hasn't gained at least 8% annually. In fact, over 60% of the time it averages over 10%. There have been 60 such thirty year periods. This should be easy to understand.  In fact ask your investment advisers from Callan, like I did. I spoke with three individuals from Callan and they seemed to be in agreement with my premise. If you have any doubts please set a meeting, I'm happy to drive to Columbus again. To farther drive home my point, I can also show you that over the last 20 year period that the S&P Mid Cap index has nearly doubled the S&P 500. We should be doing better and spending less in doing so. 

So, the S&P 500 index should be your baseline annual investment benchmark utilizing an 8% return objective. If you feel compelled to consider other investments, then they should always be above this benchmark. Listening to our investment team get rewarded while the rest of us are getting punished should be a red flag. It wasn't lost on some of us that while the investment team was getting positively acknowledged during the presentation for exceeding the performance of some of their peers; we were aware that our investment staff's performance lagged the market by nearly 2%. Last year the S&P 500 returned 9.8%, why would we even consider moving our benchmark down from 7.75%? The only reason that makes sense is that the investment staff can't be trusted to keep up with the market indexes or invest in them. 

Lastly at this point the 30 year unfunded liability needs to be adjusted to 35 years. Unfortunately due to under performing investments future teachers will have to work 35 years to qualify for full retirement.  Having to entice future teachers into our system when they have to work for 35 years and then wait until the age of 60 to retire jeopardizes our retirement system even farther. However, there is hope if we don't react hastily and get back on track. I for one am willing to help. 

Please find attached the S&P 500 document referenced during my presentation. It breaks down annual investments in 5 year increments up to 25 years. 

Respectfully, 

Dean Dennis, 
Retired CFT Field Representative

Dennis Leone’s speech to the STRS Board February 16, 2017

Is the COLA a gift? 

There may be some current board members who consider the COLA a gift, like the 13th check was. For all those who retired prior to 2013, the COLA was a legal, statutory, guaranteed part of their pension. Ohio law did not say that the Board “may” provide retirees with an annual COLA of 3%, it said the Board “shall” provide retirees with an annual COLA of 3%. By securing Legislative permission to eliminate it for one year, and reduce it to 2%, in subsequent years, the Board broke a promise to thousands of retirees. My COLA was promised to me. While the change in the Ohio Revised Code certainly permits the board to do as it wishes with new retirees, there could very well be a future legal question pertaining to whether such a new law also can take away what had been guaranteed and promised to retirees. The one year the COLA was eliminated completely, my 88-year-old mother-in-law had to borrow money to pay for her increased car insurance and her increased home insurance, and I doubt that any STRS Board member or STRS staff member had to borrow money for that purpose. Now there is Board discussion pertaining to the possibility of reducing the COLA again. Where is the Board commitment to protect my 88-year-old mother-in-law – and the oldest retirees who have the least?

Payroll Growth 

As an STRS Board member for nearly 4 years between 2006 and 2009, I repeatedly objected to the Board’s acceptance, and the staff’s acceptance, of projected payroll growth data offered by hired outsiders. I said repeatedly that the Board’s consultants were not correctly interpreting the realities facing Ohio school districts, and my publicly stated concerns were confirmed. Year after year, STRS has significantly over-estimated payroll growth. It was a miserable 1.33% aggregate average between 2005 and 2013, when the Board was using an assumption of 3.50%. Had the Board and staff been responsive to the advice that was contrary to the advice offered by non-school consultants, and had the Board implemented its 2012-13 action plan in 2006, or 2007, or 2008, STRS would be in far, far better shape financially than it is today. 

Recipients of 88% Benefit and COLA Related to Same 

Between 2000 and 2015, retirees with 35 years of service received the famous 88% benefit. It was a profound insult to pre-2000 retirees with 35 years of service to be held to a 77% benefit. The reality of this is that for the past 17 years, those who got the 88% benefit also have been receiving a COLA based on 88% of their final average salary, while the pre-2000 retirees with 35 years have been receiving a COLA based on 77% of their final average salary. Given the truth of this, it would be another stab in the back of the pre-2000 retirees with 35 years to get hit with another COLA reduction. The Board should eliminate that COLA for the 88% benefit recipients completely, or – at the very least – have future COLAs for this group recalculated and based on 77% of their original final average salary. Given the conditions summarized above, the STRS Board and staff owe it to retirees to consider options other than reducing the COLA that was statutorily promised to them when they retired. It is simply unacceptable for you to conclude that our COLA has to be solution. I need to add one more thing: Just before lunch this morning, I listened to a Board consultant who shared data about how many retirees are currently working, as if that might be important information to for the Board to consider. I certainly hope the Board is not going to demonize retirees who are working part-time to improve their standard of living…….a part-time job is NOT a justification to reduce a retiree’s COLA.

RH Jones: Tell retired teachers to attend the April 20 STRS Board meeting

From RH Jones

March 19, 2017

By phone, by email, or by US Mail please tell every retired teacher you know to attend the April 20th STRS Board meeting.  In their newsletter, they said that they would probably vote on the loss of our COLA. Numbers of retired educators packing the STRS grounds, building, and meeting room should help to let them know we cannot have any cuts to our COLA. 

Rob