Friday, June 22, 2018

What must be done about "the low hanging fruit": Your COLA

From the Ohio STRS Member Only Forum (Facebook). Author or date not given.
 Why STRS Can Afford To Restore Retirees COLA

Why Ohio Legislators Should Intervene
One of the biggest fears of retirees is that Ohio STRS is having financial difficulties and restoring the COLA benefit will jeopardize the pension. This is not the case. Below is a list of reasons why the Ohio's Legislature must restore the COLA to all retires who retired under Ohio's statutes that stated a COLA shall be paid.
1) We were told that in a Defined Benefit Plan the employer assumes all the risk. A Defined Benefit Plan is like a contact where contribution monies from the teacher and teacher's employer is given to STRS. STRS then exclusively invests the monies for the defined benefit pension plan to provide your pension benefits. Teachers who retired prior to July 2013 met all of their Defined Benefit obligations and STRS Ohio met all their 30 year investment goals (earnings assumptions) over every 30 year funding period. A 3% COLA was built into their actuarial table as a pension benefit along with the base pension payout. It goes without saying this COLA should be paid, as promised, as it was a consistently stated benefit. STRS also offers a Defined Contribution Plan; but in this plan the risk is assumed by the employee's investment selection. All teachers financially harmed by the COLA loss, were a part of the Defined Benefit Plan. Reneging on paying out the earned COLA erodes the underpinnings of Ohio's Defined Benefit Plan. Teachers are learning a lesson that they cannot trust STRS after decades of having to hand over their hard earned monies.
2) STRS Ohio created their own problem but teachers are being asked to take the fall. We understand STRS needs to have enough money to pay your pension and promised benefits. They do this by taking your contribution and your employer's contribution. They then invest the monies over your employment period prior to retiring. If they meet their earnings goal, they'll have enough money. So in order to pay out your pension and benefits they project a rate of return on their investments that they will need over the time period you work. This rate of return is referred to as their earnings assumption rate. The period of time you work prior to retiring is often referred as the funding period. Since the average person used to have to work 30 years to get full retirement benefits, the funding period is a 30 year period. So, STRS has a funded period which is blended with an earning assumption rate estimate (so basically it is what percent do they expect to earn on investments from the collected employee and employer contributions). It becomes easy to see the higher percentage rate STRS earns, the better off the funding is for your pension. Additionally the higher earnings assumption STRS projects, provides STRS with more latitude in increasing pension benefits. However, when STRS lowers earnings assumptions, problems can be created. And this is what STRS did, they lowered their earnings assumption down to 7.45% from 7.75%.
When STRS lowers their earnings assumption even slightly, it creates significant projected liabilities over the 30 year funding period. This is because STRS has billions of dollars (currently 77 billion) to invest. It's important to understand that the earnings assumption is simply a projection. In reality, STRS has always earned over 8% in returns over every 30 year funding period. STRS always earns a higher rate of return than their projected earnings assumption rate over the 30 year funding period. So when STRS lowers their earning assumption rate, they must project billions of dollars of less money in their coffers 30 years out. As a result, STRS must figure out how to make up the artificial deficit on paper.
Since they have very little choice other than to ask the legislators to raise the employers contribution tax rate, they look to you. Retirees became the low fruit and that is why your COLA is unethically being held. This is why current teachers now have to be 60 years old and have at least 35 years of service in order to avoid an actuarially reduced pension.
All this happened because STRS lowered the earnings assumption from 8%, then down to 7.75% and now down to 7.45%. STRS created the 27 billion dollars paper deficit over the 30 year funding period but teachers are taking the hit. The COLA was the low hanging fruit. If STRS restores the COLA to 7.75% it wipes out most of the paper deficit and makes it hard for STRS to argue they can't restore our COLA. 
Again, why STRS's actions are unethical: STRS's actions do not match their financial reality. STRS has always earned over 8% on investment returns over a 30 year funding period. Here's a question, why do the investment advisers for the Ohio Police and Fire retirement system project their earnings assumption to be 8.25% while STRS investment advisers project our returns to be 7.45%? Are Ohio's teachers lesser in importance?
3) STRS Ohio has a goal to be 100% funded. This sounds noble, but their goal comes at our expense. Currently STRS is around 75% funded. This means in simplistic terms that without any earnings from investments they can pay out pensions and benefits for approximately 20 years. To put this into perspective Kentucky is 37% funded and in the news, but Kentucky's legislature is allowing current retirees and all current teachers vested with 15 years to go though their state retirement system without any reduction of benefits. Again, all of Kentucky's retirees are not being impacted in any manner.
4) STRS Ohio is taking advantage of you. Our Legislature needs to review their actions and intervene. Recently, STRS requested drastic changes to our pension system, some legal but arguably unethical. Some were arguably illegal. Here is what is illegal: Prior to 1/07/13, ORC Statute 3307.67 states the COLA shall be 3%. This wasn't honored. Ohio's Constitution, Article II Section 28 which addresses Retroactive Laws, states Ohio's General Assembly shall have no power to pass retroactive laws. This means they didn't have power to change your promised COLA benefit after you retired, but they did. Then they gave their legislative power away and allowed STRS to have control over your COLA. Also violated was ORC 3307.14. This provision states in clear terms that if STRS Ohio cannot meet its financial obligations, the burden falls on the employer not the employee. ORC 3307.14 would have to increase the employers contribution to cover our COLA loss if the STRS books clearly demonstrated there was a financial crisis. While perhaps unpopular,  increasing the employer contribution would be fair in light of it has been fixed at 14% for 34 years while the employee contribution has increased 100%. Thus the legislators only real  decision should be, should they raise the employers tax, or have STRS increase  the earnings assumption rate back to 7.75% to undo the paper loss. STRS could have approached the General Assembly with this option but likely don't want to draw negative attention to themselves. Here's what they did that was legal but questionable. STRS sought actions drastically impacting the pension system. As a result retirement requirements now require a teacher to be age 60 with 35 service years for full retirement. Additionally current teachers retiring are not provided any COLA for the first 5 years of retirement. They saved a fortune by doing the aforementioned. All legal, but is this what we want for Ohio's teachers. 
5) STRS has paved the road to being 100% funded off the backs of Ohio teachers. Some simple math and common sense reveals STRS did not have to seek the authority to rob retired teachers of their COLA from the legislature.
First, STRS has 77 billion dollars in investments. STRS pays out around 7 billion annually in pensions and benefits, but STRS takes in close to 3.5 billion dollars annually from the employee and employer contributions. If STRS just earns a 5% return on the 77 billion dollars they invest, they'll covers expenses. However, knowing they actually average earning over 8% on their investments over all 30 funding periods, there is a disconnect as to why they project 7.45%. Note, the S&P has averaged 9.8% over all 64 rolling 30 year periods.
Second, let's take a moving forward look at their finances. In the past, a teacher worked and paid into STRS for 30 years in order to obtain their pension and benefits. This teacher likely retired at age 55 and lived to age 80. So STRS collected contributions for 30 years and paid out retirement benefits for 25 years.
Currently, a teacher has to work 35 years to obtain their pension and benefits. This teacher must be at least 60 years of age and have paid into STRS for at least 35 years. So STRS will collect contributions for 35 years, but only pay out pension benefits for 20 years. Additionally, STRS will not pay out any annual COLA benefits during this teacher's first 5 years of retirement. Seems unfair. STRS has drastically reduced their long term liabilities by around 25%. STRS takes in monies 5 years longer yet pays out 5 years less. They will get to their 100% fully funded goal at the expense of Ohio's teachers.
6) Nero fiddled while Rome burned. The average retired teacher's pension in Ohio is less than $50,000 for decades of service. The average promised simple COLA benefit is less than $1,500. Compare that to the salaries of the STRS staff (which pays into PERS). A typical annual salary bonus in the investment department, bonus not salary, can be around $150,000. Here's a thought, STRS bonuses could cover many thousands COLA's. We pay for STRS raises and bonuses while they take away our COLA. Something wrong?
7) Action please! In summary, The State of Ohio has relinquished control of their teacher's COLA to STRS. This action has resulted in retirees promised COLA being lost for what might effectively be a 8 year period for the majority of retirees. By relinquishing control to STRS, the legislature has violated many of their own statutes. This caused great financial hardship to retirees, financial hardship that was arguably unnecessary. That said, when will the legislature address STRS's mismanagement, take back control of the COLA and restore the promised and COLA benefit? Until the legislators, or STRS, can restore retirees COLA and make retirees whole, it is only proper that the Ohio's legislature should take actions to: 
A) Freeze all STRS salaries
B) Freeze all STRS bonuses
C) Freeze all STRS hiring
D) Legislatively move all STRS employees from PERS into STRS
E) Review selling STRS assets and real estate
F) *Restore the COLA by increasing the Employer's Contribution Rate (ORC 3307.14) or by increasing the Earnings Assumption Rate to reflect accurate historical returns 
Larry KehresMount Union Collge
Division III
web page counter
Vermont Teddy Bear Company