Dean Dennis: STRS Is Healthy and Can Afford a COLA

From Dean Dennis
November 6, 2018

STRS Is Healthy and Can Afford a COLA

Ohio STRS is nothing like many of the private pension systems, or the Kentucky or Illinois Pension systems you've read about.

Ohio STRS has 78 billion available for investments. To meet retirement obligations, they need to pay out roughly 7 billion annually for pension promises. STRS takes in roughly 3.5 billion from employer and employee contributions. Therefore, STRS needs to make up an additional 3.5 billion annually on their investment earnings (approximately 4.75%).

Historically, over every 30 year legislatively dictated funding period, STRS has earned roughly 8.6% on their investments. This is nearly 4% more than the needed 4.75% to cover pension benefit payments. While STRS historically earns 8.6% over each 30 year funding period, STRS now only assumes they will make 7.45%. This is called the STRS Earnings Assumption Rate. So, the STRS Earnings Assumption Rate is set at 1.15% lower than what STRS actually earns over the 30 funding period. If you've heard of basis points, 1.15% is 115 basis points. Having your earnings assumption rate set 115 basis point lower than what you actually earn on 78 billion dollars and over a 30 year period is significant. It's like saying our investment department is going to earn about 25 billion less dollars over this period than they used to earn.

So, what does STRS do with the extra money they earn over the (above stated) 4.75% they need to earn to pay pension benefits? They apply it to pay down their projected term long liabilities. These liabilities are mostly created by actuarial changes in long term assumptions. These changes in assumptions also caused retirees to lose their promised COLA (after they already retired) and active teachers to work 5 years longer and be at least age 60 to retire. Active teachers also had their contribution increase to 14%. While none of this happened after they retired, they still took quite a blow. Many other states like New York and Colorado have made significant changes in their pension systems, but they usually didn't apply their changes to current teachers. Instead they create a different tier for new teachers. STRS Ohio didn't even entertain this.

If STRS had been realistic about actual earnings, realistic about the longevity of their actual current retirees and approached the legislature to informed the legislature that the 30 year funding period should be changed to 35 years to reflect current reality, retired and active teachers could have been spared a tremendous amount of pain.

In Ohio, if a pension system falls under the 30 year funding period, Ohio's legislature wants to know "what's up?" and expects the pension system to submit a plan of action. When STRS Ohio changed their assumptions, they took our pension system out of the safe zone and threw in into the caution zone that would draw the attention of Ohio's legislature.

They had many options:

1) adopt a realistic earnings assumption rate in line with historical earnings (in other words leave the 7.75% rate alone)
2) leave the mortality rate alone
3) change the 30 year funding period to 35 years
4) adopt a new tier for future employees who would not be impacted by having a promise broken
5) seek an increase in the employer contribution
6) submit a plan of action projecting a timeline to Ohio's legislators on the Ohio Retirement Study Council.

STRS did none of the above. Instead, they requested control of the COLA and requested draconian changes to active teachers. Rather than take a long term approach and trust their decades of earnings history they panicked. They wanted to get healthy at one swoop of the pen.

By nearly all metrics for public pension systems, STRS Ohio is well funded. Public pension systems should be between 70-80% fully funded. The latest financial reports shows that STRS is 76% fully funded. This means all financial obligations are in the bank for retirees and a significant amount of financial obligations are in the bank for active teachers. But again, STRS is trying to do everything at once.

If STRS was a mortgage company, they would want you to have $350,000 in the bank for a $350,000 house. STRS actions are pitting active teachers against retirees because STRS has a goal of becoming 100% fully funded in an unrealistic time period. This comes at the expense of teachers, both retired and active. Rather than use the actual earnings assumption over the next 2-3 decades on their 78 billion dollars set aside for investments, they are trying to have all debt paid within 5-10 years.

I used the mortgage example because what if you were approved for a 30 year mortgage loan for a $350,000 house and suddenly the mortgage company informed you they wanted you to pay off the mortgage in 10 years? What if the company had the power to garnish your wages or raid your bank account? Sound crazy? Essentially, this is what STRS is doing to us.

We, and the public, give STRS a significant part of our salary for 30-35 years of which to invest. STRS then earned more money over our 30-35 year career than they projected to earn in relation to their 30-35 year stated Earnings Assumption Rate (the rate they claimed they needed to payout our promised benefits upon retirement). Then, STRS reneged on their promise. For retired teachers they robbed them of their COLA, after they crossed the finish line. For active teachers they moved the finish line and increased their contribution.

Bottom line, STRS is financially healthy. Think about this, if STRS hadn't dropped the Earnings Assumption from 8% to 7.75% and then to 7.45%, STRS would be nearly 100% fully funded already and you wouldn't be reading this overly long article.