Robin Rayfield explains about that 77 cents

From the June 2022 issue of the ORTA Newsletter

By Robin Rayfield, Executive Director

STRS News

The May meeting of the STRS board was the first since the election of three new board members. The STRS staff presented investment information that did not paint a rosy picture. As we all know, the markets have not been kind to investments. As of the meeting in May the total fund was down 4%. One thing that received a little back and forth was the claim that retirees are only receiving .77 cents on the dollar that they contribute.

Executive Director Neville was asked a few questions from board member Hunt that were clearly intended to give Mr. Neville an opportunity to state that such a claim is patently false. As one person that has made claims that STRS members are only receiving .77 cents per dollar contributed I feel compelled to clarify my statements. You may have heard statements from me such as:

    • Members contribute 14% of salary but only receive a benefit of 10.8% as described by the normal cost. If you do the math 10.8 divided by 14 is .77. I have been told by people that tout STRS’s excellence in investing that it is ‘wrong’ to do the math the way I have done. Normal cost is a pension term that is calculated by the system and their highly paid consultants. My understanding of the term normal cost is the ‘value of contributions earned in a year’. So, if I put in 14% of my pay and my value of benefit earned is 10.8%, my contribution was greater than my value accrued.  The 10.8% normal cost figure comes from STRS and was the level of benefits earned in the 2020 fiscal year. In the last fiscal year the normal cost was 12.2%. Better, but not equal to the contribution rate.

    • Sticking with the normal cost thoughts… My understanding is whenever the normal cost is less than the contribution rate, the members are receiving less benefit earned than the contributions they are making. Since STRS is the only pension system with a negative normal cost, the statement ‘STRS members have the worst deal in America’ seems to fit. Certainly, this is an opinion statement. Some people may actually prefer paying more and getting less. I don’t know why someone would want that arrangement, but I will accept that someone may feel that way.

I want to apologize if my .77 cents on the dollar created confusion or caused undue stress on ORTA members. That was not my intention. My intent was to inform people that, despite the claims that STRS makes about its top tier performance and its awards for transparency, our pension system is in desperate need of reform. The trustees on board are not capable of leading the necessary reform. That is why ORTA endorsed three challengers. We are optimistic that the new members can bring about a cultural change at STRS.