Saturday, November 27, 2010

OPERS recognizes a problem.....and heads off a catastrophe for its retirees

From John Curry, November 26, 2010
Isn't it amazing how this newspaper picked up on how OPERS had a heart while STRS went right on and grouped all retirees into an immediate "high premium" group? They could have used the OPERS approach but didn't. JC
"Although complaints about the fairness of the plan inevitably will arise, it appears that OPERS has made every effort to make it equitable. Explanatory hearings, including one in Toledo, were conducted across the state in July."
Toledo Blade
Article published August 9, 2004
OPERS recognizes a problem
Howls of protest can be expected from some quarters, but the Ohio Public Employees Retirement System is to be commended for taking steps to reform the pension fund’s beleaguered medical insurance benefit structure before it is overwhelmed by rising health-care costs.
OPERS is the pension fund for most state, county, municipal, and township employees, excluding schools, police, and fire. It has some 370,000 active members and about 140,000 retirees, a major part of Ohio’s workforce.
With health-care spending rising at double-digit levels for at least five years, and with its retiree ranks expected to double in number in 20 years, OPERS decided it could not afford to provide retiree health benefits indefinitely at current levels.
Those benefits are extremely generous, even though OPERS is not required by state law to provide them. Currently, a worker with as little as 10 years’ service can retire and receive health insurance fully paid by the state fund. It’s a benefit that most private-sector workers can only dream about, but it won’t last for long.
OPERS is considering changes, beginning in 2007, under which retirees with fewer years of service would pay substantially more for their insurance than those with greater longevity.
The proposal has different provisions for three groups in question: current retirees and those eligible to retire before Jan. 1, 2007; those eligible to retire after Jan. 1, 2007, and recent and future hires, specifically those who came to their jobs on or after Jan. 1, 2003.
In general, current and near retirees would feel the least of the benefit pinch, while those hired recently would have to plan to pay more for health coverage when they retire in the future. OPERS officials say the plan was set up that way in the interest of fairness, because current and near retirees have less time to “plan and save and adapt” to higher costs.
Coverage for spouses of retirees would cost more for everyone although the increase would be phased in over five years. To help pay for the changes, contributions by state and local governments will be increased, and employees will contribute 1.5 percent more of their salaries, from 8.5 percent to 10 percent, over three years.
Although complaints about the fairness of the plan inevitably will arise, it appears that OPERS has made every effort to make it equitable. Explanatory hearings, including one in Toledo, were conducted across the state in July.

Wednesday, November 24, 2010

Y'all have a nice Thanksgiving! (Plus a timely message from a former STRS Board member)

From Dennis Leone, November 24, 2010
Subject: Re:
Change is needed NOW !
There it is John…………….the ultimate proof of how naive the board has been in prior years. The STRS Board needs to:
1. Immediately eliminate the ill-advised 88%/35-year enhancement, or at least drop it completely by 2014.
2. Change the 3-year Final Average Salary calculation to a 5-year FAS calculation, effective 2014.
3. Immediately raise the active contribution rate to 13%.
4. Immediately reduce the unrealistic assumed payroll growth of 4.0% to 3.0%.
5. Immediately reduce the insane assumed stock market return of 8.0% to 7.5%.
6. Immediately raise the assumed mortality rate of retirees.
7. Immediately reduce the assumed number of active members per year, which has dropped 4,000 since 2003.
8. Raise the minimum retirement age to 55 effective 2114, then phase in a minimum retirement age of 60.
9. Immediately reduce the COLA for new retirees to 1.5% annually, if the COLA is reduced to 2.0% for all other existing retirees.
WHY IN HELL IS THIS SO HARD TO UNDERSTAND………………it is because OEA doesn't want to see those happen so fast, if at all. And even with the changes above, STRS still will not be solvent in the future, but these things STILL need to occur.
Dennis Leone
STRS Board Member between 2005 and 2009
From John Curry, November 24, 2010
Subject: In case you were doubting the miserable shape STRS is really in this!
Below you will find a scan of the October 2010 STRS Board minutes. Take some time to carefully read this sure runs contradictory to the former "everything is beautiful" mantra that we were fed in previous STRS newsletters, doesn't it? We are now in "crunch time."
Mr. Roy reported that the unfunded accrued liability is $38.8 billion. As a result, the funded ratio as of July 1, 2010, decreased from 60% to 59.1%, and the amortization period for the unfunded pension remained infinite. Mr. Roy stated that the employer contribution rate would need to increase to 25% to have a 30-year funding period for the current unfunded liability. PwC also noted that if the DB Plan was frozen and there were no future benefit accruals, the funded ratio would still only be 66.2%.
Mr. Gamzon cautioned the Board that, based on current contribution rates, STRS Ohio will not be able to meet its pension obligations at some point in the future. He also said shifting to a Defined Contribution Plan does not fix the plan because the existing liabilities still have to be paid. He indicated that the only way to fix the problem is through increased investment returns, additional contributions or reduced liabilities. Mr. Gamzon concluded that current benefits are not sustainable.
In January 2010, Milliman presented its findings of the actuarial audit to the Board. While Milliman found the actuarial procedures and practices of PwC to be of high quality and in compliance with all major aspects of applicable actuarial standards, a few recommendations were made. PwC updated the Board on its responses to those recommendations.
The first recommendation was to revise the mortality assumption. Milliman recommended using a projected mortality table as opposed to static mortality tables used by PwC. Mr. Garnzon explained the difference between the two types of mortality tables and stated ~hat the mortality table is generally updated every five years in conjunction with the experience review. PwC recommended maintaining the current mortality assumption. At this time, the mortality tables used by PwC are more conservative and appropriate.
Milliman also recommended monitoring the investment return assumption and reducing the 8% net rate of return assumption to 7.5% to provide a more neutral estimate of future returns. Mr. Garnzon pointed out that, based on a study by NASRA, the majority of public pension plans assume an 8% investment return. PwC believes this is still a reasonable assumption for STRS Ohio, based on the asset mix. However, a growing trend among other public plans is to lower their assumption. If the investment return assumption were lowered, the accrued liability and employer normal cost would increase. PwC and STRS Ohio· will continue to monitor this assumption.
Finally, Milliman recommended increasing the prior year annualized salary by a full year of payroll growth and adding one-half year of interest to better reflect actual experience when determining the normal cost rate. PwC agreed with this recommendation and the changes are reflected in the July 1, 2010, valuation results.
Next, PwC reviewed the proposed GASB standards for pension accounting by employers and STRS Ohio's response to the Preliminary Views.
PwC also provided the Board with information on the interest rate paid on money purchase benefits and withdrawals. PwC recommends maintaining the current interest rates for both options - 5% for the money purchase benefit and 2% or 3% for withdrawals based on years of service.
Larry KehresMount Union Collge
Division III
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