Tuesday, December 04, 2018

Dean Dennis responds to a retiree's question on how STRS funds are being mismanaged

When a retiree on the STRS Member Only Forum (on Facebook) recently asked for an explanation in laymen's terms of "how our STRS fund is being mismanaged or how it is in danger of failing", Dean Dennis provided her with a nutshell version and an invitation to communicate further for a more detailed explanation. Below is what he wrote.
From Dean Dennis
November 30, 2018
Hi [name withheld], I would be happy to share my thoughts with you. Please send a message to me and we can exchange phone numbers so I can answer your questions and clarify answers in more detail. That said, let me try to give you a "somewhat" short explanation.
First, regarding the mismanagement, the funds are being mismanaged in the sense that STRS is a public pension system and is trying to become "fully funded" or 100% funded at our expense. Public pensions are very different than private, or industry pension systems. Unlike a business, which can go "out of business" or bankrupt and severely harm retirees financial by not coming through with their financial obligations; state pension systems do not go out of business.
This isn't to say, they don't adopt different retirement plans. Ohio is nothing like Kentucky, but even in KY, at this point in time the KY legislature is meeting their obligations to their retirees. Ohio is doing fine and will always need teachers, Ohio will always need police. It is for this reason that the thought among experts is that state pension systems, like ours, should be 70-80% funded. This is considered enough and some feel that public pension systems that try to become 100% fully funded are doing a disservice to taxpayers by diverting monies needed for other things, such as infrastructure.
A public pension system above 75% funded, is generally considered very financially viable. STRS Ohio is above 75% funded, BUT they want to keep withholding your COLA until they get to 100%. What if a bank had an internal financial funding goal and decided not to let you withdraw some of your money that you had already earned. This is kind of what is happening.
This brings me to a second point. STRS doesn't want to adopt a long term plan to reach their self-imposed financial goals (according to the State of Ohio, STRS is well within State guidelines). Since teachers now have to work 35 years to retire, this should be the new funding period. However, it is still 30 years. Has STRS approached the State about changing it, like they did when they wanted the power to adjust our COLA? The answer is NO.
STRS wants to move towards their funding goals rapidly (not 30-35 years) and because we are giving them our COLA we're sending the message that we don't mind. They want to get there in 5-10 years. While they are keeping our money, they are also moving in the opposite direction of what is now considered to be best financial practices. STRS is getting into hedge fund investments right when other states such as California are getting out. Hedge Fund investments are considered risky, they are largely unregulated and they are full of hidden fees. I like to invest, but I would never consider buying into a hedge fund.
Regarding your second concern, STRS is telling us going forward they are only going to earn 7.45% on our monies over a 30 year funding period. The Ohio Legislature looks at 30 year funding periods to monitor the solvency the state pensions systems. STRS cannot deny that they have decades of financial history covering 30 year periods and they average nearly 8.6% on their monies. This is far above 7.45%. But, by crying poor me they have created an excuse to withhold our COLA from us. STRS has NEVER earned less than 8% over any 30 year period.
Let me ask you this, if STRS is doing so badly, why are so many of their employees getting six figure bonuses to go with their six figure salaries? Also know that the Ohio Legislature only gave STRS the power to adjust the COLA, yet STRS totally eliminated it. A number of the legislators are upset and concerned. Ohio's largest pension system (not STRS) is currently resisting going from 3% COLA to 2.5% COLA. Those resisting are legislators who are members of that system. Our pension is similarly funded. Perhaps their system, PERS, and STRS should have the same COLA guidelines. Until we get a chance to talk I hope this helps.
Larry KehresMount Union Collge
Division III
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