The financial strength of the State Teachers Retirement System — the second largest pension fund in the state — is being questioned after actuaries told trustees to make big changes. Now, teachers and retirees may face benefit cuts.
STRS Ohio’s expected annual investment return — 7.75 percent — is too rosy, retired teachers are living longer than expected and payroll growth isn’t keeping pace with assumptions.
Trustees agreed to change assumptions after Segal Consulting recommended the changes based on a review of five years worth of data. The assumed rate of return will be dialed back to 7.45 percent — though some board members wanted to be even more conservative and set it at 7 percent.
STRS Ohio is the retirement system for 490,000 teachers and retirees. It had $72.1 billion as of June 30, 2016.
All told, the changes will pile on an additional $6.5 billion in accrued liabilities — a gap in money available to pay promised benefits. Ohio pension systems are required to be able to pay off their unfunded liabilities within a 30 year window.
But changing the assumptions used by STRS means the system’s funding period will jump from 26.6 years to 59.5 years. This will require STRS to come up with a new plan to get back within the 30-year window.
“They’re trying to make the best decisions they can with the bad hand they were dealt,” said John Cavanaugh, executive director of Ohio Retired Teachers Association.
STRS told members in its March newsletter that the board is looking at changing benefits “to preserve the fiscal integrity of the pension fund.”
One option on the table is to cut or suspend the Cost of Living Adjustment for teachers and retirees. A 2012 change in state law allows pension boards to change the COLA without approval from the General Assembly.
A vote on the COLA is expected at its meeting in Columbus on April 20, though it could be delayed, said STRS spokesman Nick Treneff. “The COLA is a big lever because it impacts all the retirees and all of the members,” he said. The COLA now is 2 percent of the base pension, starting on the fifth anniversary of retirement.
The STRS board also voted to change up its “asset mix,” so that its investment portfolio has less risk and volatility. That configuration, though, means it’ll likely bring a lower rate of return: 6.84 percent over the next decade, according to consultants.
Cavanaugh said retired teachers have been calling his organization with concerns.
“As you can imagine, no one is thrilled with a potential cut in their COLA,” he said. “We also understand that they have a several billion dollar math problem that they’re trying to solve.”
In 2012, Ohio lawmakers adopted the most sweeping pension overhaul in state history, impacting 1.7 million government workers and retirees. The changes brought significant cuts to pension benefits and required employees to work longer. The overhaul was needed to shore up finances of the public retirement systems.
Like in other states, Ohio’s public pensions are defined benefits systems. The pension benefit is based on age, years of service and final average salary and it’s guaranteed. Defined contribution plans, such as 401(k) funds, are more common in the private sector.
Public employees in Ohio do not participate in Social Security.
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