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STRS Funding Level Improves

During its October meeting, the STRS Board received the results of the actuarial valuation of the pension plan. As of the end of fiscal year 2021 (June 30), the pension plan was 80.1% funded. This is an improvement from 77.4% the previous year. Very strong investment returns during the period were largely responsible for the improved funding.
Not all of the investment gain of FY 2021 is reflected in the actuarial valuation because gains and losses are smoothed over a four-year period. Using the market value of assets, the funding ratio is 87.8%. This is significant as the STRS Board policy says that they will consider benefit improvements that do not impair the fiscal integrity of the pension at 85% funding.

It would be unwise to make permanent changes based on one year of investment returns. OEA believes that at least a short-term restoration of the cost-of-living allowance (COLA) coupled with a decrease in the employee contribution rate is merited. It has taken shared sacrifice of retirees and active employees to greatly improve the funding status. The members and beneficiaries of the system should reap those rewards.

Cheiron, the Board’s actuarial firm, has noted that the pension plan is still vulnerable to adverse experience. Unfunded liabilities are greater than $20 billion and STRS pays out billions more in benefits each year than they collect through contributions. The actuary has recommended that any consideration of benefit improvements should be delayed until after the completion of the five- year experience review (expected in March 2022).

STRS Board Members Pitch Questionable Investment “Partnership”

During the STRS Board’s November meeting, two current Board members presented a “new business opportunity” for STRS. Wade Steen (Governor DeWine’s appointee to the STRS Board) and Rudy Fichtenbaum (a retiree representative) advocated for the creation of a public/private partnership with a firm called QED. Under the proposal the company would facilitate access to STRS assets by a counter party who would execute asset swaps resulting in profits from arbitrage for the counter party.

During a lengthy discussion, it was revealed that QED currently has no assets under management and no track record of performance. Further, STRS would provide 100% of the assets in the “partnership” and receive 25% of the profits. Mr. Steen had previously indicated that he had an investment plan that would return $4 billion in revenue while reducing risk to the portfolio. Based on the discussion, in order to achieve that level of return it would be necessary to devote $65 billion in assets (two-thirds of all STRS assets) to this new enterprise. A proposed motion to hire outside council to negotiate an agreement with QED was never offered

SERS Receives Actuarial Valuation Results

Cavanaugh Macdonald Consulting, SERS’ actuary, presented the results of the fiscal year 2021 actuarial valuation at the SERS Board’s November meeting. The funded status of the pension plan improved from 71.5% to 74.5%. In the actuarial valuation, investment gains are recognized over a four-year period. The funded ratio based on the market value of assets is 82.9%.

Strong investment returns also contributed to extended solvency for the SERS health care fund. The fund is projected to be solvent until 2058. The system’s funding policy allows the Board to allocate up to 0.5% of the employer contribution toward the health care fund if the pension funded ratio is between 70-80%. However, the Board voted to dedicate the full 14% of employer contributions towards basic benefits.

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OPER Board Lowers Expected Rate of Return Assumption

After hearing the results of a five-year experience study presented by their external actuary, the OPERS Board voted to reduce its assumed rate of return. The change reduced the assumed rate from 7.2% to 6.9%. This was the most impactful among several changes in economic and demographic assumptions of the pension plan.
Assumption changes added almost $2 billion in unfunded liabilities to the plan. The funded ratio was 82.9% as of the last actuarial valuation and the funded ratio would drop to 81.5% based on the changed assumptions.

Click here to download a copy of this December 2021 Report to the OEA Board of Directors. Previous Retirement Systems Updates can be viewed under the Affiliate Resources tab on the OEA website.

STRS Posts Investment Return Over 29% for FY 2021

For the fiscal year ending June 30, 2021, STRS reported a net investment return of 29.16%. This figure is net of all management fees, carried interest and other costs. Additionally, the fund beat its investment benchmark by 1.18%. This means that active management of the fund, as opposed to investing solely in index funds, added approximately $790 million (net of costs) over the fiscal year.

This rate of return was the highest for STRS since 1983. STRS total fund assets increased by over $17 billion with a market value of $98.8 billion. This is welcome news as it will increase the long-term stability of the pension fund. Further, OEA believes that as financial conditions improve, STRS should take action to reduce the contribution rate for active teachers and work to restore the cost-of-living adjustment (COLA) for retired teachers.

OEA, in collaboration with the Health Care and Pension Advocates (HPA), urged the STRS Board to establish a plan with clear financial guideposts for restoring benefits. The Board adopted a policy that once the system is 85% funded, they will consider changes that do not materially impair the fiscal health of the pension plan. The annual actuarial valuation in October will show how close this brings the plan to 85% funded.

Walters Appointed to Fill Vacancy on STRS Board

During the August meeting of the STRS Board, Rita Walters was elected by a majority of the Board to fill a vacancy as a retired member. Walters recently completed a four-year term on the Board and had finished third in the election for two retiree seats. Robert Stein, who had finished second in the election, resigned his seat before beginning his new term.

Walters is a retired language arts teacher from the Switzerland of Ohio School District and a member of OEA-R. She was elected by the STRS Board to a one-year term, September 1, 2021 through August 31, 2022. An election will be held among STRS benefit recipients to elect a representative for the remaining three years of the term.

STRS Responds to Seidle Report

Earlier this year, the Ohio Retired Teachers Association (ORTA) commissioned a third-party “forensic audit” of STRS. A report was released by Edward Siedle entitled The High Cost of Secrecy which was critical of STRS investment practices and operations. The report alleged that STRS is not sufficiently transparent in providing information on investment fees and suggests that changes in STRS investment strategies could save money in a way that could help contributing and retired members of the system.

OEA urged the STRS Board to take the Siedle report seriously and fully investigate the claims. Further, OEA asked that STRS communicate openly with its findings, whether deficiencies have been found and what is being done to address them.

On Thursday, August 19, 2021, STRS staff and consultants presented to the Board a detailed response to the Siedle report. The response refuted the claims in the report. STRS notes that the report is not in fact a forensic audit as its author is neither an accountant or auditor and not bound by professional standards. Further, the report overestimates, misstates and miscalculates various fees and performance costs of the system—including double-counting fees on alternative investments. The full response can be viewed here.

OEA has confidence that the elected members of the Board will continue to closely monitor STRS investment practices. Investment returns are the primary driver of paying future pension benefits. Active and retired teachers rely on STRS to invest these assets prudently

SERS Board Passes Motion to Pursue Pension Legislation

On Friday, September 17, 2021, the SERS Board unanimously voted to pursue legislation that would allow the Board to set a Contribution Based Benefit Cap (CBBC). If enacted, the legislation would allow the SERS Board to set a cap on how much greater a member’s pension benefit can be than a single life annuity based on the member’s total contributions. The concept is similar to a policy adopted by OPERS. Such a cap is designed to keep the majority of members from subsidizing benefits of a few members with irregular contribution histories.

SERS staff presented the Board with information on applying a range of CBBC factors. Modeled on recent retirements, a factor of 4.5 would impact 6.3% of retirees whereas a factor of 5 would affect 2.5% of retirees. Those who converted to retirement from a disability benefit would be excluded from such a cap.

The Board motion authorized SERS staff to work with stakeholder groups on the concept and to pursue the introduction of legislation. The Board’s intention is for the legislation to grant them authority to set the CBBC factor rather than setting a number in statute. The discussed timetable was to have something introduced early in 2022.

Click here to download a copy of this September 2021 Report to the OEA Board of Directors. Previous Retirement Systems Updates can be viewed under the Affiliate Resources tab on the OEA website.

Correthers, Stein and Fichtenbaum Elected to STRS Board

Two out of three of OEA’s endorsed candidates were re-elected to the STRS Board. In the election of one board member representing active educators, Carol Correthers (OEA endorsed) was re-elected to the Board. In the election of two retiree representatives, Robert Stein (OEA endorsed) was re-elected, and Rudy Fichtenbaum was elected for the first time. Rita Walters, OEA’s other endorsed candidate, finished third in the retiree election.

The results of the active member election were as follows:
Carol Correthers – 7,470 (elected)
Benjamin Pfeiffer – 5,357
Matt Sheridan – 2,877

The results of the retired member election were as follows:
Rudy Fichtenbaum – 21,339 (elected)
Robert Stein – 19,592 (elected)
Rita Walters – 17,114
Elizabeth Jones – 15,926

OEA would like to congratulate the elected members on their victories and thank all members who worked on this election effort and took the time to vote. The new four-year terms on the Board officially begin on September 1, 2021.

SERS Board Discusses Contribution Based Benefit Cap

During the May SERS Board meeting, the Board continued its ongoing discussion of plan sustainability. A large topic of conversation was the notion of a contribution-based benefit cap (CBBC) aimed at addressing spiking concerns. Such a cap would potentially limit a member’s calculated formula benefit if their contribution histories do not adequately support that benefit level. Several examples were given of situations where hypothetical members contribute small amounts over most of their career but have much larger contributions in a few years resulting in an inflated benefit. Utilizing a CBBC would place an upper limit of annual benefit based annuitizing accumulated contributions and interest and multiplying by a factor to set a benefit cap. The examples presented to the Board illustrated factors of 5 or 6 times the annuitized contributions.

The use of a CBBC is still in the exploration phase but Board members expressed some interest in preventing spiking to keep the majority of members from subsidizing others. There was also discussion of a tiered benefit formula that would have a lower multiplier in the early years of a member’s career and a higher multiplier later. This was discussed as a potential way to reward career service.

Click here to download a copy of this June 2021 Report to the OEA Board of Directors. Previous Retirement Systems Updates can be viewed under the Affiliate Resources tab on the OEA website.

SERS Changes Actuarial Assumptions, Lowers Assumed Rate of Return

On the advice of its actuarial consulting firm, the SERS Board voted to change the actuarial assumptions for the SERS pension and health care plan during its April meeting. Changes were made to the economic and demographic of the plans. The actuaries recommended lowering the inflation assumption from 3.00% to 2.40%. This change was the primary driver of the recommendation to lower the assumed rate of return from 7.50% to 7.00%. The lower assumed rate added nearly $185 million to SERS unfunded liabilities.

Other changes to the economic assumptions included a decrease in the payroll growth assumption from 3.50% to 1.75% and a reduction of the assumed increase in the cost-of-living adjustment (COLA) from 2.5% to 2.0%. Changes to demographic assumptions (retirement and withdrawal rates, mortality, etc.) were also made based on SERS plan experience. The SERS Board voted unanimously to adopt all of the actuary’s recommended changes.

Despite the drop in the assumed rate of return for the pension plan, the funding status of the system was projected to drop only slightly to 70.87% funded with a period of 26 years to pay off the unfunded liabilities. The Board also voted to raise the assumed rate of return for the health care plan to 7.00% from 5.25%. This contributed to a projected increase in the funding status of the health care fund to just over 38% funded.

STRS Reviews Proposed Changes for Health Care Plan

At the April STRS Board meeting, staff presented several proposed changes to the STRS health care plan for calendar year 2022. The proposed changes are designed to have a positive impact on premiums to offset expected rate increases.

The proposed changes include: decreasing maximum out-of-pocket limits on prescriptions to $5,100 from $6,500 for the Medicare plans; fully funding hospital coverage for Medicare enrollees with Part B-only; changes to formularies to provide greater rebates; and reducing the copay for some specialty drugs.

The STRS Board is expected to vote on these proposed changes at its May meeting. Staff will also provide an initial look at 2022 health care premiums at that time

Click here to download a copy of this May 2021 Report to the OEA Board of Directors. Previous Retirement Systems Updates can be viewed under the Affiliate Resources tab on the OEA website.