STRS to Continue Retirement Eligibility at 34 Years, Provide 1% COLA in FY ‘24
At its May meeting, the STRS Board approved two benefit changes—one impacting active teachers, and one for current retirees. The change for active teachers deals with retirement eligibility. The Board’s action extends the ability to retire after 34 years of service at any age and receive unreduced benefits. The years of service needed was scheduled to increase to 35 in August of this year. Eligibility at 34 years of service was extended for five years and will now be in effect until July 31, 2028.
On the retiree side, the Board approved a 1% cost-of-living adjustment (COLA) for fiscal year 2024. Eligible retirees will receive an increase of 1% to their base retirement benefit on the anniversary of their retirement date. Retirees are eligible for COLA if they have been retired for five years or more.
By state law, the Board is constrained in making benefit adjustments to the extent they do not materially impair the fiscal integrity of the pension plan. The actuarial consultant for STRS, Cheiron, determined that, based on the funding status of the plan, only smaller scale changes could be considered at this time. This was determined to be changes that have a de minimus funding impact—not to exceed 1% of the actuarial assets of the plan ($830 million). The total cost of the changes approved is estimated to be $825 million.
STRS Board Weighs Possible Benefit Enhancement
At the April STRS Board meeting, the board’s actuarial consultant, Cheiron, provided information on the potential of a benefit enhancement “budget.” The intent is to provide the STRS Board with options to enhance benefits without impairing the fiscal integrity of the pension plan. According to the actuaries, STRS funding is not strong enough to allow for a budget based on three fiscal integrity tests. However, they did indicate that the Board could consider making smaller scale changes of a de minimis amount—not to exceed 1% of the fund’s actuarial determined assets. Based on the most recent valuation, that amount is $830 million.
The Board was provided estimated costs of a range of benefit enhancements. A one-time, permanent Cost of Living adjustment of 2% for eligible retirees ($910 million); a reduction of one year of service (34 years) for retirement eligibility with full benefits ($1.14 billion); and a permanent 1% reduction in employee contributions ($1.32 billion) all exceeded the 1% of assets threshold. Further, the actuaries provided costs of more significant benefit enhancements. A reduction in retirement eligibility to 30 years of service costs $4.44 billion. An ongoing annual COLA of 2% costs $13.96 billion. The STRS Board is expected to further explore the options available and potentially act at its May meeting.
OEA believes that maintaining the long-term solvency of the pension plan is the top priority. All educators deserve a secure pension they cannot outlive. However, as the funding of the plan allows, benefit enhancements should be realized by both active and retired members. Providing inflation protection for retirees through a cost-of-living and reducing age and service requirements for active teachers should be pursued as long as they do not put future benefits at risk.
OPERS Funding Status Holding Steady
At its May meeting, the OPERS Board received a presentation on the 2022 actuarial valuation of the pension plan. Actuarial firm Gabriel, Roeder, Smith & Co. reported that the funding ratio of the defined benefit pension plan was 84%. The time needed to pay off the unfunded liabilities of the plan based on current assumptions (amortization period) was 16 years. State law requires this period to be no greater than 30 years.
Both the funding ratio and the amortization period were largely unchanged from the 2021 valuation despite heavy investment losses during calendar year 2022. This is because investment gains and losses are recognized over a four-year period to reduce volatility. OPERS recognized $5 billion of the 2022 loss, which was offset by unrecognized gains from previous years. In total, the unrealized loss is $9.7 billion. Over the next several years, the funding period will tend to decrease, and the amortization period will increase absent future investment gains greater than the assumed rate of return.
Based on modeling by the actuary, OPERS could exceed an amortization period of 30 years with an investment loss of greater than 4.5% in 2023. Conversely, an investment return of 19.1% or greater would offset the unrealized losses.