STRS report from the November Ohio Council of Higher Education Retirees meeting

Report from Richard Williams, WSURA’s liaison to the Ohio Council of Higher Education Retirees (OCHER)

At the previous OCHER meeting in September several members of the OCHER Board asked about the management of funds and fees for State Teachers Retirement System (STRS) investments. At the Nov. 27, 2018, meeting we received the following information:

• Over the last five years the net return on STRS assets was 9.7%, in the top quartile of public pension funds.
• STRS was third in its peer group of 17 large U.S. public pension funds for lowest investment costs, primarily because if its use of internal investment managers for about 70% of the system’s assets.
• The use of technology has allowed STRS to reduce its workforce from 731 in FY 2002 to 539 last year despite the number of active and retired teachers both increasing.
• STRS assets were $577 billion in 2007. Asset value fell by nearly 28% during 2008-09 but have since recovered to $578 billion in FY 2018.
• The ratio of Assets to Liabilities for the Pension Fund dropped as low as 56% in FY 2012 but has since recovered to 75.5% in FY 2018 due to the revision of the pension formula in 2012 and the reduction of the COLA to 0% in 2017.
• The ratio of Assets to Liabilities for the Health Care Fund was at a low of 58.3% in FY 2012 but has increased to 176.0% by 2018 mainly due to a large projected drop in the liability for current beneficiaries.

The STRS Board relies heavily on a Dashboard score where points (positive or negative) are tabulated according to how well goals are being achieved. The minimum and maximum values possible are -11 and +11. A score of +7 or greater is considered a strong enough positive for the Board to consider contribution reductions by active teachers and/or benefit increases to retirees. A score of -7 or lower suggests that STRS should consider contribution increases or benefit reductions. The current Dashboard score for the Pension Fund is -4 up from -5 last year and is considered to be an “acceptable” score meaning that the Board will probably not see any need for significant policy changes in contributions or pensions in the immediate future.

• The FY 2018 Financial Statement shows how STRS spent its money (in thousands):

• The Dashboard score for the Health Care Fund is a rosy +4 as the result of lower claims, better investment returns and smaller numbers of Pre-Medicare enrollment.

Finally, the STRS Board discussed the reinstatement of the COLA to a positive number. Given the -4 Dashboard score its looks unlikely that STRS will reintroduce a COLA before at least the five-year review comes up in 2022. Even if the funding ratio and investment returns might suggest that the COLA should be reintroduced, there are a number of cross-currents that the Board will have to deal with:

1. Current retirees will expect the top priority should be to reinstate their COLA.
2. Current teachers, however, may expect the top priority will be to cut their contribution rate from its current 14% of salary.
3. State legislators and school boards may expect the top priority will be to cut the employer contribution rate from 14% to free up more funds of the schools without having to increase taxes or appropriations from the legislature.
4. Managers of the Health Care Fund will argue that the 1% of salary that employees used to put towards the health care fund expenses will be restored.
5. Staff managing the Pension Fund will argue to reduce the assumed rate of return to reduce the chance that an economic downturn would put the fund in jeopardy again.

Everyone won’t get their wish.