Board Votes to Reduce Future Cost-of-Living Increases to 0% to Preserve Fiscal Integrity of the System; Will Revisit Within Five Years
At the April meeting of the State Teachers Retirement Board, the board made the difficult but necessary decision to reduce cost-of-living increases granted on or after July 1, 2017, to 0% to preserve the fiscal integrity of the retirement system. Current benefit recipients’ base benefit and past cost-of-living increases will not be affected by this change. The board also agreed to evaluate — not later than the next five-year actuarial experience review — whether an upward adjustment of the cost-of-living increase is payable without materially impairing the fiscal integrity of the retirement system. The cost-of-living adjustment has a large financial impact on the pension fund because it affects both active and retired members of the system. The vote follows last month’s action to approve changes to the actuarial assumptions that are used to calculate pension liabilities. The new assumptions resulted in additional liabilities that took STRS Ohio outside the parameters established in the board’s funding policy and beyond the 30-year funding target in Ohio law.
The board’s action is the culmination of many months of work with staff and consultants to get a detailed look at the financial status of the pension fund. The Retirement Board’s actuarial consultant, Segal Consulting, provided the board with updated financial projections that took into account the newly adopted actuarial assumptions. The system’s financial strength is expressed through the funded ratio — that is, the value of assets compared to accrued liabilities (expressed as a percentage), and the funding period — the amount of time needed to reach a funded status of 100% assuming current contribution rates. Segal’s projections showed STRS Ohio’s funded ratio at 62.6% with a funding period of 57.7 years. Under this scenario, STRS Ohio would be required to present a plan to the legislature to reduce its funding period to 30 years or less. Segal projects the board’s decision to reduce future cost-of-living increases will improve the system’s funded ratio to about 70.8% with a funding period of about 20 years if all economic and demographic assumptions are met. This would meet the benchmarks in the board’s funding policy, as well as the state of Ohio’s funding target.
As noted in the March issue of Board News, the changes to STRS Ohio’s actuarial assumptions followed the five-year experience study conducted by Segal Consulting. The experience review measures the system’s economic and demographic assumptions versus the actual experience over the past five years. Based on this review, Segal recommended adjustments to assumptions about expected investment returns, mortality, inflation, salary growth, payroll growth and teacher retirements, disability inceptions and terminations. The assumption changes with the most significant financial impact were: (1) Reducing the investment rate of return to recognize projections for modest global economic growth and lower expected returns for capital markets; (2) Adopting new mortality assumptions that reflect members are living longer and STRS Ohio is paying benefits for a longer period of time than expected; and (3) Reducing the payroll growth assumption to recognize there will be less money coming into the fund through member and employer contributions than expected.
Assumption Changes Have Negative Impact on Health Care Program Solvency
The Retirement Board has been weighing STRS Ohio staff proposals to improve the solvency of the retirement system’s Health Care Fund. The Jan. 1, 2017, valuation of the Health Care Fund showed a balance of $3.22 billion and an estimated solvency period of 22 years. The board learned at its April meeting that actuarial assumption changes adopted by the board in March had a negative impact, reducing the solvency period to an estimated 18 years. The primary factors for this change were increasing health care cost (trend) projections and a lower assumed rate of return on investments.
The Health Care Fund is currently funded through premiums charged to enrollees, government reimbursements and investment earnings on these funds. With no new sources of revenue for the health care program, the Retirement Board is looking at options to keep the Health Care Fund solvent until funding from the employer contributions can be returned. With the new assumptions in place, staff proposals discussed last month will need further revisions to meet the board’s funding objectives. The board directed staff to work on new options that have at least a 30-year solvency period. Under the plans presented thus far, costs for all participants are expected to increase — more so for non-Medicare enrollees — as health care program costs continue to grow. Health care coverage payouts during fiscal year 2016 totaled $677 million, an average of more than $1.8 million per day.
Proposed Operating Budget for Fiscal Year 2018 Calls for 2.8% Increase Over Current Year to Meet Board’s Investment Initiatives
The Finance Department proposed system budgets for the 2018 fiscal year (July 1, 2017–June 30, 2018) during the April meeting. The proposed operating budget totals $99.6 million, an increase of 2.8% over the fiscal 2017 budget and an increase of 0.7% over the fiscal year 2009 budget. Investment items account for all of the increase, as administrative departments budgets reflect a slight decrease from the current year. The budget increases in the investment area reflect changes in costs for custodial banking fees; payroll and staffing; and quotation and analytic services. The staffing component will expand STRS Ohio’s internal investment capabilities and recognize that STRS Ohio’s model of managing more than 70% of the system’s assets internally is cost effective. CEM Benchmarking analysis estimates STRS Ohio’s use of internal management saves about $100 million annually for the retirement system (based on median external management costs of STRS Ohio’s peer group of similar-sized retirement systems).
The proposed fiscal 2018 budget reflects 544 full-time equivalent associates, down from 556 in the current year. Other cost containment measures include spending less on printing and mailing costs as more members opt for online services. The proposed capital budget for fiscal 2018 totals $3.3 million, a 1.7% increase from the current year’s budget.
The Retirement Board approved 61 active members and 79 inactive members for service retirement benefits.
Other STRS Ohio News
STRS Ohio Retains Top Spot for CEM Service Level While Reducing Costs
CEM Benchmarking released its annual Pension Administration Benchmarking report for fiscal 2016 activity and STRS Ohio again received the very top service level score among 52 participating pension systems, primarily in the United States and Canada. STRS Ohio’s service level increased to 94 from 93. This increase was driven by new satisfaction surveying of online activities and faster than usual average speed of answer in the call center. STRS Ohio earned the highest service level score for Pension Payments, Call Center, One-on-One Counseling, Pension Estimates and Disaster Recovery. This is the 19th year STRS Ohio has participated in the benchmarking study and the ninth time the system received the top score.
While the service level was at the top, the administrative cost per active member and annuitant decreased to $107 from $110. This continues a trend of reduced administrative costs. The reduction in administrative costs had been primarily driven by staff reduction that reflects the increased usage of online applications and a reduction in retirements, counseling sessions and purchasable service activity.