October Board News

Pension Valuation Report Shows Slight Funding Improvement in Fiscal Year 2019

During the October meeting of the State Teachers Retirement Board, actuarial consultant Cheiron presented the results of its fiscal year 2019 pension valuation report. The report provides a detailed look at the financial and actuarial health of the pension fund. Valuation reports measure two sets of assumptions — economic and demographic — against the retirement system’s actual experience from the past year. Economic measures include the return on assets, the rate of inflation, salary increases and payroll growth. Demographic measures include retirements, disability inceptions, withdrawals and mortality (the number of deaths among active members and benefit recipients).

The most common ways to express the system’s financial and actuarial condition are through the funded ratio and the funding period. This year’s valuation report shows the funded ratio — the value of actuarial assets compared to the actuarial accrued liabilities — improved slightly to 76.1% from 75.5% last year. This means if STRS Ohio meets all future assumptions, including its assumed investment return rate of 7.45%, the fund has about 76 cents on hand for every dollar of benefits expected to be paid to members of the system. The shortfall between STRS Ohio’s actuarial assets and liabilities is called the unfunded actuarial liability. During fiscal year 2019, STRS Ohio’s unfunded actuarial liability decreased slightly to $23.43 billion from $23.79 billion last year. The funding period is a measure of how long it would take to close that gap (if all future experience matches assumptions) and reach a funded ratio of 100% (when plan assets are equal to the expected benefits to be paid to the membership). This measure also improved, decreasing to 16.6 years from 17.8 years last year.

Other key points from the valuation report include:

  • STRS Ohio’s Defined Benefit and Combined Plans paid about $7 billion in benefits during the fiscal year.
  • Total covered payroll increased by about 3.1% during the fiscal year, in line with the system’s 3% payroll growth assumption.
  • STRS Ohio has a net $1.3 billion in deferred investment gains that will be recognized over the next three years. The pension valuation uses a common actuarial technique called “smoothing” to spread investment market volatility over a four-year window rather than a one-year “spike.”

While the funding level improved slightly in fiscal year 2019, staff estimates that the pension fund faces a greater than one-in-four chance of dropping below a 50% funded ratio in the next 10 years. This level of risk is primarily due to the volatility around investment returns. The board and staff believe this risk level, while improving, is too high, so they will continue their commitment to improving the long-term sustainability of benefits.

Health Care Valuation Report Shows Fund Remains in Solid Position Despite no New Funding

Cheiron also shared the results of its actuarial valuation of STRS Ohio’s Health Care Fund. The report shows that good claims experience kept the Health Care Fund on solid footing during fiscal year 2019. Costs for the health care program are paid from the Health Care Fund, which is currently funded through premiums charged to enrollees, government reimbursements and investment earnings on these funds. No employer contributions are used to help fund health care since these contributions are needed for the pension fund.

The Health Care Fund balance as of June 30, 2019, was $3.87 billion, an increase from $3.72 billion last year. Benefit payouts for the fiscal year totaled about $489 million, an average of more than $1.3 million per day. The funded ratio of the plan is 174.7%, slightly below last year’s funded ratio of 176.0%.

Under current conditions, if the fund earns 7.45% in all future years and all other plan experience matches assumptions, the fund is projected to remain solvent for all current members. The sound position of the Health Care Fund allowed for the Retirement Board’s decisions in June to approve health care premiums for 2020 that included no increase for more than 90% of enrollees and to continue STRS Ohio’s $29.90 reimbursement for Medicare Part B premiums for calendar year 2020.

The positive news for the Health Care Fund is tempered somewhat by two important factors:

  1. There is no dedicated revenue stream for the fund, since all employer contributions are being directed to the pension fund. Without a dedicated revenue stream, the fund is more vulnerable to investment market volatility.
  2. The various components that affect funding for the health care program — plan enrollment and utilization, government subsidies and rebates, investment returns — are not predictable and may not be positive for the current fiscal year or in the future.

These factors can result in greater volatility in a fund of this size with benefit payments of nearly half a billion dollars per year.

Retirements Approved

The Retirement Board approved 243 active members and 58 inactive members for service retirement benefits.

Other STRS Ohio News

Health care open enrollment begins Nov. 1

Open enrollment for STRS Ohio medical plans is Nov. 1–26, 2019. During this time, eligible benefit recipients and their family members can make changes to their current coverage or enroll in a plan for the first time without a qualifying event. Current medical plan enrollees can expect to receive materials in the mail the last week of October. Enrollees who previously signed up for electronic delivery will receive an email on Oct. 24 when their materials are available in their Online Personal Account. Members who are not enrolled in an STRS Ohio medical plan and are interested in coverage should call STRS Ohio’s Member Services Center toll-free at 888-227-7877 or email [email protected] to request personalized enrollment information.

Retirement Board Election Notices to mail in early November

Election notices for the 2020 Retirement Board election will mail in early November 2019 to all employers to inform STRS Ohio members about the upcoming election. In spring 2020, STRS Ohio contributing members will vote to elect a contributing member to the board. Those eligible to run for the seat include members presently contributing to STRS Ohio or those who have contributions on deposit with STRS Ohio (including members who are receiving disability benefits). Members may request an election packet and nominating petitions beginning Nov. 1. The deadline for STRS Ohio to receive nominating petitions is Feb. 28, 2020.