Strengthening the Financial Condition of Your Retirement System

STRS Ohio first addressed pension reform in 2009, when the Retirement Board approved a plan to modify benefits in September of that year. In response to constituent and Statehouse input, the board amended its proposal in October 2010 and January 2011. The reform package went through one more revision in April 2012 following additional review and study by the Retirement Board — steps that were vital in creating a clear picture of the system’s financial condition. On September 12, the Ohio Legislature passed pension reform bills to improve the financial condition of all five Ohio pension systems, including the State Teachers Retirement System of Ohio (STRS Ohio). On September 26, Governor Kasich signed the pension reform bills into law.

The Issue

Before the 2008 investment market downturn, STRS Ohio’s pension fund had a funding period of 41.2 years, exceeding state statute’s 30-year maximum. Economic and demographic factors, such as members living longer, were causing a reduction in available funds to pay off accrued liabilities over time. The unprecedented decline in the global investment markets and the accompanying recession, along with the protracted economic recovery, significantly accelerated the need for STRS Ohio to make changes. If no changes were made, STRS Ohio would eventually be unable to pay benefits.

Planning Process

In March 2009, the State Teachers Retirement Board took the prudent and proactive step to begin a long-term contingency planning process to address the funding challenge. The board pledged that the process would be detailed, thorough and deliberative, noting that no actions would be taken lightly as all actions impact STRS Ohio members and employers. The Retirement Board and STRS Ohio staff developed a pension reform plan and refined it several times along the way with input from legislators, consultants and the Healthcare and Pension Advocates for STRS (HPA) — a coalition comprised of groups representing more than 470,000 members and retirees, as well as employers. At its April 19, 2012, meeting, the board unanimously passed a reform plan that will help ensure STRS Ohio can continue to pay pensions to future generations of teachers. The plan addressed stakeholders’ requests for a smoother transition to new retirement eligibility rules, and the board’s actuarial consultant estimates the plan reduces the pension funding period to 36 years. The plan is projected to save $11.6 billion in accrued liabilities, does not include an increase in employer contributions and maintains a 1% employer contribution to STRS Ohio’s health care fund. The plan also had the support of HPA, with several of its members testifying before the Ohio Legislature in support. The General Assembly passed STRS Ohio’s long-awaited pension reform bill (Sub. Senate Bill 342) on September 12, 2012. The effective date of the bill is Jan. 7, 2013, but most of STRS Ohio’s plan changes will take effect July 1, 2013, or later.

The Retirement Board will continue to annually review the actuarial valuations of the pension fund and the health care fund to monitor both funds’ progress over time.

The new benefit plan:

• Provides retired teachers a reasonable and reliable defined benefit pension they should not outlive, reducing the likelihood they will have to turn to taxpayer-funded public assistance, Medicaid or social services in retirement. Further, these pensions can continue to provide a stable source of revenue for local economies and provide tax revenues to support needed government services (more than $4 billion in STRS Ohio pensions are paid annually to Ohio residents).
• Continues to offer a retirement plan that will help Ohio’s public schools, colleges and universities recruit and retain quality educators.
• Provides a transition period for those teachers who are close to retirement, while recognizing that those further out from retirement have more time to plan for their future financial security.
• Preserves all past cost-of-living adjustments (COLAs) and ad hoc increases for current retirees.
• Allows retirees’ pensions to continue to grow in the future, but at a slower rate.

Changes to Pension Plan Components Based on 2012 Legislation

Changes to the Cost-of-Living Adjustment (COLA), Effective in Fiscal Year 2013

• Members who retire anytime BEFORE July 1, 2013, will not receive a COLA during the 2014 fiscal year (July 1, 2013–June 30, 2014). For example, a member who retired on Aug. 1, 1997, would not receive a COLA on Aug. 1, 2013.
• Members who retire effective July 1, 2013, will not receive a COLA on July 1, 2014.
• After missing one COLA, retirees will resume COLAs at 2% per year.
• Members retiring AFTER July 1, 2013, will also receive a 2% COLA, but it will not begin until the fifth anniversary of retirement. For example, a member who retires Aug. 1, 2013, will receive his or her first COLA on Aug. 1, 2018, and that COLA will be 2%.

Increase in Member Contributions Beginning July 1, 2013

Increase member contributions by 4%, phased in 1% per year beginning July 1, 2013, through July 1, 2016
Members will contribute 14% of their salary to STRS Ohio beginning July 1, 2016. Currently, members contribute 10%.

Change in Final Average Salary (FAS) Years Beginning Aug. 1, 2015

New FAS calculation is the average of the five highest years of earnings

Pension benefits are determined by a member’s age, years of service and FAS.

Change in Benefit Formula Beginning Aug. 1, 2015

New formula is 2.2% for all years of service

The current 35-year enhanced benefit formula will be eliminated after July 1, 2015. Teachers retiring with 35 years of service as of Aug. 1, 2015, or later will receive 77% (35 x 2.2%) of their final average salary as a pension. Beginning Aug. 1, 2026, members will need to be age 60 to receive an unreduced benefit with 35 years of service.

Members who are eligible to retire on July 1, 2015, will maintain retirement eligibility if they continue working, and the benefit will be the greater of:

• (a) The benefit calculated upon retirement under the new benefit formula, or
• (b) The benefit as of July 1, 2015, under the current formula.

Change in Eligibility for Retirement Beginning Aug. 1, 2015

Increases age and service requirements for retirement

Service credit requirements for retirement with an unreduced benefit will increase to 35 years of service by Aug. 1, 2023. A minimum age 60 requirement will be added beginning Aug. 1, 2026. This change will be phased in based on the timeline shown below. Members may also still retire at age 65 with a minimum of five years of qualifying service credit.

The service credit requirements for an actuarially reduced benefit^* will be phased in beginning Aug. 1, 2015, gradually increasing to 30 years of service by Aug. 1, 2023. This change will be phased in based on the timeline shown below. Members may also still retire at age 60 with a minimum of five years of qualifying service credit; however, the benefit would be actuarially reduced beginning Aug. 1, 2015. Benefits will be reduced to be actuarially neutral. Members can use the Service Retirement Benefit Estimate Calculator to estimate early retirement benefits.

^*An actuarially reduced benefit reflects a reduction for each year that a member retires before meeting eligibility for an unreduced benefit.

Board Authority to Make Adjustments in the Future

The new law also provides the Retirement Board with authority to make future adjustments to the member contribution rate, retirement age and service requirements, and the COLA as the need or opportunity arises, depending on the retirement system's funding progress.

Additional Items Contained in Sub. Senate Bill 342

• Elimination of purchased service subsidies — Effective Jan. 1, 2014, members will pay the full projected liability created by the purchase of service. This could result in costs two-to-four times higher than under the current rates. For service credit certified with STRS Ohio by Dec. 31, 2013, members will have until June 30, 2014, to purchase the credit at current cost. Members currently purchasing under a payroll deduction plan can continue to complete their payoff at their current rate.
• Reemployment at retirement — Effective July 1, 2014, members who hold more than one position with STRS Ohio, OPERS or SERS and who plan to retire from one employer while continuing to work in the secondary position with another employer may do so only if they have continuously held that position for at least 12 consecutive months immediately prior to retirement.
• Elimination of retirement incentive credit — Effective July 1, 2014, the provision that allows employers to establish a Retirement Incentive Plan will be eliminated for retirements after July 1, 2014.
• Interest paid for purchasing past leave of absence — Effective Feb. 1, 2013, the cost to purchase a past leave of absence will include interest on both member and employer payments compounded annually beginning the first year following the year in which the absence or leave is terminated and ending the last day of the month in which the payment is made.
• Changes for new members after July 1, 2013 — Educators who begin membership with STRS Ohio July 1, 2013, or later will have to work longer to be eligible for disability and survivor benefits.