Pension worries need to be addressed now, not later, two lawmakers say
March 31, 2009
Two Ohio lawmakers on opposite sides of the political aisle say it is critical for the state to address a looming pension crisis among teachers and other public-sector employees.
"There have been rumblings about pensions for some time. We've seen bloated pension benefits take down companies like GM," said Rep. Seth Morgan (R-Huber Heights).
Morgan and Rep. John Domenick (D-Smithfield) believe the needs of public pension funds, including the State Teachers Retirement System (STRS), all of which have been hit hard by the world financial crisis, need to be addressed.
"There will be a problem down the road," Domenick said.
In 2007, the Thomas B. Fordham Institute raised serious questions (see here) concerning the long-term viability of the STRS fund, which serves 458,000 current or retired teachers. Last year's financial meltdown has only heightened fears.
The STRS expects its unfunded liability to more than double to $38 billion by July based on investment expectations (see here). The fund is below required minimums mandated by law but no one in state government has shown any inclination to enforce the law.
During its March meeting, the STRS board said that without changes the system would not be able to meet future benefits. The board instituted what it termed long-term contingency planning because of the "significant impact market losses have had on both the system's pension and health care funds" (see here).
While there is no problem meeting short-term obligations, the STRS noted in its board report:
However, looking long term, the reduced level of investment assets, combined with future expected investment earnings and member and employer contributions, leave a shortfall in the funding of STRS Ohio benefits. Staff projects that the system's unfunded liability will increase to approximately $38 billion on July 1, 2009, from $18.2 billion on July 1, 2008, assuming the market loss is 25 percent for this fiscal year. This will result in a funded ratio (percentage of assets on hand to pay all benefits accrued by STRS members to-date) of 58 percent and a funding period of infinity. This means that, unless changes are made, the system would eventually be unable to pay members' earned benefits.
The STRS board said that clearly the current expected long-term rate of eight percent cannot be raised. The board said that changes in contributions and in other factors such as minimum retirement age, early retirement, the cost to purchase service credit, the retirement formula, the cost-of-living adjustment, and how a teacher's final average salary is calculated may be needed. Most of these changes would require legislation.
An STRS spokesperson did not return calls from The Gadfly.
Some states are already moving to shore up their public retirement systems by changing benefits and/or seeking greater employee contributions. In New Mexico, for example, new public employees will see the retirement work requirement increase five years, from 25 years to 30 years (see here).
"We just have to have a system where people work longer and contribute more for that system to make it fly," New Mexico House Republican Leader Tom Taylor told the Las Cruces Sun News. "You just can't design a system where you work a shorter period of time than you are retired. It doesn't take an actuary to figure that one out."
Meanwhile, Ohio has joined a federal lawsuit against Bank of America over pension system losses (see here). The STRS and the Ohio Public Employees Retirement System are among five retirement systems alleging that Bank of America made false statements and did not disclose important information when it acquired Merrill Lynch in late 2008.
The five public funds lost about $274 million from their transactions in Bank of America securities between July 21, 2008, and January 20, 2009. Losses for the State Teachers Retirement System were $35.5 million, and for the Ohio Public Employees Retirement System, $67.8 million.
On top of the funds' financial challenges, Gov. Strickland's education proposals call for hiring more teachers, administrators, nurses, and other school employees. But no one is sure exactly how many will be hired and what impact the new hires could eventually have on the STRS, or on local school districts that must not only pay more salaries but also face the real possibility of increased retirement contributions as well.
"No one knows how many people will be hired. The governor is being incredibly opaque (in sharing ideas on how his plans will be implemented)," said Morgan, a certified public accountant. He also said promised increases in state education funding would not pay for the cost of the additional hires.
Taxpayers are, ultimately, on the hook if pension funds go bust because these benefits are protected under Ohio's constitution. Morgan said the state needs to address the fiscal questions before they become a crisis.
"Most small companies have moved from defined-benefit to defined-contribution plans," he said. "No one wants to sound the alarm because no one wants to deal with the issue of teacher retirement."
Domenick said much of the problem is political with neither party wanting to help the other resolve critical issues. "Everyone runs away from the hot topics," he said. "Who is going to step into the fire? Your legs are going to be cut off."