Thursday, May 11, 2017

STRS Ohio Reduces COLA to 0%

Dear STRS Ohio Members,
The State Teachers Retirement Board, as part of its ongoing focus on the financial condition of the pension fund, recently reviewed the results of two studies — an actuarial experience review and an asset-liability study — that are conducted every five years. These studies establish plan assumptions, measure the system’s actuarial accrued liabilities (benefits earned by active and retired members) and help determine how to invest system assets and how fast these assets are expected to grow. The results of these studies indicate that several factors, including lower than expected investment returns, longer lifespans among active and retired members, and lower than expected payroll growth continue to have a negative effect on the pension fund.
Accordingly, at its March meeting the Retirement Board approved changes to the actuarial assumptions that are used to calculate pension liabilities. The new assumptions outlined below are projected to add about $6.2 billion to STRS Ohio’s accrued liabilities and push its funding period — the time it would take to reach 100% funded status — to more than 50 years. Ohio statute requires STRS Ohio to have a funding period of no more than 30 years or to submit a plan to reduce its funding period to reach this target.
Segal Consulting, the board’s actuarial consultant, estimated that STRS Ohio would need to reduce benefits by about $10 billion to meet the 30-year funding target. The $10 billion figure takes into account the additional $6.2 billion in liabilities mentioned above, lower expected payroll growth and market returns being lower than the assumed rate of investment return in fiscal 2015 and 2016. 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. 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 (COLA) has a large financial impact on the pension fund because it affects both active and retired members of the system. This change is projected to keep STRS Ohio within the state of Ohio’s 30-year funding target and the Retirement Board’s own funding policy target. The COLA change and the impact of the new actuarial assumptions will be factored into the system’s annual actuarial valuation report, which will be delivered in October.
We know this is not welcome news to our members, and the board and staff understand the concerns expressed by members we have met with and heard from throughout Ohio. The following pages include additional information to help you understand the factors that led to the board’s decision in April. Much of this information has been shared in STRS Ohio’s Board News, a newsletter that summarizes actions and discussions that take place at monthly board meetings. Board News is emailed to all members who have an email address on file with the retirement system. If you do not currently receive these emails, we invite you to log in to your personal account on STRS Ohio’s website and add your email address to your contact information or contact our Member Services Center toll-free at 888‑227‑7877.
STRS Ohio’s mission is to partner with our members in helping to build retirement security. Please know that we are committed to funding sustainable benefits for active members and retirees of the system, and we will continue in our efforts to communicate with you openly and honestly about the health of the pension fund.
Sincerely,
Michael J. Nehf
Executive DirectorSTRS Ohio