Retirement Board Will Continue to Share Potential Funding Improvements With StakeholdersAt its February meeting, the State Teachers Retirement Board reviewed several options to reduce the amortization period for the pension fund and agreed that STRS Ohio will continue to involve stakeholders in the process of considering plan revisions. STRS Ohio is required by law to amortize its unfunded liabilities over a period of not more than 30 years. Since STRS Ohio’s current funding period is 40.2 years, the system is required to submit a board-approved plan to the Legislature to reduce the funding period to 30 years. The plan was submitted on Feb. 21.
The plan reviewed the significant impact that pension reform legislation had on the pension fund. STRS Ohio’s July 1, 2013 pension valuation shows pension reform reduced STRS Ohio’s unfunded liabilities by $15.7 billion and improved the system’s funded ratio to 66.3%. The reforms also reduced the system’s funding period from infinity, but have not yet resulted in a 30-year amortization period.
The valuation also showed that STRS Ohio has a net $2.8 billion in unrecognized investment gains being deferred to future years. The $2.8 billion reserve is due to the four-year smoothing method that spreads investment market volatility over four-year periods. The remaining gains since 2011 reflect stronger investment returns than the 7.75% assumed rate. The plan sent to legislators explains investment gains from 2011–2014 to be factored into this year’s valuation, along with strong returns thus far in the current fiscal year, should have a positive impact on the pension fund. STRS Ohio’s actuary projects that if the current year investment returns hold until June 30, the valuation for the fiscal year ending June 30, 2014, will show about a four-year reduction in the amortization period.
The board-approved plan stated that STRS Ohio is continuing to share information about potential funding improvements with stakeholder groups, noting that constituent support was key in the pension reform process in 2012. The board is considering several options to reduce the amortization period. One option discussed by the board at its meetings in January and February was directing all or part of the one percent of employer contributions that now help fund the STRS Ohio Health Care Fund into the pension fund. Directing the full one percent employer contribution to the pension fund beginning July 1, 2014, is projected to reduce the amortization period by about four years. STRS Ohio’s actuary projects this move, coupled with the smoothed gains from strong investment returns, would result in an amortization period of about 32 years and put STRS Ohio on track to reach a 30-year amortization period in the time frame that was projected when pension reform legislation was passed in 2012. Such a move would shorten the projected life of the Health Care Fund to about 20 years; however, the board has authority to direct the one percent back to the Health Care Fund in the future, and to make “catch-up” payments to the Health Care Fund once the financial condition of the pension fund improves.
STRS Ohio’s plan also notes that the Retirement Board is continuing to study a funding policy to help guide funding decisions and will continue to use annual valuation reports to monitor the strength of the pension fund. Executive director Michael Nehf will present the plan to the Ohio Retirement Study Council at its March meeting.
Health Care Funding Status Improves Slightly in 2013Strong investment returns and changes in plan costs provided an improving financial picture for STRS Ohio’s Health Care Fund as of Jan. 1, 2014. During the February board meeting, the Retirement Board’s actuarial consultant, Segal Consulting, presented the results of the annual actuarial valuation of the fund. The projected life of the fund now extends to 2063 — an increase of about three years from last year’s valuation.
Costs for the health care program are paid out of the Health Care Fund, which is currently funded through premiums charged to enrollees, 1% of payroll from employer contributions, government reimbursements and investment earnings on these funds. The balance in the fund as of Jan. 1, 2014, was $3.47 billion.
While the report showed improved solvency, the health care program still requires changes in coverage features, program eligibility and/or premium subsidies to reach the three primary goals set by the board. Those goals include establishing Medicare as the health care program’s cornerstone, achieving 30 years of solvency for the health care program by 2016 and extending forecasted solvency to 65 or more years by 2025.
Board Receives 2013 Member Survey ResultsMore than 90% of STRS Ohio members continue to have positive overall impressions of STRS Ohio, according to the results of a membership survey conducted in November 2013.
At the February board meeting, Dr. Marty Saperstein presented the findings of the annual membership survey. Dr. Saperstein’s Columbus-based research firm, Saperstein Associates, conducted interviews with 603 randomly selected participants (302 active members and 301 retirees). Key takeaways from the presentation included:
Other STRS Ohio NewsMarkets deliver strong returns in 2013
Preliminary figures show that the STRS Ohio Total Fund return for calendar year 2013 is estimated at 17.4%. The first six months of the calendar year were already reported as part of the fiscal year 2013 return (+13.7%). The preliminary fiscal year 2014 Total Fund Return as of Dec. 31, 2013 was +10.2%, and the market value of assets stood at $72.3 billion.
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