Pension officials, who have been begging lawmakers to take action for nearly three years, say the changes are needed to shore up their finances for the long haul and to allow them to avert drastic cutbacks in health care benefits for current and future retirees.
Stock market losses, people living longer, generous benefits and crushing health care costs are driving the need for reforms. Without changes, the systems would eventually run out of money to issue monthly pension checks.
And more immediately, without changes, Ohio Public Employees Retirement System would slash its annual spending on retiree health care to $500 million.
The spending cuts, from $1.6 billion, would begin in 2014, said OPERS Executive Director Karen Carraher.
“No one is extremely happy with all the changes, especially those affecting them. However, most retirees understand the STRS’ financial situation. And they are accepting and supporting the proposed plan,” said Ann Hanning, executive director of the Ohio Retired Teachers Association, which has 30,000 members. “We know that some things must change and the sooner, the better for all members of the system.”
The five pension systems are: Public Employees Retirement System, State Teachers Retirement System, Schools Employees Retirement System (non teachers), Ohio Police and Fire Pension Fund and the Highway Patrol Retirement System which is not impacted by the reform bills.
The bills would require active teachers to contribute 14 percent of their pretax income to the retirement plan, up from the current 10 percent.
A teacher making $60,000 would have to plan for $2,400 per year less once the change was fully phased in.
“Are they thrilled about it? Probably not,” said Centerville High School math teacher Brian Cayot, who leads the district’s teachers’ union. “But they understand that it’s a necessary evil in order to have your retirement there at the end.”
Cayot said some teachers are frustrated by a proposal that would push retirement eligibility back at least five years, to age 60 after 35 years of service.
But he said many teachers just want the state to come up with a system and stick to it so they can make a plan, after years of varying proposals have left them guessing.
Ohio Senate President Tom Niehaus, R-New Richmond, and Senate Minority Leader Eric Kearney, D-Cincinnati, introduced four pension reforms bills, one for each of the four largest systems. Niehaus said he hopes the bills will go to the Senate floor for votes this week.
The bills are likely to stall in the Ohio House where key members are urging their colleagues to wait for a consultant’s report to double-check the numbers and changes being pitched by the pension boards. State Rep. J. Kirk Schuring, R-Canton, a member of the Ohio Retirement Study Council, said, “I think we should do something this year. Hopefully, we’ll be on the same page and on the same path sometime later this year.”
Lawmakers are scheduled to recess from June through the November election. The House may take up pension reform after lawmakers return in November.
How do funds work?
Like most states, Ohio’s public pensions are defined benefit systems. The pension benefit is based on age, years of service, final average salary and it is guaranteed, regardless of how well invested contributions performed over the course of the worker’s career. Defined contribution plans, such as 401(k) funds, are more common in the private sector. The employer and worker contribute to a fund over the years but the amount in the retirement nest egg when the career ends isn’t guaranteed.
Public employees in Ohio do not participate in Social Security.
Some fiscal conservatives are disappointed that lawmakers aren’t pushing for a switch to a defined contribution plan or a mandatory hybrid between the two types of plans.
“By many measures, the retirement benefits received by government workers in Ohio, on average, are more generous than those received in the private sector,” said Andrew Schwiebert of the Buckeye Institute, a conservative public policy think tank. He told state senators that Ohio could save $3.3 billion during 30 years by establishing a defined-contribution plan.
Ohio’s proposed changes are in step with reforms recently adopted by other states. According to the National Conference of State Legislatures, 41 states have enacted significant pension reforms in the past two years. Those changes have included:
• Boosting employee contribution rates.
• Increasing age and service requirements.
• Stretching out the final average salary calculation.
• Adjusting cost of living allowances, according to NCSL.
“Legislatures around the country have been acting (on pension reform proposals.) Ohio is one of the few states that hasn’t acted yet,” said Keith Brainard, research director for the National Association of State Retirement Administrators.
In Ohio, public pension benefits are not bargained in union contracts or crafted by the systems’ boards. Instead, they are prescribed by state law.
In a multibillion dollar pension system, there are certain levers that officials can move to make projected revenues match projected expenses: contribution rates, age and service requirements, final average salary calculations, and cost of living allowances.
Under the new Ohio proposals, police and fire employees would have to contribute more money to their retirement, with the increase from 10 percent to 12.25 percent phased in during three years. That’s an impact of $1,000 to $2,000 per year for most officers.
“It’s a big deal for departments like us that haven’t really had a raise in three or four years,” said Randy Beane, president of the Dayton Fraternal Order of Police. “We’re going to get a 1.6 percent raise in November, but this ... will eat up a substantial part of our raise.”
Beane said changes in how officers’ final average salary will be calculated for pension purposes are significant, as is the eventual increase in retirement age from 48 to 52. “It’s hard to be a cop on the street when you’re in your 50s, chasing these young guys down,” Beane said. Beane said he understands the need for change, but thinks the public sometimes overstates complaints about police benefits. “There was a time, and I lived through this time, when we made substantially less and received substantially less benefits than the public did,” he said. “It’s balancing act.”
When asked about likely higher out-of-pocket costs, 17-year veteran Dayton Police Officer Tim Gould chuckled about squeezing more life out of his 1995 Honda Civic that has 198,000 miles.
Gould said there has been more criticism of police benefits in recent years, including a race-to-the-bottom feeling where some residents ask, “I don’t get that benefit, so why should they? It’s kind of strange because just in the last couple of years it has really flip-flopped,” Gould said. “Police and fire and teachers were really the core of society, who people always looked up to. But as soon as the recession hit, with everybody losing jobs, they kind of turned and looked at us differently.”
Provisions become law
Because pension provisions are carved into law, it can be difficult to change them, particularly for workers already vested in the systems and retirees already out the door.
Seven states — Maine, New Jersey, Rhode Island, Oklahoma, Colorado, Minnesota and South Dakota — have taken steps to cut back cost-of-living allowances for current retirees. That prompted a string of legal challenges from retirees who argued that the COLA was a contractual benefit. Courts in Colorado, Minnesota and South Dakota ruled against the retirees and cases are pending or on appeal in Colorado, Maine and Rhode Island, according to Brainard.
“An automatic COLA is a surprisingly expensive benefit provision and it is becoming more expensive as longevity improves,” Brainard said. The COLA is a big lever for the Ohio systems. “If you affect only new hires, it takes much longer to generate any savings.”
Bill Winegarner, of Public Employee Retirees Inc., which represents 62,000 retirees in Ohio, said, “Those people who retired under the COLA deserve to retain the COLA because you can’t change the law after the fact. So, our position on the COLA for current retirees is: No change.” He stopped short of saying that PERI would file a lawsuit over the COLA reductions.
While the reforms may seem drastic, Ohio is known for prudent stewardship of the public retirement systems, Brainard said. Unlike other states, Ohio has five state-run systems rather than a patchwork of locally run funds and Ohio has never skipped making employer contributions.
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There are five systems that serve 1.8 million Ohioans and invest $163 billion. But STRS, OPF and HPRS don’t have enough funding to pay off all their liabilities over a 30-year period as required by state law. The funding ratio shows what percent of liabilities could be paid off now. The funding period shows how long it would take to pay off the liabilities.
Fund name
Active members
Inactive members
Retirees
Assets
Funded ratio
Funding period
Ohio Public Employee Retirement System
356,734
438,434
179,565
$73.2 billion
76.10%
29 years
State Teachers Retirement System
177,897
151,291
138,088
$66.3 billion
58.80%
Infinite
School Employees Retirement System
125,337
102,894
67,221
$10.6 billion
65.22%
28 years
Ohio Police and Fire Pension Fund
28,073
2,735
26,074
$12 billion
69.40%
Infinite
Highway Patrol Retirement System
1,537
126
1,424
$775 million
62%
Infinite
Source: Ohio Retirement Study Council
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