Ohio Teachers Pension Fund Lowers Assumptions, Adjusts Assets

The Ohio’s State Teachers Retirement Board has lowered the actuarial assumptions it uses to calculate pension liabilities, following a five-year experience review.

The plan’s actuarial consultant, Segal Consulting, which conducted the review, recommended adjustments to assumptions for expected investment returns, mortality, inflation, salary growth, payroll growth and teacher retirements, disability inceptions and terminations.

The review measured the system’s economic and demographic assumptions, compared to the actual experience over the past five years. The main changes to the assumptions include:

Reducing Expected Investment Return to 7.45% From 7.75%:

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Because assets are not expected to grow fast enough to pay benefits, the projected financial impact adds about $3.2 billion to liabilities.

Updating Generational Mortality Tables: Because plan members are living longer, that means STRS Ohio is paying benefits for longer than expected. This is projected to add $4.1 billion to the fund’s liabilities.

Reducing Inflation Assumption to 2.5% From 2.75%: This impacts expected investment return and individual salary increases.

Reducing Salary Growth Scale for Merit and Seniority: Individual teacher salary increases were lower than expected, which reduced the fund’s liabilities by approximately $1.3 billion.

Reducing Overall Payroll Growth to 3% From 3.5%: This lengthens the funding period by recognizing that the money coming into the fund through member and employer contributions will be less than expected.

Under the new actuarial assumptions, the plan’s funded ratio drops to 62.4% from 69.6%, and the funding period increases to 59.5 years from 26.6 years. Because the funding period falls outside of the state of Ohio’s 30-year target, STRS Ohio is required to present a plan to reduce its funding period to 30 years or less.

The new assumptions would add about $6.5 billion to STRS Ohio’s accrued liabilities, according to the board, which also said that it would address the plan’s cost-of-living adjustments (COLA), and will likely make a change in April’s board meeting.

“Models of possible plan design changes indicate the cost-of-living adjustment is the most effective means possible to preserve the fiscal integrity of the fund because it by far has the biggest impact on liabilities,” said the board. “The COLA has a significant financial impact because it affects active and retired members of the retirement system.”

A state bill passed in 2012 gives the retirement board the authority to set the COLA, allowing it to indefinitely suspend or reduce the COLA if deemed necessary. It can also vote to restore the COLA if and when the pension fund recovers and is funded enough to do so.

“Discussion on potential benefit plan design changes will continue at the April meeting, when a vote on these changes is likely,” said the board.

New Asset Allocation

The board also selected a new asset allocation for the system’s total fund that has a lower risk-return portfolio, which was done in response to an asset-liability study conducted by the retirement board’s investment consultant, Callan Associates. The new asset mix is designed to provide lower volatility, although it will provide a slightly lower expected rate of return.

The asset-liability study, which began in August, was conducted to help the retirement board determine reasonable risk and return expectations. The plan conducts these studies every three to five years to keep up with change and uncertainty in the capital markets, and to confirm an investment policy to meet return and risk objectives in relation to funding, accounting, and policy goals.

Callan projects the new asset mix to earn a return of 6.84% over the next 10 years, but said returns could be higher over a longer time horizon.

Asset Class	Current Target	New Asset Mix Target
Broad U.S. equity	31%	28%
Broad international equity	26%	23%
Broad U.S. fixed income	18%	21%
Real estate	10%	10%
Private equity	7%	7%
Opportunistic/diversified	7%	10%
Liquidity reserve	1%	1%

By Michael Katz

Illinois Gov. Bruce Rauner vetoed a bill aimed at staving off the impending insolvency of two Chicago pension funds, saying it would have created a “five-year pension funding fiscal cliff,” and raise taxes for the city’s residents.

The bill was passed unanimously by the Illinois Senate in January, and had been championed by Chicago Mayor Rahm Emanuel, who lashed out at Rauner for quashing the measure.

“Instead of helping secure the future of our taxpayers and middle-class retirees, the governor chose to hold them hostage,” said Emanuel spokesman Adam Collins in a statement.

According to the Governor’s office, Chicago’s pension funds face a combined deficit of approximately $30 billion, and Illinois state pension funds are underfunded by $130 billion.

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The Chicago Municipal Employees’ Annuity & Benefit Fund (CMEAB) is a defined benefit, single-employer plan, and is projected to have a funded ratio of 27.6% for 2017. That figure is forecast to dwindle down to insolvency by 2025, according to the CMEAB’s most recent annual report for the year-ended 2015. Its net pension liability more than doubled between 2014 and 2015 to $18.62 billion.

Meanwhile, the $1.24 billion Laborers’ & Retirement Board Employees’ Annuity & Benefit Fund of Chicago had an overall funded ratio of 53% as of the end of 2015. For 2017, the plan was projected to have a funded ratio of 46.6%, and is expected to become insolvent by 2027.

The killed bill would have allowed members of both pension funds who were hired between 2011 and 2016 the option to pay more in employee contributions, in exchange for the ability to retire two years early at the age of 65. It would have also allowed new members to the system to retire two years earlier while also increasing their employee contributions.

“This is another kick-the-can approach to pension funding that landed Chicago in fiscal crisis in the first place,” Rauner said. “This bill will create an unsustainable funding schedule that will lead to tax increases without solving the real problem.”

Rauner is backing legislation sponsored by House Republican Leader Jim Durkin, and 25 other Illinois House Republicans, which he said would save state taxpayers between $1 billion and $2 billion.

The proposal would require members of the Teachers’ Retirement System (TRS), the State Universities Retirement System of Illinois (SURS), the State Employees Retirement System (SERS), the General Assembly Retirement System (GARS), and the Chicago Teachers Pension Fund to either exchange their tier 1 cost-of-living adjustments (COLA) for the right to have future raises to be counted as pensionable, or keep their COLA but not have future raises count as pensionable.

It would also provide a one-time normal cost payment to the Chicago Teachers’ Pension Fund of $215.2 million for fiscal year 2017; close new member participation in GARS, offer Tier 1 TRS, SURS, SERS and GARS employees the option to participate in a defined contribution (DC) plan, and create a voluntary Tier 3 Hybrid defined benefit/defined contribution plan for new Tier 2 employees under TRS, SURS, and certain SERS members who do not participate in Social Security.

“Taxpayers around the state will save billions by making structural changes to our state pension system,” Rauner said.

By Michael Katz