It was the intent of the Ohio General Assembly to “recognize that no member has a legitimate expectation of any particular future cost-of-living adjustment, or payment of future cost-of-living adjustments at any particular time, under Ohio law.”
The Ohio State Teachers’ Retirement System cannot invest its way to a permanent COLA, Brian Grinnell, former chief actuary of the $97.3 billion pension fund, told Pensions & Investments.
Grinnell left the pension fund in May after more than 10 years as its chief actuary. In a Sept. 27 interview, he said his responsibilities were primarily to help STRS staff and the board understand the risks the pension fund has faced and help develop a forward-looking plan to make decisions with long-term outcomes in mind.
In his interview, he said, “I was not comfortable with the direction the plan was headed, and I didn’t feel like my continued participation would be positive.”
The pension fund has been beset by controversy for several years after a group of retired teachers, represented by advocacy organization the Ohio Retirement for Teachers Association, launched an aggressive social media campaign criticizing the pension fund’s board for voting not to award retirees cost-of-living adjustments every year between 2017 and 2022, after previously cutting the COLA to 2% from 3% for five years beginning in 2012.
Anger among retirees eventually led to a series of board elections. The 11-member Ohio STRS board consists of seven trustees elected by STRS participants and four trustees appointed by state officials. Of those seven elected trustees, six — all elected since 2021 — call themselves reformers.
The reformers support restoring a permanent annual 3% COLA that was in place before a 2012 pension reform law, which would be funded by cost cutting, including a move to passive investing and significant cuts to the investment staff.
Since the reform trustees took over the majority, enacting their plans has proven not to be so simple, because a permanent COLA can only be approved by the pension fund’s actuarial consultant — currently Cheiron — if it does not impair the fiscal integrity of the pension fund, according to the 2012 Ohio pension reform law.
The pension reform law, SB342, was one of five laws that addressed funding issues at all five of Ohio’s state retirement systems and was drafted as a result of severe stock market declines that came from the Great Recession in 2008 and 2009. Among all the state systems, STRS was the worst off in 2012 with a funding ratio of 57.6% as of June 30 of that year. Additionally, the amortization period for the retirement system's unfunded pension liabilities under the STRS defined benefit plan had become infinite — meaning that it would never become fully funded.
Grinnell said STRS has had to contend with the challenge of being an extremely mature pension fund: Essentially, there is more money being sent out to retirees receiving benefits now relative to the future contributions the pension fund can expect from current and future teachers.
“Here’s where STRS is a little bit of an unusual situation because it is a fixed-rate plan,” Grinnell said, “so both the benefits and the contributions are essentially fixed by statute. So most plans, if they have a bad year in terms of investment performance, the contribution rate goes up the following year to fill that hole. That doesn’t happen at STRS.”
Grinnell said when a pension fund is both a mature plan and has that fixed-rate contribution and fixed benefits, it’s very difficult to recover from any kinds of market downturns. He noted that all five of Ohio’s state retirement systems have that fixed-rate structure.
“Most other public pensions do not have that kind of structure,” he said, “and I think that tends to work all right for an immature plan, a plan that’s growing and not paying out a lot of benefits relative to the contributions.”
STRS, however, is not growing. As of June 30, 2023, the number of active teachers participating in STRS was 175,032, down from 179,944 as of June 30, 2003, according to actuarial valuation reports for those years. However, the number of retirees and beneficiaries receiving benefits rose to 156,511 as of June 30, 2023, up from 108,294 retirees and beneficiaries 20 years earlier.
“An important thing here is Ohio’s population has been pretty stagnant for the last 25 years, in particular the school age population. That’s actually been shrinking,” Grinnell said.
Beginning in the 1990s, he said, the population of school-age children in Ohio has been declining about 1% every year.
“It makes sense that if the school-age population is declining, there's a good chance that the number of teachers are going to go down eventually as well,” he said. “That's what the plan has seen. So that's another factor that contributes to maturity and the vulnerability of the plan to downturns. It's hard to recover that resilience.”
As of June 30, 2023, STRS' funding ratio was 81.3%, according to its latest actuarial valuation report.
Effects of the law
One result of that level of maturity was the 2012 pension reform law, which increased the employee contribution rate to 14% from 10%. However, the employer contribution rate remained steady at 14%, a significant point of contention among teachers.
The pension reform law also amended Section 3307.67 of the state’s revised code to state it was the intent of the Ohio General Assembly to “recognize that no member has a legitimate expectation of any particular future cost-of-living adjustment, or payment of future cost-of-living adjustments at any particular time, under Ohio law.”
As a result, the law modified the COLA, noting in the uncodified section that modifying future COLAs was "the most effective means for restoring the long-term solvency" of the defined benefit plan.
The law also requires STRS to have a funding period of no more than 30 years or to submit a plan to the Ohio Retirement Study Council, the state’s agency overseeing all the retirement systems, to reduce its funding period to reach this target.
While the board was able to approve a 2% COLA every year until 2016, Grinnell said an experience study and asset-liability study conducted early in 2017 showed a number of assumptions needed to be changed, which would increase the calculated liabilities of the system.
New assumptions
The Segal Group, at that time the Ohio STRS actuarial consultant, conducted the studies.
“It was clear that the mortality experience of the system was different than the (earlier) assumption,” Grinnell said. “Mortality had improved … over the last 20 years, and the assumption hadn’t really reflected that. So in the 2017 experience review, there was a change to the mortality assumption.”
At the same time, he said, the pension fund had an assumed rate of return of 7.75%.
“Risk-free rates had gone from 7%-plus in the early 2000s down to around 3% at that point in time,” Grinnell said.
“So that assumption was also under a lot of scrutiny, they lowered the assumed rated of return from 7.75% to 7.45%,” which increases how much is needed to be contributed to the plan.
Complicating things further, the pension fund had just emerged from an anemic year of investment returns, with a net return of 0.92% for the fiscal year ended June 30, 2016, according to that year’s comprehensive financial annual report. While it beat its benchmark return of 0.45%, it was still well below STRS’ assumed rate of return.
Grinnell said the rising mortality assumptions, the lowering of the assumed rate of return and a low investment return for the prior fiscal year all hitting at the same time meant the “funding ratio was going to drop substantially due to the combined impact of all these things at that point in time.”
The result was that STRS’ funding period would exceed 30 years and a plan would have to be submitted to the Ohio Retirement Study Council on how to get it back under that benchmark.
According to Grinnell, the Segal Group told the board the only substantial thing that was within its authority to do was reduce the COLA.
“So at that point in time, the board made the painful decision to reduce that COLA from 2% down to 0%,” Grinnell said.
Unfortunately, the COLA would remain at zero through fiscal year 2022, a period that saw significant market volatility in part due to the COVID-19 pandemic.
It wasn’t until fiscal year 2023 that retirees received a 3% COLA for that single year. However, that has not been repeated.
By Rob Kozlowski Pensions & Investments October 2, 2024