Ohio Braces For Pension Cuts?

Alan Johnson of The Columbus Dispatch reports, Ohio’s public-employee pensions face cutbacks:

Public-employee pension funds are big business in Ohio, providing a safety net for 1.75 million people.

There’s a lot riding on them.

Collectively, Ohio’s five public pension funds have $192 billion in assets and last year paid out more than $15 billion in pension benefits and $1.1 billion in health-care benefits. They are not required by law to provide health insurance, but all five do. Whether they will in the future is uncertain.

Although the funds have been mostly reliable and financially sound for decades, recent economic downturns, soaring health-care and prescription-drug costs, and the increased longevity of retirees have taken a toll. Several of the funds are reducing or eliminating cost-of-living adjustments, cutting subsidies and increasing health-care premiums.

The five funds are the Ohio Public Employees Retirement System (public workers); State Teachers Retirement System (teachers); School Employees Retirement System (school-bus drivers, cafeteria workers, janitors, secretaries); Ohio Police & Fire Pension Fund (municipal police officers and firefighters); and the Highway Patrol Retirement System (state troopers). The Ohio General Assembly has oversight of all five through the Ohio Retirement Study Council.

The big question: How long can the pension funds hold out financially in this economic climate? A study released in December by the Mercatus Center at George Mason University painted a gloomy picture.

“Ohio’s four largest public pension plans are severely underfunded based on traditional metrics of pension solvency, and they are only guaranteed to be able to finance their promised obligations for roughly the next decade without additional taxpayer contributions,” economists Erick Elder and David Mitchell wrote.

“However, the funding ratio does not take into consideration the investment risk associated with pension-plan assets; even if Ohio’s pensions were fully funded today, they would still only have a fifty-fifty chance of being able to fulfill their promises in the year 2045.”

The School Employees Retirement System

Members of this pension fund are the lowest-paid of the five, averaging about $24,000 a year, and the fund is under fire from members and the Ohio Association of Public School Employees, a labor union, because of proposed changes in cost-of-living adjustments.

Retirees receive a 3 percent COLA one year after retirement, but fund administrators propose eliminating the COLA from 2018 to 2020 and then capping it at 2.5 percent thereafter. Retirees would get no COLA until their fourth anniversary.

About 200 union members marched last week from the Statehouse to the fund headquarters at 300 E. Broad St. in protest. Some said they are worried that the proposed COLA changes signal bigger problems.

“The fear people have is not having a pension,” said OAPSE President JoAnn Johntony, 76, head custodian in the Girard City Schools in Trumbull County, where she has worked for 50 years. “To try to solve these problems on the backs of school employees is wrong.

“We have to live and pay bills like everybody else,” Johntony said. ’They’re not seeing the human side of this. They’re not seeing how this affects our daily lives.”

Lois Carson, 57, the union’s vice president and a secretary in the Columbus school district, said she will live on her late husband’s small pension and her pension when she retires.

“I will probably be moving in with my kids to survive,” she said. “I’m very scared about it.”

Facing increases in health-care costs, SERS retirees will be making less in retirement benefits than they did 30 years ago, Carson said.

The fund must get legislative approval for the COLA changes. Bills are pending in both the Ohio House and Senate. Administrators say the changes are needed to stabilize the fund and continue to provide health-care benefits that otherwise probably would run out in less than a decade.

The Ohio Retirement Study Council recommended last week that the legislature approve the COLA adjustment for the school-employees fund.

Ohio Public Employees Retirement System

With 1 million active members and retirees, this is the largest public pension fund in Ohio and the 12th-largest public retirement system in the nation. It affects about 1 in 12 Ohioans and has 3,680 public employers in the system.

Changes began in 2012 when the General Assembly approved cost-cutting measures.

OPERS spokesman Todd Hutchins said the changes keep the health-care package intact “for the foreseeable future.” Hutchins said the fund is 80 percent funded for the future, falling within the 30-year requirement under state law for paying off pension liabilities.

Some of the changes, however, will make it harder for younger retirees and spouses of retirees. New retirees will pay about $219.33 in monthly health premiums, more than six times what retirees paid last year. The fund is also ending both premium payments and reimbursement of some Medicare expenses for the spouses of members.

Ohio Police & Fire Pension Fund

The fund provides pension, disability and optional health-care benefits to full-time police officers and firefighters and their dependents.

“We continue to meet the state requirements as far as our funding level. That’s something we have to look at every year,” spokesman David Graham said. “We must be able to pay off our unfunded liabilities in a 30-year period, and we’re at 29 years.”

But changes are coming for fund members as trustees begin the process of providing stipends to retirees to seek their own health-care coverage rather than providing health insurance for them.

John Gallagher, the fund’s executive director, told The Dispatch, “Our investment returns in 2016 were excellent, with a net 10.9 percent return for the year. Our current challenge is finding a way to sustain a health-care option for our retired population. While it is not a requirement that we provide a health-care plan, we realize it is a vital part of a secure retirement.”

State Teachers Retirement System

Like other public employees, retired teachers face big changes in their benefits. As of July 1, the system will temporarily eliminate all new cost-of-living increases in pensions to “preserve the fiscal integrity of the system.” Spokesman Nick Treneff said the situation will be re-evaluated in five years.

The system previously reduced the annual increase to 2 percent from 3 percent.

Treneff said the decision to eliminate the COLA resulted from three factors: lower-than-expected returns on investments, a larger-than-expected payout in pension benefits, and new mortality statistics showing that retirees are living longer, thus increasing the fund’s financial liability.

“Health care isn’t a requirement, but we know members value it,” Treneff said “To have good coverage is essential to the life of retirees. We don’t divert any money to health care from employee contributions.”

Ohio Highway Patrol Retirement Fund

With 3,200 members, the fund is by far the smallest pension system, and it has had to increase health-care premiums annually to remain in the black.

Like the other funds, the patrol system is struggling to meeting costs, said Mark Atkeson, the executive director. “Health-care costs have skyrocketed. The collapse of 2008-2009 set everything back, and we’re not completely recovered from that.”

Last week, the retirement study council approved removing a provision allowing patrol members to retire at age 48 with unreduced benefits; it also approved some reductions in off-duty disability and survivor benefits. The changes need the approval of the legislature.

Although those adjustments will help, the system’s health-care fund is projected to run out of money in less than a decade, Atkeson said.

Michael Katz of Chief Investment Officer also reports, Ohio PERS Considers Cutting COLA for Retirees:

The $90.6 billion Ohio Public Employees Retirement System (OPERS) said it is considering limiting the cost-of-living adjustments (COLA) for its retirees.

“Our retirees are living longer, requiring us to pay benefits for many more years than in the past. Further, we are in a decades-long period of low inflation,” said OPERS Executive Director Karen Carraher in a mailer to plan participants. “With this environment in mind, we have begun to gather feedback from members, retirees, and stakeholder groups about potential changes to the cost-of-living adjustment that would affect current retirees.”

OPERS started providing a COLA in 1970, and it has changed several times since then, according to Carraher, who said the purpose of a COLA is to lessen the effects of inflation on participants’ pension benefit, not to fully offset it. OPERS currently has a fixed 3% COLA for its retirees. For those who retired after January 2013, that COLA is scheduled to match the Consumer Price Index (CPI), with a maximum adjustment of 3% starting in 2019.

“The CPI has topped 3% only five times during the past 25 years, so OPERS’ fixed COLA has resulted in a net benefit increase for many retirees,” said Carraher. “Simply put, the COLA we are paying is exceeding the CPI in these low inflationary times.”

Because of this, OPERS has proposed a plan to base the COLA for all retirees, including current retirees, on the CPI capped at 3% starting in 2019. For plan members who retired before 1990, and who have seen inflation reduce their purchasing power, Carraher said OPERS could provide a one-time benefit increase.

“We are also looking at other options,” said Carraher, “including a COLA freeze and a COLA based on the CPI capped at 2.5% or 2%. There are many other scenarios that could be added as we gather feedback.”

Any changes to the COLA require approval by the OPERS Board of Trustees as well as the Ohio Legislature. According to Carraher, OPERS is funded at 80%, and is well within the state-mandated limits for pension fund solvency.

“However, we can’t always count on the future reflecting the past,” she said. “In order to retain our strong financial position, and continue to offer the COLA to current and future retirees, we are considering these steps now. As we go down this path together, it is important to stress we are gathering feedback and will move through a very open and public process to evaluate changes.”

As you can read, things aren't looking good at Ohio's public sector pensions and active and retired members are right to be concerned.

Ohio's pension woes are part US pension storms from nowhere which I recently covered in detail. It's not as bad as Kentucky, where public pensions are finished and I keep reading articles on this website that it's only getting worse.

But Ohio has its pension issues to contend with and it needs to get real on public pensions to sustain them over the long run.

This week, I covered the University of California's pension scandal where I made the following recommendations to shore up their pension plan:

• Immediately cap all pensions to a certain amount, including those of these pension "elites" and let them take you to court if they feel you are reneging on their contract.
• Immediately raise the contribution rate and cut benefits (fully or partially remove cost-of-living adjustments) until the plan gets back to fully-funded status.
• Make pension contribution holidays illegal at UC and everywhere in California and the United States. Period.
• Raise the retirement age of UC's professors to 65. If my 86 year-old father who like most doctors everywhere has no pension can still work as a psychiatrist three times a week, these professors can tough it out in academia till 65 (most work well past that age).
•  Forget shifting new professors to defined-contribution (DC) plans. The brutal truth is they're horrible and will only ensure pension poverty down the road. UC needs to curb pension largess but shifting to DC will only ensure pension poverty and make it harder to attract qualified staff.
• Follow Canada's CAAT Pension Plan when it comes to the gold standard in pensions for university defined-benefit pensions. CAAT Pension Plan is a jointly sponsored plan where sponsors share the risk of the plan if it goes into deficit. You can read all about this plan here and read their 2016 annual report here.

Now, I realize it's hard capping pensions after the fact and illegal but dire situations require drastic actions.

In Ohio, things aren't that bad but I would definitely make some recommendations:

• Introduce a shared-risk model and make sure employees and the plan sponsors share the risk equally. This effectively means when the plan runs into trouble, contributions are raised and benefits are cut (fully or partially remove COLAs) until plans are back at fully-funded status.
• Alamagate all of Ohio's public sector plans into OPERS which is actually well run and has better governance than all the other plans. When it comes to pensions, bigger is better as long as the governance is there.
• Get real on investment assumptions and future returns and prepare for the worst bear market ever. 

I'm dead serious about that last one and added to my US long bonds (TLT) at the open this morning as everyone got excited about tax cuts and bonds sold off (click on image):

Too little, too  late. Don't get excited, be prepared here, the pension storm cometh and it will wreak havoc across US public and private pensions, especially once deflation strikes the US.

Below, the Silver Report Uncut reports the pension crisis has now moved to Ohio. Faced with no funding Ohio scrambles to hold on by eliminating the COLA cost of living adjustment. Pensioners worry about their ability to afford retirement.

Take these doomsday clips with a shaker of salt, the situation isn't apocalyptic, these are long-dated liabilities, but it's clear there needs to be certain changes, including changes to risk-sharing and governance, to bolster Ohio's public defined-benefit plans over the long run.

But make no mistake, the US pension crisis is here to stay, it's deflationary and it will exacerbate pension poverty and keep us in a low growth, low inflation world for years.