Ohio STRS Submits Funds Reform Package

September 1, 2009 (PLANSPONSOR.com) - The board for the State Teachers Retirement System of Ohio (STRS) has approved a sweeping package of changes designed to strengthen the system's financial condition.

According to a STRS news release, the plan includes an increase in contributions; an increase in final average salary years; a change in eligibility for retirement; a change in the benefit formula; and a reduction in the annual cost-of-living adjustment.

“Without these changes, STRS Ohio would eventually be unable to pay future benefits,” officials said in the news release. “This plan enables the Retirement Board and staff to meet their fiduciary responsibility to help ensure the long-term solvency of STRS Ohio for future generations of teachers. ”

STRS Ohio projects that the changes would save $8.99 billion in future liabilities and would bring the pension fund to a 33.4-year funding period from its current status of infinity, the announcement said. Further, the current 1% employer contribution to the health care fund continues.

The news release said STRS and Ohio’s four other public pension systems will present their plans to the Ohio Retirement Study Council (ORSC) on September 9 for either maintaining or returning to a 30-year funding period. The ORSC is then expected to help draft proposed legislation to present to the Buckeye State’s legislature and governor to implement the suggestions.

Before the market downturn, STRS Ohio had a funding period of 41.2 years, exceeding state statute’s 30-year maximum funding period. Factors such as members living longer caused a reduction in available funds to pay off accrued liabilities over time.

Contribution Increase

Increase member contributions by 0.5% per year beginning July 1, 2011, to a total of 2.5% on July 1, 2015.

Increase employer contributions by 0.5% per year beginning July 1, 2016, to a total of 2.5% on July 1, 2020.

Currently, STRS Ohio members pay 10% of their salary to STRS Ohio, and employers pay 14% of total teacher payroll in lieu of paying into Social Security. This plan component increases member and employer contributions by a total of 5% by July 1, 2020. The member increase would be phased in at 0.5% per year, beginning July 1, 2011, until 2.5% is reached on July 1, 2015. The employer increase would be delayed for five years, when it would be phased in at 0.5% per year, beginning July 1, 2016, until 2.5% is reached on July 1, 2020. Ultimately, STRS Ohio members would contribute 12.5% and employers would contribute 16.5%.

Increase in Final Average Salary (FAS) Years

FAS calculation to be based on five highest years of earnings beginning August 1, 2015, versus the current three years, beginning August 1, 2015.

Change in Retirement Eligibility  

Increase years of service required for retirement, beginning August 1, 2015.

The recommended change increases the number of years required to be eligible for retirement. Beginning August 1, 2015, members can retire at any age with 35 years of service; at age 60 with 30 years of service; or at age 65 with five years of service.  Members who meet age and service eligibility for service retirement as of July 1, 2015, under the existing rule retain their eligibility.

Benefit Formula Change  

New formula would be 2.2% per year for the first 30 years of service; 2.5% per year thereafter, beginning August 1, 2015.

The 35-year enhanced benefit is no longer needed to encourage teachers to work longer and is eliminated. Those who have 30 years of service; who are age 55 with 25 years of service; or who are age 60 with five years of service as of July 1, 2015, receive the greater of:

(a) The benefit as of July 1, 2015, under the current formula; or

(b) The benefit upon retirement under the new formula.

Members who are eligible for service retirement will receive no less of a base pension benefit than they could have received on July 1, 2015. Under the new formula, at the end of a 35-year career, teachers would receive 78.5% of their final average salary; teachers who retire at age 60 with 38 years would receive 86% of final average salary.

COLA Reduction  

Beginning July 1, 2011, current retirees would receive an annual 2% COLA; members retiring on July 1, 2011, or later would receive a 1.5% COLA each year.  Currently, the COLA is 3%.

The news release said the proposal's overall goals were to: 

  • Preserve the defined benefit plan for Ohio's public educators. STRS Ohio members do not have to worry about outliving their benefits.
  • Continue to offer a retirement plan that will help Ohio's public schools, colleges and universities recruit and retain quality educators. 
  • Allow for current and future active members, retirees and employers to collectively contribute to a solution.
  • Provide a transition period for those teachers who are close to retirement, while recognizing that those further out from retirement have more time to plan for their future financial security.
  • Allow members to continue to control their retirement decisions and not be "forced" out. This mitigates a potential "stampede" of members who want to retire before changes go into effect.
  • Preserve all past cost-of-living adjustments (COLAs) and ad hoc increases for current retirees.
  • Allow retirees' pensions to continue to grow in the future, but at a slower rate.