Pension Reform Bills Take Baby Steps, Avoid Big Changes
Minor reforms to Ohio’s five public employee pension funds signed by Governor John Kasich at the end of September will result in commonsense changes, but will likely require additional legislative action in the future. Rather than take bold steps to phase out antiquated, bureaucratic defined benefit plans, the Ohio General Assembly opted for a number of small tweaks to the ailing pension systems.
Earlier this year, the latest in a series of studies from the Pew Center on the States warned of unfunded state pension liabilities exceeding $1 trillion nationwide. In an updated fact sheet published June 18, 2012, Pew indicated Ohio’s total pension liability was greater than $200 billion – with less than the generally-accepted 80 percent of liabilities funded.
“Ohio failed to consistently pay its full annual pension contribution from 2005 to 2010. The system was 67 percent funded in fiscal year 2010 and faced a $58 billion funding gap. Most experts agree that a fiscally sustainable system should be at least 80 percent funded,” Pew wrote.
The Republican-controlled Ohio Senate unanimously passed reforms to the Ohio Public Employees Retirement System (OPERS), State Teachers Retirement System of Ohio (STRS), Ohio Police & Fire Pension Fund (OP&F), Ohio Highway Patrol Retirement System (HPRS), and School Employees Retirement System of Ohio (SERS) in May 2012. The GOP-controlled Ohio House passed its versions of the five bills on September 12, 2012, with the only vote against coming from Republican Danny Bubp, who opposed the STRS reforms as too lenient.
Each of the reform packages will begin to take effect in January 2013, with most provisions phased in gradually for those near retirement. The bills make a number of seemingly obvious changes to the defined benefit plans, increasing employee contributions while updating rules for retirement ages, service credit purchases, cost of living adjustments, and final salary determinations.
However, the reforms also represent a failure by Republicans to phase out top-down defined benefit pensions in favor of defined contribution plans like the 401(k) plans common in private industry.
An Ohio Retirement Study Council (ORSC) overview of the bills contains 26 pages of tweaks to OPERS, STRS, OP&F, HPRS, and SERS – but even actuaries hired by ORSC, a state government body, acknowledge that more changes will likely be necessary to keep the pension funds afloat.
“Because the 30-year plans were designed (appropriately) to make the least amount of cuts to pensions consistent with the 30-year objectives, and investment returns since June 30, 2011 have been less than actuarial expectations, it is likely that further adjustment will be required for SERS, STRS, OP&F and HPRS,” wrote Pension Trustee Advisors (PTA) and KMS Actuaries, LLC in a July 2012 report to ORSC.
After conducting interviews with ORSC members, PTA and KMS wrote, “The councilmembers were generally in agreement that the defined benefit (DB) delivery model be preserved, but subject to management of the risk to the taxpayers of increased contributions. Some councilmembers articulated a personal preference for a defined contribution (DC) model or hybrid model, but realized that the DB model had a long history, was very popular among the workforce, and would likely be preserved.”
“Other councilmembers would not be opposed to increases in the employer contributions, but that was generally not considered fair to the Ohio taxpayers, who are currently under particular financial constraints,” the pension analysts continued.
Taxpayers can look for these reforms to be used in the future as evidence the pension funds have taken a haircut and deserve higher taxes.
PTA and KMS added, “Councilmembers do not want Ohio to be in the position where DB plan investment losses generate increased costs to taxpayers. If the DB plans can be structured in a manner to eliminate this risk, there would be no immediate need to consider a change to a pure DC approach.”
In other words, trimming benefits, tweaking eligibility, and increasing employee contributions allowed Ohio’s Republican leadership to avoid even discussing a gradual shift to defined contribution plans, which would be truly unpopular among government workers in large part because public employee unions thrive on collectivism and bureaucracy.
While the legislature reviewed proposals from the five state pension systems and debated how to keep them viable, STRS touted a list of talking points from the D.C.-based National Institute on Retirement Security (NIRS) asserting, “the starting point for discussions with the Ohio Legislature for needed changes in state statute must be the preservation of the Defined Benefit pensions offered by each system.”
NIRS reached this conclusion by treating defined benefit payments to pensioners as free money, insisting that in 2006 defined benefit pensions “supported more than 79,000 Ohio jobs,” “accounted for $702.5 million in state of Ohio and local tax revenue,” and “saved taxpayers $7.3 billion in public assistance expenditures nationally.”
As indicated by the fact that no Democrat in the General Assembly voted against any of the pension reform bills signed by Kasich in September, the plans were endorsed by the pension systems themselves and by the Ohio Education Association (OEA).
Although the STRS bill will increase teachers’ contributions to their pensions, it will not directly impact union power – unlike the 2011 union reform bill demonized by OEA and other unions as an “attack” on workers.