The Senate Insurance, Commerce & Labor Committee moved Senate Bill 343 based on recommendations that the OPERS Board approved in late 2009 and early 2012. You can read highlights of our proposal here. If the full Senate OKs the bill, it will go to the Ohio House of Representatives for committee review.

The Senate committee heard proponent and opponent testimony at a hearing yesterday. Representatives of the Ohio State University and the Inter-University Council testified in support of the bill. Testifying in support of the legislation, but in opposition of the minimum earnable salary provision, were representatives from the Ohio Municipal League, the Ohio Association of Election Officials and the Ohio Township Association.

Under the current minimum earnable salary provision, OPERS members must earn at least $250 per month to qualify for full-time service credit that month. The Board proposed raising that earnings floor to $1,000 per month. At its February meeting, the Board modified the recommendations by phasing in the higher salary amount.

Implementation would take place over three years: $750 per month during the first year of implementation, $875 the second year, then $1,000 beginning in the third year after a pension bill is signed into law, indexed for inflation. If members make less than the full monthly amount, they would receive a pro-rated amount of credit toward their pension benefit and access to health care coverage.

OPERS will continue to work diligently with members of the Ohio General Assembly to pass pension legislation in 2012. While the action taken by the Senate is promising, the House of Representatives has said it will consider the bill after an actuarial study by the Ohio Retirement Study Council is concluded. We will keep you updated on all events surrounding pension legislation. Your continued show of support is important, so please take action and let your legislators hear from you.

Carraher addressed the Senate Insurance, Commerce & Labor Committee on Senate Bill 343, co-sponsored by Senate President Tom Niehaus and Senate Minority Leader Eric Kearney. You can read her full testimony by clicking here.

Senate Bill 343 was based on pension redesign recommendations made by the Ohio Public Employees Retirement System Board of Trustees for OPERS members and retirees. Sen. Niehaus told reporters the full Senate could vote on the measure as early as next week. Ohio House leaders indicated yesterday they preferred to review the actuarial study commissioned by the Ohio Retirement Study Council before acting on pension legislation.

The major changes we have proposed include raising age-and-service limits for retirement eligibility, tying the cost of living adjustment to the Consumer Price Index, changing the final average salary calculation and extending the time it takes for the benefit multiplier to increase. A full analysis of all the Board’s recommended changes can be found here.

Carraher told the Senate subcommittee that the OPERS Board “did not enter into these decisions lightly.”

“The final product was the result of very deliberate and careful planning so as to strike a balance … between not proposing enough changes, which will require additional, more drastic changes at a later date, or proposing changes that are too severe, which will cause undue hardship on our members,” she said. “In addition, the proposed plan design changes will enable OPERS to preserve future funding for discretionary access to health care coverage for our retirees, coverage we believe is an integral part of retirement security.”

In November 2009, the OPERS Board of Trustees approved plan design changes that will help us maintain our retirement fund for the long term. There were several reasons for this plan. Among them:

• Longer life spans: Simply put, people are living longer, and we need to alter retirement benefits to enable us to provide them for a longer period of time than in the past.
• Changing demographics: As the baby boomer generation ages, we expect an influx of retirees that will be much higher than normal.
• Equity among members: The proposed changes will help minimize the subsidization of member benefits that are paid for by other members.
• Economic factors: The changes ensure that benefit levels are funded by employee and employer contributions, as well as investment earnings.

Five key issues

The OPERS board amended part of the plan proposal in February 2012. The plan now strikes a balance between the need for more drastic changes later and causing undue hardship on members now. The plan has five key components:

• Age and service eligibility: Our proposal would add two years to the current plan, requiring a minimum age of 55 and 32 years of service or age 67 with five years to retire with an unreduced benefit. The chart you can access here provides details for retiring with an unreduced as well as a reduced benefit. The document includes a transition plan for members who are close to retirement.
• Final average salary (FAS): The plan would change the FAS calculation from the three highest calendar years of earnings to the five highest years.
• COLA: The cost of living adjustment would be tied to the Consumer Price Index, up to 3 percent each year, instead of a consistent 3 percent annual increase. A transition plan applies here, too.
• Benefit formula: For an unreduced benefit, all members would receive 2.2 percent of their FAS for all years of service up to 35, then 2.5 percent thereafter.
• Age and service reduction factors: Ohio law currently establishes the factors at 75 percent to 100 percent of the base benefit for members selecting to retire early. The OPERS Board recommends that in the future an actuary should establish these factors.

Impact on health care

The OPERS Board also is considering significant changes to our retiree health care plan, because we project the expenses to continue to outpace both the employer contributions that are set aside to support the health care plan as well as the plan’s investment returns. It’s critical to note that Ohio law requires us to meet our pension obligation but does not require health care coverage. Thus, according to state law, all of our members’ contributions to OPERS go toward their pension benefits.

The health care coverage OPERS offers to retirees is separate from the pension design changes because it’s not required by statute. But the delay of legislation certainly will directly affect the Board’s ability to provide access to health care coverage. Absent pension legislation, our health care assets would be spent down in eight years if we maintain the current plan.

In other words, unless pension legislation passes in 2012 there will need to be major changes to the health care plan. The OPERS Board must make changes to the current health care coverage plan even if the Ohio legislature passes our proposed plan design changes. But they won’t be as drastic as they’ll have to be if our proposed legislation does not pass.

Additional proposals

There are many other changes the Board has recommended to plan design that are not subject to the transition plan. They include:

• Making the purchase of service credit actuarially neutral
• Raising the minimum earnable salary
• Eliminating two alternative benefit calculations
• Creating an anti-spiking provision
• Making changes to the disability program
• Calculating intersystem transfers
• Changing the criteria for membership determinations
• Limiting retroactive retirement benefits to 90 days

Pension legislation timeline

As we stated earlier, the OPERS Board approved pension plan changes in November 2009. No action was taken on the proposal in 2010.

In early 2011, the Ohio Senate and Ohio House of Representatives each introduced placeholder bills for pension redesign. OPERS testified several times in support of the passage of the bills.

In the summer of 2011 an actuarial study of the pension plans’ proposals was requested by the Ohio Retirement Study Council, a legislative body that oversees the state’s public pension plans.

We need your help

There recently has been renewed interest in passing pension legislation in 2012, and it’s vitally important that we secure your help. We estimate that delays in passing these changes have cost OPERS more than $700 million in unrealized savings, or about $1 million per day.

We ask you to support OPERS’ recommended changes to help us preserve your benefits. Sign and mail the postcard you may have received last week from OPERS. If you have opted for email correspondence only, go online to www.opers.org, sign the petition we have created, email your legislator, and tell your friends and family about the need for pension legislation this year.

Also, stay abreast of legislative hearings. We will provide the most up-to-date information and the latest news involving your pension system through our PERSpective blog, OPERS website, Facebook and Twitter sites.

With your assistance, we can continue to provide you the retirement security that benefits all Ohioans.

More than two years ago the Ohio Public Employees Retirement System recommended changes that would help keep us strong and would enable OPERS to continue to provide access to health care coverage for retirees. Sometime this week you will receive either a letter or an email from our executive director, Karen Carraher, urging you to remind legislators that we need pension legislation to pass in 2012. The letter includes a postage paid postcard that you can return to us, and the email contains links to the OPERS website.

What you can do

• Return the postcard: The postcard included with the letter is designed to show support of proposed pension changes currently before the legislature. Please sign and mail the postcard to OPERS.
• Visit the newly redesigned OPERS website at www.opers.org. Click on the ‘Take Action Now’ button at the top of the page to access tools to let your voice be heard, including:
• Sending a letter of support: The OPERS Legislative Action Center (click on “Contact your Legislator”)  includes a letter that you can sign that can be emailed immediately to your representatives in the Ohio House and Senate and other elected officials.
• Signing the online petition: Our website now contains a petition that asks the legislature to pass pension redesign legislation this year. Members can sign it electronically.
• Telling a friend: At the OPERS Legislative Action Center, you can send an email to up to 10 of your friends and family members at a time, letting them know that you showed your support and suggesting that they, too, contact their legislators.

Why changes are necessary

Changes to the pension plan are necessary to maintain pension fund solvency as required by law. These changes have been pending since November 2009 when the OPERS Board of Trustees developed a plan to address the long-term solvency of the fund and provide retirees with access to health care coverage. Delays in the legislative process have caused OPERS to forfeit more than $700 million in potential savings—that’s nearly $1 million per day.

The proposal will allow us to maintain health care coverage for current and future OPERS retirees. Health care is expensive, and the cost rises every year. OPERS currently is developing changes to the health care plan, and passage of pension legislation will allow us to minimize their impact.

OPERS needs legislative action this year. If pension legislation is not passed in 2012, we will have to develop more far-reaching health care changes that will reduce our annual health care expenditures by more than two-thirds, from approximately $1.5 billion to $500 million. This will affect both current and future retirees.

We need your support

Your support is critical to prevent further delay. Please let legislative leaders and elected officials know that you support the plan proposed by the OPERS Board and that legislative action is necessary in 2012.

OPERS will deliver all postcards, letters and the signed online petitions to your legislators to demonstrate the popular support for legislative action in 2012. We look forward to working with you to preserve the benefits that provide Ohioans with retirement security and annually pump more than $5 billion into Ohio’s economy.

A proposal to declassify a board of directors is filed to require that all of the directors be nominated for election each year, rather than serving longer, staggered terms within a specified “class.” Companies often cite the practice of declassified boards with longer terms as a defense against takeovers. However, studies have shown that it can lead to less accountability and management oversight.

OPERS reviewed long-term performance and the classified board structure with five companies this year. After a series of discussions with company representatives, four of the five companies agreed to submit proposals at this year or at future shareholder meetings to declassify their boards.

The fifth company decided that it preferred to have the proposal voted on by its shareholders at the annual meeting. While the board recommended voting against it, the company’s shareholders supported the measure by a wide margin. OPERS is working constructively with the company board to implement an annual election of directors in the near future.

The OPERS Board of Trustees adopted a corporate governance policy and proxy voting guidelines in 2003, which are updated annually. Corporate governance encompasses the rights and responsibilities of a company’s board of directors, managers and shareowners. The Board has a quiet diplomacy standard in order to build relationships with directors and company representatives to provide shareholder value for investments held over the long term.

The OPERS corporate governance policy includes proactive initiatives to increase company disclosure and minimize conflicts of interest that can occur with companies, their boards of directors, executive staff and shareholders. The recently-released 2011 Corporate Governance Annual Report highlights our engagement with public companies.

Carraher was joined on the April 2 edition of the “All Sides with Ann Fisher” show on WOSU by Diane Oakley, executive director of the National Institute on Retirement Security. They talked about retirement issues on both a national and statewide level during the 1-hour program.

Carraher stressed the need for pension legislation this year in order to keep the OPERS pension fund strong and able to withstand the longtime ebbs and flows of the economy and changing demographics of our members.

OPERS is working with state legislators to pass the changes that the OPERS Board of Trustees passed in November 2009 and amended in February. The changes will also allow access to meaningful health care for OPERS retirees.

Issues such as the pending legislative changes and confusion over State Issue 2 caused many members concern in 2011, Carraher said.

“Last year we saw a 39 percent increase in retirement,” she said.

Both guests stressed the advantages of defined benefit pension plans. Oakley, whose organization provides valuable research on a wide range of retirement issues, said defined benefit plans are less expensive to maintain because of professional management.

“They have outperformed the employee selections in defined contribution plans,” Oakley said. “(Private-sector, defined contribution plans) are 1 percent lower in rate of return than the more balanced portfolios of the state retirement systems.

“That might not sound like much, but 1 percent over 30 years means you have 25 percent more to fund your retirement.”

Carraher reminded listeners that OPERS members contribute at least 10 percent of their salaries toward their pensions, and that Ohio is a non-Social Security state. That means career public employees in Ohio do not receive Social Security benefits. Instead, most have defined benefit pensions, such as the one provided by OPERS and the other four public pension systems, as their sole retirement income.

That is an advantage that provides security and peace of mind to many retirees.

“Defined benefit (pensions) are designed so you don’t outlive them,” she said. “They’re more efficient. You don’t have to be that investment expert. We have $73 billion and 55 employees in our Investment division. That’s their job, to make sure they earn that return that supports two-thirds of the benefit.”

To listen to the entire interview, you may click on this link.

While OPERS Board members have not settled upon any final health care changes, they have indicated preferences in many areas. Before the Board takes final action, OPERS staff will make presentations around the state and conduct a survey to gather feedback from members and other stakeholders. We will publish definitive dates, times and locations when the dates are set, and we encourage members to attend.

A final decision by the Board will be made this fall, with implementation beginning next year and final implementation in several years.

Although nothing specifically has been decided, the new health care plan may:

• Initiate a minimum age between 55-65 for members to become eligible for health care coverage.
• Increase minimum years of service for health care eligibility from the current 10 years to 15 or more years.
• Require more out-of-pocket costs for covered services.
• Increase premium costs.
• Eliminate coverage for spouses under age 65, and provide access, but no allowance, for spouses over age 65.
• Base premiums on age and years of service.
• Reduce or eliminate the Medicare B reimbursement.
• Introduce a new, personalized plan model for recipients with Medicare that will allow them more choices and greater affordability.
• Reduce the number of plans for non-Medicare participants.
• Transition some changes over time.

Why are we contemplating these major changes to our health care coverage?

The reasons include the continual rising costs of health care, the fact that life expectancies continue to grow, the doubling of the number of retirees over time because of the retirement of the baby boomers, and the lack of pension legislation passing.

One message is clear: OPERS cannot continue to maintain the same level of health care coverage to retirees and dependents over the coming years without rapidly exhausting all the money in the health care fund.

And without the passage of pending pension legislation that includes the Board’s proposed changes, the situation is even worse.

If pension legislation does not pass in 2012, OPERS will need to reduce the health care program by more than two-thirds, reducing annual expenditures from the current $1.5 billion to less than $500 million. This will result in drastic cuts to the health care program for current and future retirees.

OPERS currently directs a percentage of the employer contribution into the health care fund. In the absence of pension legislation, OPERS no longer will be able to set aside this money. Even with investment income, we project the value of the fund to decline to zero by 2020. By law, all of the employee contributions are directed toward pension benefits, not health care.

Even if legislation passes in 2012, the Board is planning to set our long-term health care funding rate at only 4 percent annually. Four percent is about half of what our current health care plan costs. We cannot support our current coverage levels at the 4 percent funding level.

However, the 4 percent funding level will allow us to retain our pension fund strength and still provide a meaningful health care coverage option for career employees. But it will not eliminate the need for us to make significant changes to health care.

Maintaining the status quo is not an option. As we stated in a blog last month, the challenges we face are too far-reaching to consider simply retaining the current plan.

We hope to soon provide details on our statewide informational sessions and our member survey. The feedback we receive from these meetings, and the survey results, will be shared with OPERS Board members so they can finalize the health care changes.

We understand that planning for retirement takes careful preparation, and one key component is health care. We encourage you to stay engaged with the process by attending a health care presentation, reading OPERS correspondence, and regularly checking the OPERS website for up-to-date information.

The National Conference of State Legislatures has released an informative report on this topic. You can read “State Pension Reform, 2009-2011,” by clicking on this link.

Some of the details:

• Over the three-year period, 30 states increased required employee contributions, but in only 10 cases were employer contributions decreased in return.
• Thirty-three states increased age-and-service levels necessary to retire, although in many cases they were for new hires only.
• Twenty-one states reduced cost-of-living adjustments, in some cases for current as well as future retirees.
• Only 17 states adopted longer periods to calculate final average salaries.
• Ohio and South Carolina are considering major policy changes. Our proposed changes include increased age-and-service levels, a longer period for final average salary calculations and tying the COLA to the Consumer Price Index. Employee and employer contribution rates are not increased.

The NCSL, in cooperation with the Pew Center for the States, has created a searchable database of additional pension changes that are pending in state legislatures. Users can look up various types of information for specific states, including defined benefit plan changes, cost of living adjustments, re-employed retirees and the purchase of service credit.

You can access the Pensions and Retirement State Legislation Database by clicking on this link.

For instance, in 2003 we established three plan tiers and began requiring 10 years of service time for members to become eligible for coverage. In 2007, we initiated a wellness program, required increased member cost shares and set a threshold of 55 years of age for covered spouses.

The retirement of the baby boomer generation, longer life expectancies and the fast-rising costs of health care have required the OPERS Board of Trustees to consider significant changes in order to preserve the program for as long as possible. These external forces on our program already are apparent: In 2010 we covered more than 217,000 lives, an increase of more than 33 percent from 2000.

Meanwhile, national health care expenditures have risen sharply. The Centers for Medicare and Medicaid Services says total spending on health care will top $3 trillion this year and rise to more than $4.2 trillion in five years.

These trends place OPERS’ health care program in a critical position. The OPERS $11.5 billion Health Care Fund is one of the nation’s best for public pension systems. Nevertheless, we are projecting the value of the fund to decline to zero by 2020.

Why?

In the absence of pension legislation that would significantly reduce our unfunded accrued actuarial liabilities, our Board of Trustees in 2010 voted to decrease funding to the plan to zero by the end of 2013, from the current rate of 4 percent. The board had to take this step, because its first obligation is to fund the pension benefit. Health care is not guaranteed and not required by law.

Without the pension design changes that our Board has been advocating since 2009, OPERS will need to significantly reduce the health care program by more than two-thirds, reducing annual expenditures from the current $1.5 billion to less than $500 million. This will result in drastic cuts to the health care program for current and future retirees.

We are hopeful that pension legislation will pass this year. Yet even if it happens, our long-term health care funding rate will be set at an annual level of 4 percent. That will allow us to retain our pension fund strength and still provide a meaningful health care coverage option. It will not eliminate the need for us to make significant changes to the health care program.

Maintaining the status quo is not an option. The challenges we face are too far-reaching to consider simply maintaining the same plan.

With that in mind, we have been planning a series of changes to our plan. The OPERS Board has been discussing key issues for many months now, focusing on providing a health care program for career employees.

First, OPERS staff is scheduling a series of presentations to explain the anticipated changes and gather feedback from our members and other stakeholders. These interactive sessions will be held around the state in May, June and July. We will publish definitive dates, times and locations when the dates are set, and we encourage our members to attend.

In addition, we will survey our members about suggested changes to our health care program. The feedback we receive from these meetings and the survey results will be shared with OPERS Board members so that they can finalize the health care changes.

Adoption of the Board-approved plan by the Ohio General Assembly will allow us to avoid the two-thirds reduction in our health care program and continue to offer it to the career public employee well into the future.

We understand that planning for retirement takes careful preparation, and one key component is health care. We encourage you to stay engaged with the process by attending a health care presentation, reading OPERS correspondence, and regularly checking the OPERS website for up-to-date information.

The chief tool proposed by the OPERS Board is what we call the contribution-based benefit cap. It considers the member’s career contributions toward his or her pension, in addition to the final average salary, in determining one’s annual benefit.

Many of our members have responded to our social media discussions of this benefit cap by asking for more examples. We hope the following examples provide clarification of this issue. As we stated in the first blog on the subject, if the cap had been in place, it would have applied to only 2 percent of new retirees from 2006-10.

We repeat: The contribution-based spiking proposal will not impact members who have had normal raises and promotions throughout their careers. Rather, it is meant to temper benefit payouts that are out of line with a member’s career contributions that ultimately are subsidized by other members.

It is important to remember that this proposal requires the passage of legislation by the Ohio General Assembly prior to implementation.

The following examples help explain the benefit cap, and show that the cap only applies in unique circumstances with fact patterns that do not represent the typical career for public sector workers.  In addition, there are two graphics below that illustrate the examples.

For purposes of these examples, certain assumptions have been made:  the members began public service at age 23 and worked for 32 years.

• “Al Steady”: This member received annual salary increases over his career and never was promoted. His five-year FAS was $37,481, and the accumulated contribution that represents his pension contribution, plus interest, was $85,325. Thus, Al would receive an uncapped annual pension benefit of $26,387.
   
• “Bea Drop”: Bea worked for 22 years with a starting salary of $50,000 and annual raises, making over $100,000 in her last few years. Then, she moved into a part-time job with a pay cut to $13,938 and earned 4 percent annual raises for 10 years thereafter. Even though she had the salary drop and moved to part-time status, her annual pension benefit of $74,275 would be uncapped because of her high level of employee contributions over time compared to her final average salary of $105,505.
   
• “Carl Ladder”: Carl received annual increases. But he also received a promotion every five years. He received a pay increase of $20,000 with each promotion, so his compensation chart looks like a stair step. Carl ended his career with a high salary ($231,082), but because of his significant contributions, he retired with an uncapped benefit of $147,385.
   
• “Dan Spike”: Dan began his career with a salary of $12,000 and was earning a modest annual raise of 1 percent for 22 years. Then, he moved into a job that paid $100,000 more than his then-current salary of $14,789. That compensation spike later resulted in a benefit cap. Even though he worked for 10 years at the higher salary, his benefit would be capped at $68,481 instead of the projected $86,648 because his contributions were out of line with his FAS.
   
• “Erin Jump”: Like Dan, Erin began her career making $12,000 in salary and received modest, 1 percent, raises each year for 27 years. Then, in the last five years of her career, she “jumped” to a new job paying $100,000 more than she was earning. Because of this change, her lifetime contributions were actually less than her five-year FAS. Her annual benefit would be capped at $44,199, instead of the $82,986 she would have received without the contribution-based benefit cap.

The contribution-based cap proposal would not have a transition plan, so it would apply equally to members of Groups A, B and C who have not contributed enough in employee contributions upon retirement.

We hope that these examples help to illustrate that the proposed benefit cap, and that the issue only applies to a small subset of our membership. Members who are able to spike their final average salaries have their benefits subsidized by members who do not spike, and this cap helps to control that disparity.

The practice of spiking is often cited by observers as a significant issue for public pension funds. It requires a legislative solution.

CBBC cap chart

Cap chart for various members