Pension officials, who have been begging lawmakers to take action for nearly three years, say the changes are needed to shore up their finances for the long haul and to allow them to avert drastic cutbacks in health care benefits for current and future retirees.
Stock market losses, people living longer, generous benefits and crushing health care costs are driving the need for reforms. Without changes, the systems would eventually run out of money to issue monthly pension checks.
Locally, many public sector union leaders and managers — who also pay into and benefit from the system — understand the need for change. But they don’t hesitate to describe the impact of incentivizing retirement.
“Because of the (proposed) changes, some of our truly great educators are having to get out of the business before they had otherwise wanted,” said Kathy Richison, president of the Springfield teachers union.
The same sentiments are echoed in other publicly-funded sectors like work in county government.
Without changes, Ohio Public Employees Retirement System would slash its annual spending on retiree health care to $500 million, from $1.6 billion, beginning in 2014, said OPERS Executive Director Karen Carraher.
“No one is extremely happy with all the changes, especially those affecting them. However, most retirees understand the STRS’ financial situation. And they are accepting and supporting the proposed plan,” said Ann Hanning, executive director of the Ohio Retired Teachers Association, which has 30,000 members. “We know that some things must change and the sooner, the better for all members of the system.”
The five pension systems are: Public Employees Retirement System, State Teachers Retirement System, Schools Employees Retirement System (non-teachers), Ohio Police and Fire Pension Fund and the Highway Patrol Retirement System, which is not impacted by the reform bills.
The bills would require active teachers to contribute 14 percent of their pre-tax income to the retirement plan, up from the current 10 percent. A teacher making $60,000 would have to plan for $2,400 per year less once the change was fully phased in.
Employees of city or county governments would need to work 32 years instead of 30 to retire at age 55, and with only five years’ service, an employee would have to wait until age 67 to retire.
Clark County Administrator Nathan Kennedy said that when the legislature discussed pension changes last year, “some of the employees that had their 30 years plus decided to leave.”
As a result, “we lost a lot of employees and a lot of institutional knowledge.”
If that happens again, “we’d be losing some good employees,” Kennedy said.
If there is a silver lining, he said, it is the potential cost savings and the opportunity to reshape the county work force for changed circumstances. The cost savings would come from the generally lower salaries of newly-hired employees and from positions left unfilled.
Ohio Senate gets the ball rolling
Ohio Senate President Tom Niehaus, R-New Richmond, and Senate Minority Leader Eric Kearney, D-Cincinnati, introduced four pension reforms bills, one for each of the four largest systems. Niehaus said he hopes the bills will go to the Senate floor for votes this week.
The bills are likely to stall in the Ohio House, where key members are urging their colleagues to wait for a consultant’s report to double check the numbers and changes being pitched by the pension boards. State Rep. J. Kirk Schuring, R-Canton, a member of the Ohio Retirement Study Council, said, “I think we should do something this year. Hopefully, we’ll be on the same page and on the same path sometime later this year.”
Lawmakers are scheduled to recess from June through the November election. The House may take up pension reform after lawmakers return in November.
How do the programs work?
Like most states, Ohio’s public pensions are defined benefit systems. The pension benefit is based on age, years of service, final average salary and it is guaranteed, regardless of how well-invested contributions performed over the course of the worker’s career.
Defined contribution plans, such as 401(k) funds, are more common in the private sector. The employer and worker contribute to a fund over the years, but the amount in the retirement nest egg when the career ends isn’t guaranteed.
Public employees in Ohio do not participate in Social Security.
Some fiscal conservatives are disappointed that lawmakers aren’t pushing for a switch to a defined contribution plan or a mandatory hybrid between the two types of plans.
“By many measures, the retirement benefits received by government workers in Ohio, on average, are more generous than those received in the private sector,” said Andrew Schwiebert of the Buckeye Institute, a conservative public policy think tank. He told state senators that Ohio could save $3.3 billion over 30 years by establishing a defined-contribution plan.
But others say a direct comparison can’t be made between some risky, stressful public-sector jobs — like those in public safety — and the whole of the private sector.
“The robberies, the burglaries, the assaults, the homicides, the car chases. Anything ... that would make your adrenaline and your stress levels go up, the average person doesn’t deal with those on a daily basis,” said Andrew Scott, president of the Springfield Fraternal Order of Police.
“I’ve seen a lot of (police officers) retire, and when they get close to that retirement age, they look worn out,” he continued. “They look a lot older than they actually are. Then a short time after their retirement, they look younger. They’re less stressed, and it’s visible.”
Ohio’s proposed changes are in step with reforms recently adopted by other states. According to the National Conference of State Legislatures, 41 states have enacted significant pension reforms in the past two years. Those changes have included:
• boosting employee contribution rates;
• increasing age and service requirements;
• stretching out the final average salary calculation;
• adjusting cost of living allowances, according to NCSL.
“Legislatures around the country have been acting (on pension reform proposals). Ohio is one of the few states that hasn’t acted yet,” said Keith Brainard, research director for the National Association of State Retirement Administrators.
In Ohio, public pension benefits are not bargained in union contracts or crafted by the systems’ boards. Instead, they are prescribed by state law.
In a multi-billion dollar pension system, there are certain levers that officials can move to make projected revenues match projected expenses: contribution rates, age and service requirements, final average salary calculations, and cost of living allowances.
Under the new Ohio proposals, police and fire employees would have to contribute more money to their retirement, with the increase from 10 percent to 12.25 percent phased in over three years. That’s an impact of $1,000 to $2,000 per year for most officers.
City of Springfield Personnel Director Jeff Rodgers said retirements from the Fire Division were “a little bit larger” last year, when changes were under consideration. But he said those retirements also were driven by provisions of Senate Bill 5, which eventually was repealed by voters.
Rodgers said any effect of the deliberations in Columbus this year has been “fairly sparse” and limited to people who are “right on the fence” about retiring.
He added the situation could change “if it becomes law.”
David Estrop, superintendent of the Springfield City School District, said he thinks teachers and other school personnel are waiting until legislation actually passes to make decisions on whether to retire.
In the past two years “we’ve seen an increased number” of retirements as the legislature has considered changes in the retirement systems, he said.
“I think the information is just in the process of getting out to everyone” about what new legislation may bring. “I suspect we will know over the next couple of weeks” what will happen.
COLA, or no COLA?
Because pension provisions are carved into law, it can be difficult to change them, particularly for workers already vested in the systems and retirees already out the door.
Seven states — Maine, New Jersey, Rhode Island, Oklahoma, Colorado, Minnesota and South Dakota — have taken steps to cut back cost of living allowances for current retirees. That prompted a string of legal challenges from retirees who argued that the Cost Of Living Adjustment was a contractual benefit. Courts in Colorado, Minnesota and South Dakota ruled against the retirees and cases are pending or on appeal in Colorado, Maine and Rhode Island, according to Brainard.
“An automatic COLA is a surprisingly expensive benefit provision and it is becoming more expensive as longevity improves,” Brainard said. The COLA is a big lever for the Ohio systems. “If you effect only new hires, it takes much longer to generate any savings.”
Bill Winegarner, of Public Employee Retirees Inc., which represents 62,000 retirees in Ohio, said, “Those people who retired under the COLA deserve to retain the COLA because you can’t change the law after the fact. So, our position on the COLA for current retirees is: No change.”
He stopped short of saying that PERI would file a lawsuit over the COLA reductions.
While the pension reforms may seem drastic, Ohio is known for prudent stewardship of the public retirement systems, Brainard said. Unlike other states, Ohio has five state-run systems rather than a patchwork of locally run funds and Ohio has never skipped making the mandated employer contributions into the pension funds.
“I think that the systems are perceived to be well-run and the Legislature for the most part has been very responsible in funding them,” Brainard said.
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