Moody’s gives thumbs up to pension cuts for teachers

Moodys gives thumbs up to pension cuts for teachers

Combined ShapeCaption
Moodys gives thumbs up to pension cuts for teachers

The State Teachers Retirement System decision to cut the cost of living allowance is bad news for teachers and retirees but good news for school districts, community colleges and public universities, Moody’s Credit Outlook reported this week.

STRS voted April 20 to indefinitely suspend cost of living allowances as a way to reduce its unfunded liabilities, which ballooned when the system changed its assumptions about investment returns, mortality and payroll growth.

RELATED: Retired Ohio teachers to lose cost of living increase

Moody’s said: “The action is credit positive for Ohio school districts, community colleges and public universities, which are collectively responsible for funding STRS, because it avoids a potential increase in their pension contribution requirements.”

In Ohio, schools and teachers each contribute 14 percent of a worker’s salary into STRS.

Across the nation, pension funds are updating mortality assumptions and lowering assumed rate of investment returns. STRS dialed back its investment return rate from 7.75-percent to 7.45 percent per year.

RELATED: Ohio's public pension systems shift more health care costs to retirees

Dropping the assumed rate of return drives higher contribution rates for government units in the pension systems in other states, Moody’s said, but STRS’ ability to suspend the COLA “highlights the flexible legal framework surrounding public pension benefits in Ohio.”

Despite the move by STRS, Moody’s warns that the fund’s new 7.45 percent assumed rate of return is still higher than the 7.0 percent rate recommended by actuarial consultants.

STRS has $72 billion invested for 490,000 teachers, retirees and beneficiaries. Employee and employer contributions as well as investment returns fund the pension checks.

RELATED: Retiree health care cuts looming for cops and firefighters in Ohio

Like in other states, Ohio’s public pensions are defined benefits systems. The pension benefit is based on age, years of service and final average salary and it’s guaranteed. Defined contribution plans, such as 401(k) funds, are more common in the private sector. Public employees in Ohio do not participate in Social Security.

Depending on the pension system, employee contribution rates range from 10 percent to 14 percent of their salaries while employer contribution rates range from 14 percent to 26.5 percent.

About the Author