Faster pension reforms urged

Ohio lawmakers advised to act

7/12/2012

COLUMBUS -- Proposed new tools state lawmakers have proposed giving state public employee pension boards to act independently in raising employee contribution rates and reducing some benefits will likely have to be used more quickly than expected, a state consultant told lawmakers on Wednesday.

It's been three years since Ohio's five public pension systems came to lawmakers with proposed changes, and so far the House has not acted on reforms recently passed unanimously by the Senate that built on those plans.

Those legislative changes, which vary between pension systems, would generally raise retirement ages over time, require greater contributions from employees toward their own pensions, reduce annual cost-of-living adjustments, and look at a worker's salary history over a longer period of time when calculating benefits.

But they would also give the funds' governing boards more power to act quickly on their own to make additional changes with legislative approval to ensure the retirement funds' stability when investment returns turn sour.

Between political finger-pointing, a panel of Ohio lawmakers Wednesday learned that delays in getting reform packages to Gov. John Kasich's desk will mean a couple of the pension funds will have to immediately put some of those new tools to work on top of the direct reforms included in the bills.

"They will need to make additional changes..," said William B. Fornia, co-author of a study conducted by Pension Trustee Advisors and KMS Actuaries and commissioned by the Ohio House at a cost of $239,580 by the legislative Ohio Retirement Study Council.

"They're going to need more painful tools than what they've already done," he told council members.

Despite their shortcomings, Mr. Fornia generally described the pension funds as solid and the most recent reform proposals to be "pretty dang good."

The funds have estimated that failure to implement the proposed changes is costing them $2 million a year and endangering their ability to provide optional health-care benefits to retirees.

Since the 2008 economic downturn, fund investments have generally underperformed the 8 percent annual target. Despite this, the study suggests that a long-term expectation of 7.75 percent to 8.25 percent a year remains reasonable.

The study also suggests that the pension funds continue their moves toward a full-benefit retirement age of 67 for nonsafety workers and 57 for public safety employees such as police and firefighters.

The Public Employees Retirement System, the largest and healthiest of the five pension funds, and the School Employee Retirement System covering lesser-paid, non-teacher employees are the only two funds not required to raise employee contribution rate, currently 10 percent for most workers, under the Senate-passed bills.

The State Teachers Retirement System, the Highway Patrol Retirement System, and Police and Fire Pension Fund all call for increased member contributions to as high as 14 percent of salary, the same as the government employer’s share.

Several of the pension funds have fallen short of their mandate under state law that they be fully funded within 30 years. The proposed plans are designed to get them back on track.

House hearings will begin next week on proposed reforms. Speaker Bill Batchelder (R., Medina) said he still expects the House to return to Columbus this summer to deal with the issue, but no official session days have been set.

"The longer we delay, they're going to more out of sync…," said Sen. Charleta Tavares (D., Columbus), a council member. "If we continue to wait, we're not implementing the changes that need to be made post-haste. …"

Rep. Lynn Wachtmann (R., Napoleon), however, countered that if lawmakers had passed the plans as first proposed three years ago, they would have been a "miserable failure." More changes were subsequently made to the plans.

"It is clear to me after reading this report … that the Senate version (of pension reform) clearly does cut benefits for everybody versus the opportunity to raise the contribution level for employees," he said. "I, for one, know this is all difficult. … I feel as though the Senate bill … is very inadequate unless you wear extraordinarily rose-colored glasses."

The report generally defends the current "defined-benefit" approach employed by all of the retirement systems. That guarantees retired employees a monthly benefit based on past salary, length of service, and age rather than on how investments perform.

But the study suggested offering workers additional options, such as a 401k-type of plan in which workers would contribute to their own accounts and ultimately receive benefits based on how much money those contributions earn.

Contact Jim Provance at: jprovance@theblade.com, or 614-221-0496.