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October Board News
Posted: Oct. 20, 2017
Actuarial Valuation Shows COLA Change, Investment Returns Lead to Funding Gains
During the October meeting of the State Teachers Retirement Board, actuarial consultant Segal Consulting presented key findings from its July 1, 2017, annual pension valuation report. This report provides a detailed look at the financial health of the pension fund. The most common ways to express the system’s financial condition are through the funded ratio and the funding period. This year’s valuation report shows the funded ratio — the value of assets compared to actuarial accrued liabilities (benefits earned by members of the system) — improved to 75.1% from 69.6% last year. The funding period — the amount of time needed to pay off the system’s unfunded liability under current assumptions and benefit levels — also improved, decreasing to 18.4 years from 26.6 last year. Segal shared that without the board’s action to reduce cost-of-living increases granted on or after July 1, 2017, to 0%, STRS Ohio’s funded ratio would be just 66.6% and the funding period would have increased to 50.4 years.
Investment returns for the 2017 fiscal year topped 14% and also helped account for part of the funding improvement. Segal noted that the pension fund has a net $155 million in deferred investment gains that will be recognized over the next three years. STRS Ohio uses a common actuarial technique called “smoothing” to spread investment market volatility over a four-year window rather than a one-year “spike.” Last year’s valuation report showed a net $2.8 billion in deferred losses to be recognized.
The valuation report measures two sets of assumptions — economic and demographic — against the retirement system’s actual experience from the past year. Economic measures include the rate of inflation, return on assets, salary increases and payroll growth. Demographic measures include retirements, disability inceptions, withdrawals and mortality (the number of deaths among active members and benefit recipients).
This year’s valuation report included the updated actuarial assumptions the board adopted in March. These new assumptions included reducing the expected investment return to 7.45%, updating to generational mortality tables to recognize that STRS Ohio retirees are living longer, reducing the inflation assumption and reducing overall expected payroll growth.
Other key points from the meeting include:
Retirement Board Adopts Health Care Premium Subsidy Plan for 2019 and Beyond that is Designed to Extend the Life of the Health Care Fund
At its October meeting the Retirement Board adopted a new plan for providing health care premium subsidy assistance to benefit recipients who are enrolled in the STRS Ohio Health Care Program. The new subsidy strategy will go into effect in 2019 and will not affect the 2018 health care plan or premiums.
Since STRS Ohio health care plan enrollees are eligible for Medicare for most of their retirement years, the board-approved subsidy plan will offer greater protection against health care inflation for Medicare enrollees than for non-Medicare enrollees. Under the new subsidy plan, benefit recipients who are enrolled in an STRS Ohio health care plan under Medicare will receive a subsidy that will grow with health care inflation up to a cap of 6%. Non-Medicare enrollees will receive the same subsidy dollar amounts that are offered in 2018; however, this dollar amount will not grow with inflation in the future.
The newly adopted plan is projected to extend the solvency of the Health Care Fund to the year 2047. The fund previously was estimated to remain solvent through 2034. Additional details on subsidies, plan design and 2019 plan premiums will be shared in the spring/summer 2018 newsletters.
Annual Statements of Account Mailed to Members
Members began receiving their Annual Statements for the Defined Benefit Plan at the end of September. Mailing continued through mid-October for the Combined Plan and Reemployed Retiree statements. Many STRS Ohio members have chosen paperless delivery of their Annual Statement and instead view the statement through their Online Personal Account. Nearly 59,000 members have now opted out of receiving paper statements. Regardless of whether a member received a paper statement, all members can view a PDF version of their statement through the STRS Ohio website’s Online Personal Account section.
Public Participation at Retirement Board Meetings Moves to Mornings; Next Meeting Scheduled for Dec. 14
In response to member requests, the Retirement Board is moving the public participation portion of future board meetings to a morning time slot. Public comments will now take place mid-morning, typically following the report from the Investment Department. This is expected to be between 9:30 and 11 a.m., depending on the length of the agenda. STRS Ohio members requested the opportunity to speak before the current after-lunch time slot so they can express their views before the board takes actions during the day. The new schedule will begin at the board’s next scheduled meeting on Dec. 14.
The Retirement Board approved 281 active members and 91 inactive members for service retirement benefits.
March 17, 2017
|Retirement Board Adopts New Actuarial Assumptions — Including Lower Investment Return; Will Consider Benefit Plan Design Changes in April|
|At its March meeting, the State Teachers Retirement Board voted to approve changes to the actuarial assumptions used to calculate pension liabilities. The vote follows the five-year experience review conducted this winter by the board’s actuarial consultant, Segal Consulting. The experience review measures the system’s economic and demographic assumptions versus the actual experience over the past five years. Based on this review, Segal recommended adjustments to assumptions about expected investment returns, mortality, inflation, salary growth, payroll growth and teacher retirements, disability inceptions and terminations. In total, the new assumptions outlined below have a negative overall impact on the system’s funding. When applied to the July 1, 2016, valuation of the pension fund, the new assumptions would add about $6.5 billion to STRS Ohio’s accrued liabilities (benefits earned by active and retired members).|
|The most common ways to express the system’s financial condition are through the funded ratio and the funding period. The funded ratio is the actuarial value of assets compared to accrued liabilities. The gap between the assets on hand and what is owed in benefits is called the “unfunded liability.” The funding period is the amount of time needed to pay off, or amortize, the system’s unfunded liability, assuming current contribution rates. When measured with the new actuarial assumptions in place, STRS Ohio’s funded ratio drops to 62.4% from 69.6%, and the funding period increased to 59.5 years from 26.6 years. The funding period falls outside of the state of Ohio’s 30-year funding target, and will require STRS Ohio to present a plan to reduce its funding period to 30 years or less.|
|Following is a summary of the key changes to the assumptions and how each impacts the system’s funding:|
|Board to Continue Discussion on Benefit Plan Design Changes|
|When adopting the assumption changes, the board recognized that benefit plan design changes are now necessary to preserve the fiscal integrity of the pension fund. Models of possible plan design changes indicate the cost-of-living adjustment (COLA) is the most effective means possible to preserve the fiscal integrity of the fund because it by far has the biggest impact on liabilities. The COLA has a significant financial impact because it affects active and retired members of the retirement system. Substitute Senate Bill 342, passed in 2012, gives the Retirement Board authority to set the COLA. The board can choose to indefinitely suspend or reduce the COLA and can vote to restore the COLA when the pension fund is healthy enough to do so. Discussion on potential benefit plan design changes will continue at the April meeting, when a vote on these changes is likely.|
|Board Selects New Asset Mix for Pension Fund|
|Following the completion of the five-year asset-liability study conducted by the Retirement Board’s investment consultant, Callan Associates, the board selected a new asset mix for the system’s total fund with a lower risk-return portfolio. The new asset mix is designed to provide lower volatility with a slightly lower expected rate of return. The asset mix includes investments that will be easier to convert to cash when benefit payments are due each month. The new asset mix targets are shown below.|
|Callan projects the new asset mix to earn a return of 6.84% over the next 10 years, but said returns could be higher over a longer time horizon.|
|The asset-liability study began in August to help the Retirement Board determine reasonable risk and return expectations. These studies are typically conducted every three to five years to acknowledge change and uncertainty in the capital markets and to confirm an investment policy to meet return and risk objectives in relation to funding, accounting and policy goals. STRS Ohio’s Investment staff will begin to develop acceptable target ranges for each asset class and will incorporate the newly approved asset mix target in its Investment Plan before implementing the changes.|
|STRS Ohio’s New Asset Mix Targets|
|Click here to view a table that shows STRS Ohio's current and new asset mix targets.|
|Board Considers Pathways to Improve Solvency of the Health Care Fund|
|The board continued its discussion on various plans designed to extend the life of the Health Care Fund. The most recent valuation projects the fund to remain solvent for 22 years; however, there is no dedicated source of revenue for the fund, since all of the employer contribution is directed to the pension fund.|
|The board has narrowed its focus to four potential plans — or pathways — that would extend the solvency for the health care program to 35 years or more, with the hope that some funding from the employer contribution could eventually be used for health care. The pathways under consideration would continue to provide a higher premium subsidy percentage for Medicare enrollees than for non-Medicare enrollees. This is consistent with the board’s strategic plan goal to establish Medicare as the health care program’s cornerstone. The board reviewed projected monthly premiums and lifetime costs under each of the pathways being considered and saw that costs for all participants are expected to increase — more so for non-Medicare enrollees — as health care program costs continue to grow. In April, the board is expected to approve a pathway to improve the fund solvency.|
|Retirement Board Election Materials to Mail in April for Contributing Member Seat on the Board; Retiree Candidates Unopposed|
|The 2017 Retirement Board election packet will mail on April 3 and will include information about the two candidates — Sean Patrick Brennan and Carol L. Correthers — who are running for the one contributing member seat on the board that is up for election this year. The election packet will also include instructions for casting votes online, by phone and by mail. Those eligible to vote in this election include all STRS Ohio contributing members, individuals who have contributions on deposit at STRS Ohio and disability benefit recipients. The deadline for voting is May 1. STRS Ohio will announce the results of the election following certification of the election results by the board of tellers on May 6.|
|Robert Stein and Rita J. Walters were the only two retired members who filed enough completed petitions for the 2017 election for the two retiree seats on the board. Since they are unopposed, in accordance with Ohio statute, no retiree election needs to be held. The term for Stein and Walters begins Sept. 1, 2017, and runs through Aug. 31, 2021.|
|The Retirement Board approved 98 active members and 76 inactive members for service retirement benefits.|
STRS April Board News
Posted: April 22, 2016
Board Approves Health Care Program Changes for 2017; Long-Term Health Care Funding Discussions to Continue
At its April meeting, the State Teachers Retirement Board approved changes for the 2017 health care program that are designed to help reduce STRS Ohio’s long-term plan costs and extend the solvency of the health care fund. Due to increasing claims costs and the lack of a dedicated source of funding, STRS Ohio is facing significant health care funding challenges. The approved changes do not provide a long-term funding solution for the health care fund. The changes are projected to extend the solvency of the health care fund by two to three years beyond the projected 15-year solvency period reported last month in Segal Consulting’s annual actuarial valuation.
The board is exploring long-term funding solutions for the health care program that would allow STRS Ohio to continue a health care program that is of value to members. Throughout the discussion of possible options, STRS Ohio will use its website, newsletters and eUPDATE email news service to keep members informed.
Following reviews that took place during its February and March meetings, the Retirement Board approved the changes outlined below to the STRS Ohio Health Care Program for 2017:
Plan design changes for 2017:
Eligibility changes for 2017:
Subsidy changes for 2017:
STRS OHIO www.strsoh.org