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STRS Update. STRS Update. What the heck is going on up there?!. STRS Update. Long-term planning Performance Based Incentives Operations Budget Other issues on the horizon. STRS Update. Unfunded Actuarial Liability (UAL) Has doubled in the past 18 months Funded Ratio has decreased

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strs update1

STRS Update

What the heck is going on up there?!

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STRS Update
  • Long-term planning
  • Performance Based Incentives
  • Operations Budget
  • Other issues on the horizon
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STRS Update

Unfunded Actuarial Liability (UAL)

  • Has doubled in the past 18 months
  • Funded Ratio has decreased
  • Funding Period likely at “Infinity”
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STRS Update

Levers

  • Contribution rates
  • Retirement eligibility
  • Final Average Salary
  • Benefit formula
  • Cost of Living Adjustment (COLA)
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STRS Update

Contribution Rates

  • How much?
  • Who pays?
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STRS Update

Retirement Eligibility

  • Retirement age
  • Years of service
  • Good for STRS but bad for schools?
    • Need for fresh ideas
    • Higher insurance costs
    • More staff at “top of scale”
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STRS Update

Final Average Salary (FAS)

  • Five highest years instead of three
    • About a 3% average reduction in FAS
    • The “stealth cutback?”
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STRS Update

Benefit Formula Changes

  • Elimination of “35 Year Enhancements?”
  • Other “multiplier” changes?
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STRS Update

Cost of Living Adjustments

  • Biggest impact on unfunded liability
  • Reduction of COLA to 1.5% of initial benefit?
  • Impacts everyone in the system
  • Political opposition from retirees?
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STRS Update

Sample Scenario: Contribution Rates

  • 5% total increase is under consideration
  • Contribution increases alone don’t solve the problem, but can provide additional money for health care.
  • The increase could be phased-in in ½% increments for both school districts and individuals.
  • The language that will likely be sought would be “permissive” so that increases could be scaled back if they become unnecessary in the future.
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STRS Update

Sample Scenario: Retirement Eligibility

  • Under serious consideration is a minimum retirement age of 60 with 30 years of service.
  • A phase-in period between 3 and five years is probably going to be part of this element of the plan.
  • Savings of just under $1 billion would be realized, but no significant improvement in the Funding Period would be produced
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STRS Update

Sample Scenario: Final Average Salary

  • FAS would be the average of top five salary years if proposal currently under study is adopted.
  • Total savings – about $750 million.
  • No significant improvement in either the Funding Period or the Funded Ratio.
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STRS Update

Sample Scenario: Benefit Formula

  • Under study:First 30 years of service at 2.2%, additional years at 2.5%
  • Virtual elimination of the “35 Year Enhancements,” although higher required years of service would find most retirees in the mid-80% of FAS range
  • A possible variation: sliding the 35 Year Enhancements up the scale to 38, 39, or 40 years of service
  • Phase-in period is a matter of controversy.
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STRS Update

Sample Scenario: Cost of Living Adjustment

  • Cutting COLA to 1.5% of initial annual benefit.
  • The COLA is the most robust of all of the levers.
  • The 50% reduction in COLA would produce $8.5 billion in savings to the system, as well as big improvements in the Funding Period and Funded Ratio.
  • Phase-in periods and “grandfathering” of some groups are being considered, but they all cost money that is difficult to produce using the other levers.
  • Retiree groups are likely to mount a substantial political effort against this idea.
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STRS Update

Overriding Concerns

  • Will these changes work?
  • Do they spread the pain fairly?
  • Will the changes cause a “retirement stampede?”
  • Should there be a phase-in period?
  • Should certain groups be “grandfathered?”
  • Can the package gain legislative approval?
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STRS Update

Performance Based Incentives (PBI)

aka “Investment Staff Bonuses”

  • History
  • Internal vs External Management
  • Cost Effectiveness
  • Compensation structure
    • Designed to attract and retain necessary talent
    • Salary + PBI = 25th Percentile
  • No PBI in losing years beginning FY 2010
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STRS Update

PBI Issues

  • PBI for FY 2009
  • Who is our competition for talent?
  • Is industry salary data current?
  • Is the 25th percentile the right target?
  • Is “value-added” the right approach?
  • Are we using the right benchmarks?
  • What is the right mix of salary and bonus?
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STRS Update

Operations Budget - FY 2010

  • Smallest budget in four years ($89 million)
  • 11% reduction of 2009 budget
  • 2.3% reduction from current estimated 2009 expenditures
  • ORSC praised STRS budget for “restraint”
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STRS Update

On the menu:

  • Financial package in the Legislature
  • Health Care Stabilization Fund (HCSF)
  • Staff compensation study
  • PBI issues
  • Staffing issues – “right-sizing”
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STRS Update

Keyword:

Table

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STRS Update

“Everything is on the table.”

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STRS Update

“Everything is on the table.”

“All stakeholders are at the table.”

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STRS Update

“Everything is on the table.”

“All stakeholders are at the table.”

“If you’re not at the table, you’re on the menu!”