Tuesday, January 22, 2013

Consequences - Intended or Otherwise

The State Teachers Retirement System (STRS) recently conducted a survey of its members, and found that among other things, about half the working teachers reported that "they plan to teach longer than they originally thought, and the most common reason cited for this was pension reform legislation."

How does this jive with the story Charlie Boss wrote for the January 20, 2013 issue of the Dispatch, where she reported on the large number of teachers that seem poised to retire this year?

I've been writing for several years about the solvency of the State Teachers Retirement System (STRS), hoping to alert both teachers and community members to the need to reform the structure of this system if it is to survive. Mostly my objective has been to point that most of the fiscal problems troubling STRS is of their own doing, and to object to any move to have taxpayers bail them out. But there is also the reality that the poor decisions that benefit one generation - mostly mine, the Boomers - get paid for by the following generations - our children.

There is no safety net for the teachers should STRS go bust. The teachers do not participate in Social Security, nor does the school district make Social Security contributions on their behalf. STRS is it for them. So if STRS becomes unable to pay the benefits promised, the teachers are in a lot of trouble.

Pension funds are a pretty simple concept:  a member, and usually the employer, make contributions to the fund while the member is working. Then the fund managers invest the contributions in hope of boosting the amount of money in the fund. When the worker retires, contributions by that worker stop, and benefits begin being paid to the worker, usually to the end of life.

That sounds a little like an IRA or a 401(k) account any one of us might have. We put money in those accounts, and sometimes the employer kicks in a little too. We invest it to earn some extra money. Then at some point we stop putting money in, and start taking money out.

But there's a big difference: a retirement fund is a pool, with all the working members contributing to a common fund. All that combined money gets managed and invested as a huge portfolio. All the while some members have retired, and switched from contributors to beneficiaries. There is money going in, money being invested, and money being paid out - all at the same time.

With an IRA/401(k) plan, you can start withdrawing money at age 59 1/2, and take it out at whatever rate you want. But when the money is gone, it's gone. If you don't put enough in over your lifetime, don't earn enough on your investments (eg - like in our current interest rate environment, where CDs and other 'safe' investments earn nearly zero interest), or withdraw too much too soon, you can run out of money. Tough luck if that happens.

That's a lot less likely with a retirement system like STRS. It's not just you putting money into the system, it's all the members and all the employers. There are currently about 75,000 active public school teachers in Ohio, plus all the administrators and other professions who are members of the system. Since 2003, teachers have been contributing 10% of their salary to STRS, and the school district (ie the taxpayers) another 14%. With the statewide average teacher salary of about $58,000 (from the Ohio Dept of Ed CUPP report), this means the average teacher contributes $5,800/yr from their own paycheck, while the school district contributes another $8,120, or $13,920/yr. Multiply that by 75,000 teachers you get about $1 BILLION in new contributions each year.

That's a lot of money. As teacher salaries accelerated dramatically in the past couple of decades, the pension fund grew to be quite sizeable - about $80 billion by 2007. While the rising levels of contributions had a lot to do with the fund growth - including the teacher contribution increasing steadily from 8.5% in 1978 to the current 10% rate starting in 2003 - a good part of it was due to some extraordinary luck the investment managers at STRS had as well. They caught a kind of perfect storm, where contribution levels were high, the investment markets in which they participated (primarily common stocks and real estate) were booming, and the benefits being paid out were relatively low, because their retired members we getting benefits based on past salaries, which were much lower than today.

The STRS Board looked at all that cash building up, and decided they could increase the benefits they paid out to members. Existing members were given a "13th paycheck" each year - essentially an 8.3% increase in their annual pension. And for members yet to retire, the real bonanza was put in place.

Prior 1989, STRS members received 2.0% of their "Final Average Salary" (the average of the salaries of their final three years of employment) times the number of years of service. In other words, a teacher who was paid $50,000/yr for the last three years, and who retired with 35 years of service, would receive an annual pension of $50,000 x 35 x 2.0% = $35,000.

In 1999, the percentage was increased to 2.2%, meaning that a teacher with an FAS of $50,000 and 35 years of service would receive a pension of $38,500. But during those 10 years, the FAS would likely have increased from $50,000 to something around $67,000 (assuming 3% annual raises). That would make the pension be $67,000 x 35 x 2.2% = $51,600, or more than the final working salary of the teacher who retired just ten years earlier.

But that's not all. Also included in the 1999 modification was a 'kicker' which awards a teacher completing 35 or more years of service a multiplier of 2.5%, rather than 2.2%. This means the teacher retiring in 1999 would receive $67,000 x 35 x 2.5% = $58,600.

The good days ended in 2007 when both the stock market and the real estate market tanked. The size of the STRS retirement fund dropped from $80 billion to $47 billion in a matter of months - a loss of 41%. In other words, money equal to 33 years worth of contributions just evaporated. The fund managers would need to increase the size of the now shrunken fund by 70% just to get back to were they were (chart from Kathy Bracy's blog).

click to enlarge
Meanwhile, STRS continued on as though nothing had happened. Contribution rates remained the same, as did benefit payouts.

click to enlarge
Fast forward to 2013, and a Hilliard teacher retiring at $90,000/yr - which most do - will receive an annual pension benefit of $90,000 x 35 x 2.5% = $78,750. It is unlikely that the contributions made by the teacher, plus the contributions by the school district, plus the earning on those contributions over the teacher's career, is anywhere near enough to fund this level of benefits to a teacher who is likely to collect these benefits for another 20+ years. By the way, the Present Value of $78,750/yr paid out over 20 years, using the current 2.63% rate on 20 year Treasury Bills is $1.5 million.

So something had to change, and finally it has. Last year, the STRS Board and the General Assembly enacted changes to the rate of contributions (for the teacher, not the taxpayers) and the number of years service required to retire. The 35 year kicker was eliminated for those who retire after July 1, 2015. This is why any teacher who will reach 35 years of service before that date will almost certainly retire by the 2014-2015 school year. Here in Hilliard, we gave our teachers a little extra incentive, with a one-time $40,000 bonus for retiring last school year or this school year.

So how do we reconcile the STRS Survey saying teachers think they'll be working longer than they had planned, and Charlie Boss' story saying that they will be retiring in droves?

It all depends on which side of that July 1, 2015 date one plans to retire. If you had always planned to retire before 2015, little has changed. If you had planned to retire after 2015, but will reach 35 years of service by then, you pretty much have to retire before 2015, or you'll leave too much money on the table. That's certainly a significant component in Superintendent Dale McVey's decision to retire this year.

But if your retirement date is after 2015, it's a different world. You're going to pay more into the system, and get less out. Consequently those teachers are expecting that they'll have to work longer to earn enough benefits to afford retirement.

We Boomers are coming to a time when we have to face up to this. We've largely been a 'consumption generation.'  We live in a world where our parents paid the price to win World War II, then came home to build most of the infrastructure we count on for every day life. Our generation has built our wealth by consuming that infrastructure, and not doing nearly enough to maintain it, or replace it when it reaches the end of its design life.

The roads and electrical power systems are two glaring examples. We've created a regulatory environment where heavy trucks tear up our highways, when lots of that freight should be carried on the railroads (the railroads themselves carry their share of the blame as well). On those occasions when I choose to ride my motorcycle on a freeway, I have to make sure to preserve a sight line far enough ahead to detect and avoid potholes that could easily knock me off the bike. That's the reason I much prefer the back roads for short distances, and little used US highways for longer ones (US 89 is a favorite).

We generate 20% of our total electrical demand with nuclear power plants, many of which are operating well past their planned life. Not that I'm opposed to nuclear power - as long as our appetite for electricity keeps growing, nuclear power is absolutely necessary, and new plant designs are much safer than those now in operation.

But we Boomers won't be paying for the road reconstruction, new nuclear power plants, or a smart power grid. Our time to generate that kind of funding has largely passed. It is our children who will bear this burden. Nor will we have fully paid for all the retirement benefits we'll consume, be it private pension benefits, Social Security, or Medicare/Medicaid. They'll being contributing to that as well.

The least we can do is get out of the way and let all these unemployed and underemployed young people with huge student loans get a toehold on life...

... anyone remember Logan's Run?


  1. Scary story for the teachers. How do you expect it to impact HCSD?

    ...and I do remember Logan's Run. I read it in one sitting.

    1. CE: As of the beginning of the school year, we had only 8 teachers with 32 or more years of service, so not a lot of them will be 'forced' to make a retirement decision before 2015.

      There are however about 30 more with 30-31 years of experience, who have to feel this door was slammed in their face - just as they were getting close to the finish line.

  2. I have always admired your ability to discuss sensitive socioeconomic issues in a neutral, direct, well-reasoned manner.

    Perhaps you aren't giving the Boomers quite enough credit for the tremendous things you guys have accomplished in technology and medicine (and the associated gains in productivity).

    But I agree that many seem to be unwilling to see that the numbers just dont work...

    1. Thanks. That's always been the goal of this blog, with the hope that it would stimulate folks to ask more question, and to engage in the dialog, regardless of where one stands on the issues. A friend of mine once said that it's hard to find solutions when you start out by poking the other guy in the eye.

      Yes, we Boomers accomplished some pretty cool things - our contributions to the development personal computing and the internet being among those having the most impact. We fit in there someplace between the Apollo program and video games.

      Yep, this issues can't be solved by pretending they don't exist.

      Thanks for the comment.

  3. Paul,

    Thanks for posting what most low information voters fail to know about the system. There are several issues I would like to address.

    1. Even after all the talk about being part of our community, the teachers decided to not be part of the Social Security System. Why would they, the employer puts in 6.2% vs the generous 14% the district puts into STRS. Most employers put in 2%-3% into a retirement or 401K plan. It is clear 9% for most tax payers by their employer vs 14% by the school (as well as other Ohio gov jobs)

    In addition most employer systems and SS have early retirement at 62, but with large reductions. Not our teachers, most have retired in their late 50's and by the time the poor tax payers retire at a fraction of their annual salary, the teacher had been to Europe and HI and have annual retirement income the same as what they were making when they prior to retirement.

    2. Items such as SSI and other social benifits are paid by SS. Guess who did not pay for that MRDD studend down the street, you got it teachers. That same group who claims to be part of the community.

    3. You will also hear how SS is in trouble. The teachers will say my program should be bailed out if you bail out SS. The BIG difference is that SS money has been borrowed by the USA and the money used for what items such as education. Where do you think the money comes from. So there is a note for the SS loans. When the USA repays the notes SS will be just fine. Remember the when the class warfare starts, the entitlement class (teachers) will be voice there demands, however they will forget the 13th check.

    In review when you see the next levy request, it will be driven by the soon to expire teacher union contract. You will hear how they pay more for health care (still less than most working class district residents). They will say they have not had a salary increase, but educate yourself on step and grade program then have. At some point they will pay more into retirement and the disrict will be asked to do the same. Learn what a teacher makes, what they pay for and what they get when they retire. Look at what you earn, pay for health benifits and your retirment.

    Once educated you will be able to tell your school board how to act. They will not listen, so when the levy come up and you vote NO make it clear that teacher costs was the reason for your NO vote.

    1. 1. I'm not sure how that came to be (public employees not being part of Social Security), but SS was not, and is not designed to be a pension system. It's supposed to be a safety net, which is the reason both contributions and benefits are limited.

      I grew up in an industrial region during the post-WWII industrial boom. Other than the few folks who were small business owners, every Dad I knew of (and a few Moms) worked for one of the large industrial concerns and collected a decent pension when they retired. My dad worked for the same company for 35 years, and collected a livable pension for another 25 years until he passed away.

      For some reason, we Boomers didn't feel a pension was all that important. I guess we all thought we were going to get rich and retire to a tropical island. I think we were the grasshoppers in the fable of the grasshopper and the ant.

      The big exception was government. The understanding was that public sector workers, including teachers, didn't get paid all that much, but had the comfort and safety of a decent pension. That changed when public sector unions came to be, and successive generations of politicians yielded to the political power of those unions to create a situation where the salaries are more competitive with private sector compensation, but also have generous pensions - something lacking from most private sector jobs.

      Whether you think that's good or bad, it's what it is. My position is simply that, for now at least, the employer (ie taxpayer) contribution to these systems is adequate, and that any additional money needed to fund these extraordinary benefits need to come from the employees, else the employees need to accept reduced benefits.

      2. Interesting point. Hadn't thought of that.

      3. You're right that the Ohio public employee pension programs have not been tapped to fund government operations, as has been the case in other states. I understand that Illinois is one place where this happened.

      However, the Ohio public pension programs are free to buy bonds issued by the State of Ohio, which achieves the same purpose, but with the distinction of being voluntary, acknowledging that four of the 11 members of the STRS Board are political appointees.

      Indeed - the two factors which will most directly impact the next levy are the terms of the next teachers' contract (nearly 90% of our spending), the new funding formula soon to be announced by the Governor (our most unstable funding source.

  4. Another jealous anon ripping on HIGHLY qualified professionals required to attain a masters and much more to do their job. Isn't enough, enough already? Some are so tired(not just teachers themselves) of hearing teachers make too much, don't work enough, no summers, etc, etc. It really is getting old. Didn't we all have a CHOICE on what we wanted to do with our lives? My father worked in a factory and retired with a GREAT pension, as well as a very nice sum in stocks that the company would match when he bought. So please don't feed me that other professions don't have their perks when in fact, many do. Some people want something for nothing. You are one of them. Instead of complaining about teachers this and teachers that, why don't you write our government and have them fix the current funding for schools. Or follow elections and vote for those who are pro school instead of those who are axing public education and giving more money to failing charter schools. We all have a choice. Instead of criticizing those who educate our youth, why don't you do something about it? Oh wait, I know, you will vote against a levy.
    Sorry Paul, but this anti teacher stuff is a broken record. Its not always about what a teacher makes now, or when they retire. Its also about lifetime earnings. I know many a teacher who started off making around 15K who could barely make it by month to month. While other professionals were making 10-15K more starting off. Were teachers kicking and screaming about that? No, they made a choice. When the market was humming and many in the private sector were raking in the money, were teachers yelling about wanting a bonus too? No, they CHOSE a stable consistant career. Now times are tough, and all we hear is how the public sector is robbing people and the cause of the financial issues we deal with. With the demands in education in this day, as well as parental demands, state demands, legislative demands, teachers are well worth what they are making! Most people on the outside have no clue what goes on within a school on any given day. Its so easy to judge from the outside or compare what they experienced 20yrs ago when they were in school. Contrary to what many believe, its night and day difference.

    1. I know that the teachers retiring today started off at a pittance, which is the reason I don't engage in the fairness argument. One of the characteristics of a capitalist economy is folks get paid what they can negotiate, which doesn't usually line up with societal worth. After all, Urban Meyer just got a extension to his contract, which now pays him over $3 million/yr. Is what he does worth more to society than what a 2nd grade teacher does? Or a physics professor? Doesn't matter, it's what he was able to negotiate with his particular public employer.

      Same with the teachers. The teachers retiring now are those who fought the battle for collective bargaining, which led to decent salaries and more job security. The pensions they'll receive is consequence of that effort, plus the risks they took with their retirement fund.

      My position again is that, for the time being at least, the taxpayers are contributing enough to STRS. The ups and downs experience by the system are the consequence of investment decisions the STRS members allowed to be made on their behalf. When the stock market boomed, the STRS members chose to keep all the benefit of that (by creating the 13th paycheck and the 35yr booster), rather than sharing the profits by lessening the burden on the taxpayers (e.g. knocking the employer contribution from 14% down to say 12%). So I feel it is appropriate that if the fund takes a loss, again due to those investment decisions in which I had no say, then it is the STRS members who have to live with the consequences, such as reduced benefits and delaying retirement.

      We live in a country where we get to make all kinds of choices. Some are altruistic, but most are selfish. Collectively our choices cause resources to be allocated. We have to be vigilant about concentrations of power, because when those concentrations develop, our choices become limited (with a monopoly being the end state).

      This is really the core debate in our country. Republicans claim to be all about choice and liberty, but without constraint, they will drive toward monopoly. Democrats tend to favor monopolies as well, with the government being the sole service provider (which is why many are in opposition to charter schools).

      Democracy doesn't demand unanimous agreement - in most cases a simple majority rules. It means we'll disagree and argue. That's okay as long as we peacefully (albeit sometimes loudly) disagree, and accept the outcome.

  5. I would like to respond to the anon post that named me as a jealous anon.

    1. I also have a masters degree.
    2. Jealous no.
    3. Ripping no again.

    The issues I address in my post were to help inform the low information voter. Most people (tax payers) have no idea how the step and grade and the retirement system works for our teachers.

    Enough is enough, I could not agree more with you. The tax payer has paid enough. When you look at the average home owner in the district and see how the last 10 years has been then do the same of the teachers in the district the teachers have done well.

    I have not complained about teachers nor did I criticized teachers. My comments were to educate the voters. When the district spends 90% of the operations budget on teacher compensation packages I feel a close look is needed.

    Sounds like your dad did well, however if the labor costs had driven product cost beyond market prices. He would have lost job and company would have gone broke.

    Yes teachers had a choice also when picking education as their life passion.

    Please remember the voter has the last word. Schools are a local issue, but no choice is given the home owner. The school is given a marketplace and the ability to tax. A monopoly on public education.

    The shocking fact is your post is reactive to a common public opinion. I would like to say if you can't take the heat, well you know the rest! You say those on the outside have no clue. I would say those on the inside have no clue what life is about on the outside!

    The real shocker is, I thought it was about the children and their future. There is no connection between the cost of education and the quality. There is a connection between what people will pay for education and how much a teacher makes.

    So if teachers are unable to agree on a contract or homeowners fail a couple levy requests or STRS runs out of money. Remember who help cause this A TEACHER!

    1. Your comment implies that teachers have what they have because they have the power to unilaterally dictate the terms of their contracts.

      That is not so. The contracts are the result of negotiations between the union representing the teachers, and the school board representing the voters.

      I think the "low information voters," as you call them, make their biggest mistake when they blame the teachers for the terms of the contracts, yet keep electing the same people to the school board year after year.

      What will you do to cause our school board to negotiation the next contract differently?

  6. Well i'am anonymous, yes jealous that I pay for a rich compensation packages for our teachers. Packages that far exceed what those of us ont he outside have, for we work in the real world.

    Our teachers work in a sheltered workshop, and are in fact expresseed by their own demands a special needs employees.

    1. In todays world nobody other than those paid by the hour work 8-5. Our teachers do not work an entire year.

    2. Our teachers pay far less for health care than the outside world.

    3. Our teachers have no connection between salary and results. They get another step or grade by seniority and education, not results. There is no measure between the amount of education the teacher has and the quality delivered by the teacher to the students of HCSD.

    4. The retirement system provides a level of retirement that is not matched anywhere outside the sheltered workshop.

    Teachers do not want to be measured or work like those on the outside, but there is one area they want to be like the outside Salary.

    We hear about what they would make on the outside, yet we do not see many moving from inside the workshop to the real world.

    The anon person who posted about enough is enough stop picking on teachers provides a great look into the workshop. Teachers a a valued part of our community (while not paying for some community needs) we need them and they provide a much needed service. It is the total cost that needs to be addressed.

    The contract expires this year, and a new agreement will be put into effect. Very soon after the new contract there will be a levy request. There is a cause and effect relationship.

    Yes there is an attack on what teachers total package cost. It is called the real world. Teachers need to come out of the workshop and see the real world is about.

    Our school board is part of th eproblem. The formula is so simple. HOw many children in a class times teachers needed = 90% of operational budget. Teachers have a boss beyond the classroom and they have another name, taxpayer.

    The fact that teachers are allowed to tell the poor teacher stories to students during class time is a crime.They are stealing education time to promote their own welfare.

    So when the HEA badges start showing up in the classroom this is step 1 of the two 2 step process (richer contract / higher levy)

    My advice to many is look at the total value of you comp package and see what it takes to make the same on the outside. This might help you understand why there are no votes at levy time.

    1. I don't appreciate the tone this dialog is taking, especially by those who choose to hide behind a mask of anonymity.

      The question is what are you going to do in regard to these strong opinions you have espoused? If the school board isn't doing what you desire, how are you going to change that?

  7. Paul,

    As I can best remember, the other 4 board members were all endorced by the union. It is my opinion that the gang of four lack the tools, experience and spine to get the best deal for our schools and thus the children.

    Look at the number of openings we have every year and the number of applicants. I think econ 101 teaches supply and demand. How many teachers leave the Hilliard schools for others that pay better. Maybe we should teach such a class to our HIGHLY qualified teachers with masters degrees this concept. Another way would to tell all the anti teacher crowd that the concept does not apply to our teachers.

    The best way to address this is a community conversation that Dale and or the board has been unwilling to start and have.

    1. So let's hold some community conversations of our own. Would you be willing to organize one?

  8. Paul,

    I understand your concern for the demeanor and direction of the string of posts ont he site. However the issue nobody on the board wants to address is MONEY. Salary, retirement plans STRS and a list of other work rules, far different for those of us who are not teachers.

    While education is about the youth of our community, new levy money is converted to higher teacher costs. The total labor cost provide the average teacher with a healthy salary and retirement. We are asked to give more to a group who claim shared sacrifice, while we see our pay checks get smaller and taxes go up.

    I for one dislike the union concept. When I think union, steel auto and mfg comes to mind. I think of teachers as educational professionals. So when teachers have a union and quote like the last contract (we will work to the contract no extras) I think GM.

    The next contract will divide the community. Dale has beeen a lot of things but the great communicator he is not. So he retires to make sure he gets the most he can (and I understand as I would do the same), but leaves the community at odds. The only reason the last levy passed was parents with kids in sports could deduct the higher tax and not larger sports costs.

    The 200 vote margin will break the next vote. Depending on how many mills maybe for ever. The community is a tinder box and no group is talking. One quote passed around is the teachers want back all they have given up the past years. If that is the case I fear for our district. Just think the new leaders gets all this in the first 12 months.

    But as I said the posts are focused on taxes and salary. Posts on the board indicate we are in for rough sleddings.

  9. Paul, will absolutely agree with you on the anon comments.
    It is important that we are reminded that this is a safe
    moniker as provided because as you are aware, the board and district has long tentacles, and have no problem
    moving their resentment of not so flowery comments about district operations, spending into the classroom

    It should be noted that the gang of four, glad I penned that were feigning shock at a borad meeting two years ago when a member of the audience mentioned that people were afraid to speak up because of the retribution factor.
    The response by the four others, Maggied, departed member
    , Whiting and Teater, was that they did not believe it happens, when right in their own board meeting members of the public stated their concern.

    Its unfortunate it has come to this. There is no concept of what is happening in the private sector by our board.
    At one of the communication sessions a member, asked in suprise who had taken pay cuts over 20 % and seeemed flabergasted that many put their hands up.

    The issue that could have been saving us millions at this point if you go back even five years, are the so called little expenditures IE supplementals, that properly could have been reigned in but to your question of people stepping up, one cannot get even a jaded response to my question to the board about a month ago using real time examples. Our newest member MRS KECK talked during her campaign about supplementals and that they should be looked at. I know I asked, and so did many others to her during the campaign.

    I guess I am all four for another communications sessions,
    but for pete sake, why wont our board have a public discussion on spending items like the supplementals and thaqt they should be looked at as a way to save cost.

    Of course we will get that same pathetic response
    that we dont negotiate in public, or that is part of contract negotiation, Who's money is it Pauls.

    It is also blantently criminal to badger students during the sacred negotiaion time. It would take courage for the board to speak up as well as the employee groups to state publicly that this will NEVER happen again. Is that too much to expect, it would appear to be yes.

    Otherwise have the courage to sign your name and be counted.
    bUT ON THE other hand protecting your children and yourself is very important also

  10. Paul,

    I would be glad to work on this process. We could host in township building.

    Pay scale and step and grade
    Classroom size and class offerings

    These topics would provide an education to voters. Some items are cost drivers others a items adm used by HCSD to pass levy.
    The program would help inform the tax payers that are not highlighted in paper or by the district.

    I would invite Brian and Dale. We need to create documents that are true and honest. We need to know our stuff. Incorrect data and info is not want we want.

    I feel confident in my subject data or know how to ask. The communication of the meeting is an item of great concern. A good turn out is needed. I want to educate and talk not just give one side or the other.

    In addition we need other topice, make it a series.


  11. Great Ideas Dave, good for you