CHICAGO — With a long-awaited new report about its pension systems in hand, Ohio lawmakers will restart debate Wednesday on stalled legislation to shore up the state’s retirement system and chip away at its unfunded liabilities.
Ohio’s retirement systems, like most states, have suffered deep losses in its funded levels over the last several years, tumbling roughly 20% since 2008.
But unlike many states, double-A-plus rated Ohio does not face serious credit challenges from its unfunded retiree liabilities, according to analysts and state pension fund experts.
Even as lawmakers debate reform, Ohio’s pension liability is expected to remain a manageable expense, due in part to fixed employer contributions, a 30-year funding standard, and regular contributions to its retiree health care liability.
The release of last week’s report, by consultants Pension Trustee Advisors and KMS Actuaries, prompted House leaders to move up hearings on reforms to this week from November.
Most of the reforms on the table were proposed years ago by the pension funds themselves, which are required by state law to submit plans for becoming 100% funded within 30 years. Any changes, however, require legislative approval.
The Senate passed many of the proposals last May, but the House opted to wait until the outside review was complete before tackling reform legislation.
“The Senate version made strong headway but there is still much more work to be done in the Ohio House,” state Rep. Lynn Wachtmann, R-Napoleon, said in a statement. “Our goal has consistently been a long-term solvency and strength of the state retirement system as well as health care for retirees.”
When it comes to retiree health care costs, the Buckeye State is in an elite group of seven states that has funded more than 25% of its other post-employment benefits liability, according to Pew Center on the States.
Ohio has five retirement funds, the largest of which is the Ohio Public Employees Retirement System, or OPERS, which accounts for 96% of state employees.
The retirement systems have a combined funded status of 67% as of 2011, down from 87% in 2008.
As of December 2010, OPERS had an unfunded accrued pension liability of $16.8 billion with a funded status of 79.1%, down from 92.7% in 2006, the report said. Its unfunded health retiree liability totaled $15.6 billion with a funded ratio of 41.8%, up from 39.1% in 2006.
The Ohio School Employees Retirement System, or OSERS, had an unfunded liability of $5.8 billion with a 64.4% funded ratio in 2011, down from 79.6% in 2007. The Ohio State Teachers Retirement System, or OSTRS, had an unfunded liability of $2.1 billion with a funded ratio of 58.3% in 2012, up from 33.2% in 2008. Two other smaller funds cover highway patrol and police and firefighters.
The Senate bills and the report’s recommendations would give the pension boards greater authority and independence so that they can make changes to the plans without legislative approval.
Other recommendations include raising the retirement age, setting a target contribution for OPEB payments, automatic benefit changes based on certain triggers, as well as reduced cost-of-living adjustments and increased member contributions by up to 4% over the next four years. The report urged maintaining two of the system’s chief strengths: a 14%-of-payroll cap on employer contribution and the requirement that funds submit 30-year funding plans.
“The current Ohio pension system structure is solid, and the 30-year funding requirement is an important feature,” the report said. “Unlike the vast majority of states throughout the country, the Ohio taxpayer has not issued a ‘blank check’ for increased employer pension costs to compensate for unfavorable investment returns and other results.”
The 14% contribution by employers goes toward the annual required contribution for the pension plans, with any left over money used for OPEB costs.
“Very few pension systems in the U.S. have this rigor in shifting the unfavorable experience to the employees in the form of potentially reduced future retirement or health care benefits and-or increases in employee contributions,” the report says. “This mechanism utilizes the efficiencies of defined benefit plans without the risk of a blank check for increased employer costs to compensate for unfavorable investment returns and other results.”
Despite the state’s 32% funded OPEB ratio, one of the best in the country, investment losses coupled with rising health care costs mean some of the funds end up insolvent beginning in 12 years if many of the proposed reforms are not enacted, the report warned. OPEB funding comes from the same pot as pension contributions, but is subordinate. That means less money for retiree health care if the pension system requires more funding.
OPERS, for example, in 2012 allocated 4% of pay toward its OPEBs. That will decline to 1% next year and 0% in 2014 if pension reform is not enacted.
“From a credit perspective, it’s a good thing they’re looking at the system and looking at any adjustments that need to be made,” said Fitch Ratings analyst Marcy Block, who covers Ohio. “Generally these reforms are to the benefit of the funded ratio, which helps the state.” On the OPEB side, the state is particularly good despite future challenges. “They definitely have a strength in that area,” she said.
Fitch recently introduced a new liability metric for states that combine net tax-supported debt with the pension liabilities attributable to the state as a fuller indicator of long-term burdens facing states. Based on that metric, Ohio ranks ninth lowest out of 43, with a burden of 4.2%. The median burden was 6.9%, the report said.
Moody’s Investors Service, which rates Ohio Aa1, says the state’s long-term liabilities are moderate compared to the state’s budget. “Despite the recent decline in funded ratios, it is unlikely that a subsequent increase in annual contributions will strain the state’s budget,” analyst Baye Larsen wrote in a recent credit report.
Larsen noted that the state’s OPEB funds have assets of $14.5 billion to cover liabilities.
The legislative hearings begin the same week that Ohio Attorney General Mike DeWine announced he will seek lead plaintiff status in a proposed class action lawsuit against JPMorgan Chase & Co. tied to the bank’s $5.8 billion trading losses from the “London Whale” scandal.
DeWine said JPMorgan’s misleading trading activity caused three of Ohio’s five retirement systems to lose a total of $27.5 million on JPMorgan shareholdings.
“The filings allege that pension fund managers acting on behalf of Ohio retirees were given false and misleading information by JPMorgan Chase that hid the true nature of the bank’s risky trades, causing Ohio teachers, school employees, and public employees to lose tens of millions of hard-earned retirement dollars,” DeWine said in a statement.
Three of the state’s five funds, OPERS, OSERS, and OSTRS, joined the Arkansas Teacher Retirement System, the Oregon Public Employees Retirement Fund, and a Swedish fund known as AP7, for the lawsuit. The motion was filed in the U.S. District Court for the Southern District of New York.
Despite this summer’s legislative efforts, pension reform may end up appearing less effective next year when the Government Accounting Standards Board’s new accounting requirements take effect, the authors of the pension report warned.
The impact of the new GASB standards on Ohio’s funding status remains unclear, but will likely create “confusion and misinterpretation among the public,” according to the report.
“While legislation will hopefully pass in Ohio that will ‘solve’ the current pension program funding difficulties, once the new GASB provisions become public, it may appear that this was not the case,” the report says. “Communication of the facts will be an important responsibility of the pension systems and knowledgeable public officials.”