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 Funding Period likely at “Infinity”

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

STRS Update Contribution Rates How much? Who pays?

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”

STRS Update Final Average Salary (FAS) Five highest years instead of three  About a 3% average reduction in FAS  The “stealth cutback?”

STRS Update Benefit Formula Changes Elimination of “35 Year Enhancements?” Other “multiplier” changes?

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?

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.

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

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.

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.

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.

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?

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 = 25 th Percentile No PBI in losing years beginning FY 2010

STRS Update PBI Issues PBI for FY 2009 Who is our competition for talent? Is industry salary data current? Is the 25 th 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?

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”

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

STRS Update Keyword: Table

STRS Update “Everything is on the table.”

STRS Update “Everything is on the table.” “All stakeholders are at the table.”

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!”