(August 23, 2019) After multiple meetings over many months with OPERS senior staff and leadership, PERI has decided to take action designed to support the long term stability of the Pension and Health Care Funds. While health care is not a guaranteed benefit, retirees have overwhelmingly said that they see it as an important benefit and want it to continue. In order for the Health Care Fund to potentially receive sufficient contributions from OPERS employer contributions and investment returns to support long term solvency, there must be changes made to the Pension Fund to shore up its funded status and reduce its amortization period. Just one or two poor years of investment returns or a recession would almost certainly send the Pension Fund into a fiscal situation that would legally require OPERS to dramatically reduce its unfunded liabilities through severe plan design changes. These would include a long term suspension or permanent reduction of the COLA for retirees. Health Care would almost certainly be eliminated once the funds are depleted.
While we do not support the concept of reducing or suspending a COLA for current retirees, we realize that retirees will likely lose much more if a modest concession is not made. After much discussion with PERI, OPERS staff agreed to a two year suspension of the COLA effective January 1st 2022 versus other options more costly to retirees. Additionally, we were able to secure an agreement that the COLA would return to all OPERS retirees after December 31, 2023 based on their current condition. For example, any pre-2013 retiree receiving a fixed 3% COLA would see that fixed 3% after the suspension. PERI believes our new position on pension provides the best opportunity for the preservation of health care benefits and a stronger pension fund. Without these changes and given the likelihood of a recession in the next two years and OPERS current Pension Fund amortization period at such a high level, there is virtually no chance of employer contributions being directed to health care now or in the future. We believe that doing nothing to support the Pension Fund will lead to the loss of all health care benefits.
For the first time, OPERS proposed changes include driving cost efficiencies through plan design changes for future public sector hires as well a 1% increase in the employee contribution for this group. This was a major issue we communicated with legislators during the debate on HB 413 two years ago.
PERI’s position also includes support for one of five changes to health care (Package 5) that in our opinion, would provide benefits albeit at a reduced level, for the greatest number of both Pre-Medicare and Medicare eligible retirees. These packages are available for review by the public on OPERS website.
If OPERS Board of Trustees does not agree to the positions PERI has adopted, the PERI board reserves the right to rescind its support for these changes. OPERS is expected to take action in the next 30 to 60 days. Please read the following position paper to learn more about this topic.
PERI’s Board of Trustees recently made a very difficult decision to support OPERS efforts to shore up the pension fund that could also provide sustainability for retiree health care benefits. While this decision is a departure from our position to protect retiree’s COLA at all costs, there are new factors in our opinion that will provide retirees with longer term security and certainty when it comes to their benefits.
Please read the rest of this position paper to learn more about the actions that may be taken and why we believe retirees will benefit in the long run.
Since the spring, OPERS has held a series of meetings around the state with retirees to share their concerns over the financial condition of the Health Care and Pension Funds. Although the funds are separate, the ability for retirees to continue to receive meaningful health care benefits as well as their pensions rests on the financial strength of both funds.
While retirees should already be aware that health care is not a statutorily guaranteed benefit, it has been enjoyed by retirees for more than 50 years. After that period of time, health care benefits may feel like an entitlement. Not surprisingly, more than 90% of retirees have said it is important for OPERS to continue to provide meaningful health care benefits.
OPERS has identified a serious funding shortfall with the Health Care Fund that endangers its long term solvency. In fact, OPERS states the fund will be insolvent in eleven years. How could this occur when changes were made to both the pension and health care plan designs in 2012 that at that time were expected to protect both funds? There are several reasons.
First, health care premium inflation has been increasing at rates no one expected to see. This is not a problem of OPERS’ making, rather it is a national crisis with no solution in sight. Medicare eligible retirees were moved to a connector model through One Exchange in 2016 which helped OPERS better manage health care costs. Despite Medicare eligible retirees’ concerns at that time with becoming accustomed to a new health care delivery system, they now receive their benefits more efficiently and with substantial savings to OPERS.
Despite these savings, OPERS is faced with escalating health care premiums for pre-Medicare retirees. Specifically, this population constitutes only 20% of the total retiree population but is consuming 60% of the annual cost of health care provided by OPERS! This is an alarming development that is caused by healthy retirees leaving OPERS’ group plan to find less expensive options in the private market. This adverse selection leaves OPERS with an ever increasing population of unhealthy retirees, which is driving annual premiums to unsustainable levels.
All retirees have seen changes to health care such as the phasing out of spousal premium reimbursement and the increased cost of prescription medications. These cuts have inconvenienced retirees who may be better off financially, but in some cases has made it extremely difficult for lower income retirees to make ends meet. We believe all retirees need some sense of predictability when it comes to their health care benefits.
To this end, OPERS has spent significant time and effort to examine a variety of proposals that would shore up the Health Care Fund and give retirees some sense of predictability. To OPERS’ credit, they would prefer to develop a sustainable funding model for health care despite its voluntary status as a benefit, because it is so important to retirees.
At the very least, OPERS needs to be able to direct a minimum of 2% of the employer contribution to the Health Care Fund annually and count on investment portfolio returns of 6.5%. This is only achievable as long as the Pension Fund is on solid financial footing.
Remember, we said earlier that the solvency of the Health Care Fund is eleven years. The funded status of the Pension Fund is currently at 77% and the amortization period (the amount of time it takes to pay off all unfunded liabilities) sits at 28 years. OPERS and their actuaries have calculated that the Pension Fund will not be at a sufficient level of solvency to direct any portion of the employer contribution to the Health Care Fund until 2034, fifteen years from now. As you can see, the Health Care fund will run out of money in 2030, and unless reforms are made, health care will be gone for good.
OPERS’ current unfunded liabilities in the Pension Fund sit at $24 billion, the highest level in their history. This is primarily due to challenges to meet their annual investment target which now sits at 7.2% annually. It is also a function of a reduction in their investment return target from 8% two years ago to 7.5% and to a level of 7.2% today.
Some will argue that the stock market average over the past decade has easily exceeded 8% and therefore the Pension Fund should be better funded than it is. PERI would agree with this assessment if OPERS had most of their portfolio invested in stocks, but they don’t. Any fund investing billions of dollars as OPERS does, must have a diversified portfolio in order to protect against wild swings in gains and losses from year to year. Because of this reality, OPERS’ diversified portfolio will generally earn about 60% to 70% of what we see in U.S. equities markets. While this is less than what they might be able to achieve if fully invested in the markets, they also benefit in down years by not losing as much as they might have otherwise.
By their own admission and despite their reasonably good financial standing, OPERS is only one bad year away from potentially sliding into a fiscal situation that would lead the General Assembly to make drastic changes to Pension Fund benefits, as we saw in 2012. We have experienced the longest economic expansion in our nation’s history and are overdue for a recession. It is prudent for OPERS to take steps now to avoid the financial mess that occurred after the last recession a decade ago.
OPERS has presented several packages designed to lower the pension fund’s unfunded liabilities. Each involves some form of suspension or permanent reduction in the COLA payment given to retirees in addition to other plan changes that would impact future retirees. Additionally, actives upon retirement would be required to wait until their second year to receive their initial COLA payment. The goal to share plan design changes with actives as well as retirees is welcomed.
PERI believes that because retirees strongly want to retain health care benefits, the only prudent action is to find a solution that is a “win-win.” We believe a COLA suspension versus a permanent reduction in COLA payments is better for retirees in the long run, especially those who retired prior to 2013 and receive the fixed 3% benefit. OPERS has made no secret their preferred solution would be to cap the COLA for everyone. Their other preference is to freeze COLAs for up to three years and potentially cap at a lower level.
These options were not acceptable to PERI. We held the line at a two year suspension with the understanding that OPERS must return all retirees to their current conditions at the conclusion of the suspension period. This protects retirees receiving the 3% COLA and provides the best opportunity to save health care benefits.
There will be arguments presented suggesting any new restrictions that might be needed to improve the Pension Fund would only impact future retirees since current retirees’ pension benefits are protected by law. While this is the case, if such an action were to be passed by the Legislature, there is absolutely no guarantee that if lawsuits were pursued, the Ohio Supreme Court would ultimately rule to protect current retirees.
Retirees should also remember that if OPERS made the changes we anticipate they will make to the COLA, and we fight to have them rejected once they arrive in the General Assembly, and we possibly succeed, we could very well find ourselves facing more drastic circumstances in a few short years.
Consider this: if OPERS is unable to lower their unfunded liabilities and we experience a serious economic recession, then our success is short-lived. OPERS could easily recommend to the General Assembly that all COLAs be suspended or permanently frozen to get the Pension Fund back to a reasonable amortization period and funded status. Don’t forget, health care benefits would very likely be discontinued. Our experience suggests legislators would be receptive to these arguments.
A prudent and responsible approach is the one we currently support that will allow us to achieve the following:
PERI’s position is contingent upon OPERS Board of Trustees accepting our recommendations for the selection of Health Care Package 5 (which would benefit the most retirees possible of the five packages presented) and acceptance of COLA Package Three, which would only suspend the COLA effective January 1, 2022 through December 31, 2023 and return all retirees to their COLA current condition at that time.
PERI’s Board of Trustees reserves the right to rescind its position if OPERS Board of Trustees alters its position from what PERI has agreed to support.