Building a Stronger OPERS Ohio Municipal League Annual Conference Nov. 1, 2017

Ohio Public Employees Retirement System State of OPERS Funding Update Investment Update Health Care Status Update Cost-of-Living Adjustment (COLA) Why now? Why retirees also? Why COLA? Status Questions Ohio Public Employees Retirement System

Ohio Public Employees Retirement System State of OPERS – Funding Status Update Funding as of 12/31/2016 $ in B Pension Health Care* AAL $100,166 $18,711 Assets $80,280 $11,922 UAAL $19,886 $6,789 Funded Ratio 80% 64% Amortization/ Solvency 19 years 16 years Health care assets cannot be used for pension funding Ohio Public Employees Retirement System * Roll-forward of 12/31/15 AAL

State of OPERS – Funding Status Update Valuation Year Actuarial Accrued Liabilities (AAL) Valuation Assets Unfunded Actuarial Accrued Liabilities (UAAL) Ratio of Assets to AAL Amortization Years Total Defined Benefit Return Unrealized Gain/(Loss) 2016 $ 100,166 $ 80,280 $ 19,886 80% 19 8.31% $ (2,766) 2015* $ 97,177 $ 78,061 $ 19,116 20 0.33% $ (3,501) 2015 $ 91,832 $ 13,771 85% 2014 $ 89,285 $ 74,865 $ 14,420 84% 21 6.96% $ 2,398 OPERS is currently anticipated to fund health care at 0% in 2018 and beyond, so no additional levers would be available to offset any reduction in the assumed rate of return. Ohio Public Employees Retirement System

Ohio Public Employees Retirement System State of OPERS – Funding Status Update Investment Returns (1972-2016) Negative Return 0.00%-8.00% Return 8.00+% Return Year Return 1973 -18.80% 1978 2.20% 1972 18.00% 1974 -11.90% 1979 2.87% 1975 21.40% 1977 -1.00% 1981 0.71% 1976 20.80% 1994 -0.02% 1987 1.29% 1980 9.73% 2000 -0.71% 1990 6.30% 1982 28.32% 2001 -4.58% 1992 5.66% 1983 9.64% 2002 -10.73% 1996 7.85% 1984 13.07% 2008 -26.92% 2011 0.20% 1985 25.59% 2015 -0.03% 2014 6.70% 1986 15.21%   1988 9.25% 1989 18.38% 1991 15.68% 1993 9.72% 1995 20.47% 1997 13.37% 1998 14.45% 1999 12.10% 2003 25.39% 2004 12.49% 2005 9.03% 2006 14.66% 2007 8.52% 2009 20.06% 2010 13.90% 2012 14.40% 2013 14.00% 2016 8.23% Any year less than 8.0% return is a loss Despite many years of positive returns, a $19 billion unfunded liability still exists OPERS cannot invest our way out of UAAL Market volatility calls for pragmatism in plan design Ohio Public Employees Retirement System

Ohio Public Employees Retirement System State of OPERS – Investment Update OPERS Investment Performance (Preliminary Returns, net of fees, as of 08/31/2017) Ohio Public Employees Retirement System

Ohio Public Employees Retirement System State of OPERS – Investment Update OPERS Asset Allocation Today: Since 2007, the asset structure of OPERS Investment Fund has been transformed. The changes were made to reduce the volatility of the Fund’s assets, while continuing to earn high risk-adjusted returns. This was accomplished principally by moving toward a peer group weighting in alternatives asset classes such as real estate and private equity, and moving some funds to multi-asset class strategies such as Risk Parity (which broadly owns the same asset classes found elsewhere in the asset allocation of the Fund but adjusts their portfolio weighting to balance risk). Private Alternatives: include Private Equity and Private Real Estate Public Alternatives: include Commodities, REITs, Risk Parity and Global Tactical Asset Allocation (GTAA) Ohio Public Employees Retirement System

Ohio Public Employees Retirement System State of OPERS – Investment Update Private Alternatives: include Private Equity and Private Real Estate Public Alternatives: include Commodities, REITs, Risk Parity and Global Tactical Asset Allocation (GTAA) Ohio Public Employees Retirement System

Ohio Public Employees Retirement System Health Care Update HRA Successes Educational Efforts Open Enrollment Ohio Public Employees Retirement System

Cost-of-Living Adjustment State of OPERS – COLA Cost-of-Living Adjustment Ohio Public Employees Retirement System

Ohio Public Employees Retirement System Challenges – COLA Update Market Volatility Unfunded Liability Changing Demographics Environment - Pension Envy Ohio Public Employees Retirement System

Why now?

Ohio Public Employees Retirement System COLA – Why Now Reduce $19 billion unfunded pension liability specific target not set Maintain intergenerational equity Ability to react to market volatility and life expectancy of retirees Continue to provide health care Continue to be proactive No Health Care funding beyond 2017 Ohio Public Employees Retirement System

Accumulated Member Contribution Pension Benefit Paid To Date OPERS Retiree Statistics Averages Current Age % of Retirees Years of Service Years in Retirement Monthly Benefit COLA Career Contrib. Rate Accumulated Member Contribution Pension Benefit Paid To Date 90+ 2% 19 29 $1,380 $23 8.0% $28,126 $359,777 80-89 11% 20 $1,735 $33 8.3% $47,279 $359,710 70-79 26% 22 13 $2,153 $48 8.5% $75,168 $303,414 60-69 36% 24 7 $2,676 $66 8.8% $99,758 $251,487 50-59 10% 26 6 $3,195 $83 $109,018 $227,124 Below 50 & Disability 1% $2,318 $59 9.1% $53,340 $177,783 Deceased 14% $1,272 $26 $48,876 $267,718 All 100% 12 $2,260 $53 8.6% $79,337 $278,167 Retirees/beneficiary receiving pension benefit as of 8/31/2017. Deceased = beneficiary receiving benefit. Accumulated member contributions include 4%/1% interest accumulated throughout career and up to retirement. Pension benefits paid to date are nominal dollar amounts. If one considers investment losses the greatest risk to a DB plan, then loss of future contributions is the second biggest risk. The active members’ contributions to UAAL creates a trickledown destabilizing impact on the plan. The bulk of our retiree population has retired in the last 10 years. When we see these heavy waves of young retirees, long term costs of the group must be carefully considered and accounted for. All older retirees have gone through high inflation periods with little or no COLAs at times. Ohio Public Employees Retirement System

Why retirees also?

Retiree & Member Levers Age & service eligibility increased Age & service calculation modified 5-year FAS CPI-based COLA Actuarial reduction factors Spiking (CBBC) Minimum earnable salary increased Disability program changes Liability cost service purchases Joint retirement/intersystem transfers Survivor benefit eligibility Medicare-Eligible Health Care & HCPP 3.0 Remaining: COLA Non-Medicare Health Care S.B. 343: Age & service retirement eligibility/calculation Final Average Salary (FAS) Cost-of-living adjustment Actuarial reduction factors for early retirement Contribution-based benefit cap (CBBC) Minimum earnable salary Disability program changes Cost of service credit purchases Intersystem transfers Enhanced refund Membership determinations

Impact of Prior Pension Changes

Why COLA?

Ohio Public Employees Retirement System Why COLA? Active member benefits have been addressed to account for increased life expectancy and elimination of subsidization of benefits and for contribution levels Source of pension UAAL remains primarily attributable to retiree population; COLA is the only pension lever Long-term, low inflation predicted to continue; current COLA outpaces inflation No additional levers remain to significantly reduce unfunded liability that do not constitute total benefit redesign Ohio Public Employees Retirement System

Ohio Public Employees Retirement System Historical Inflation Original COLA significantly lower than inflation = mitigated only 1.5% of 6.0% (1970) COLA predated health care – never intended to offset health care inflation In the last 30 years, COLA has tended to outpace inflation 60% of the time Ohio Public Employees Retirement System

Ohio Public Employees Retirement System Payments in 2016 OPERS paid $5.3 billion in pension, the COLA accounts for $1.3 billion of that amount OPERS paid $1.2 billion in health care coverage Ohio Public Employees Retirement System

COLAs at Ohio Retirement Systems COLAs at Ohio Retirement Systems All Ohio COLAs are simple, not compounded COLAs at Ohio Retirement Systems Set by Board 0% beginning 7/1/17 Previously 2% with 5-year delay after retirement STRS HPRS Set by Board annually currently 1.25% Capped at 3% Retire after 1/7/13, minimum age 60 Pre-1/7/13, minimum age 53 SERS Board authority to grant COLA based on CPI, capped at 2.5%, beginning 1/1/18 Previously a flat 3%, regardless of CPI changes 3% Currently suspended Resume in 2019 CRS 3% for those with 15 years on 7/1/13; minimum age 55 2013 new hires & lower service members = CPI, capped at 3%; eligible at age 60 3% (pre-1/7/13) % increase in CPI, capped at 3%, starting in 2019 (2/1/13) OPERS OP&F

COLA Status Update

Ohio Public Employees Retirement System COLA - Process Discuss Considerations with Stakeholders Board Discussions Collecting Data Revise Considerations Based on Input/ Feedback Ohio Public Employees Retirement System

Ohio Public Employees Retirement System COLA Survey Surveys Sent 194,125 Surveys Received 75,796 (37.1%) Survey Comments 29,681 Ohio Public Employees Retirement System

75,796 Surveys Received and Entered Survey Results 75,796 Surveys Received and Entered 73% think it is reasonable to align all COLAs with inflation 58% think OPERS should provide a COLA every year regardless of the System’s financial condition 56% would prefer the shortest 1-year freeze (if a freeze were imposed) 72% would prefer a lower cap over a COLA freeze 46% would prefer a lower cap of 2.5% (if a cap were imposed) *As of Sept. 27, 2017 Ohio Public Employees Retirement System

Ohio Public Employees Retirement System Feedback Themes Retirees feel COLA exceeding inflation is acceptable and would rather the COLA be compounding Retirees express need for COLA to offset health care expenses WEP/GPO Ohio Public Employees Retirement System

Ohio Public Employees Retirement System Feedback Themes Many people retired in anticipation of Senate Bill 343 Retirees recognize low inflation times but worry about possible future high inflation Given the choice, the preference for all is no additional change Ohio Public Employees Retirement System

Ohio Public Employees Retirement System COLA – Next Steps Update Board’s discussions: Options presented to the Board included several parts: Transitioning all COLAs based on CPI subject to a cap COLA freeze 1-5 years Ad hoc increase Transition delay Future funding triggers Changes only on actives Flat dollar amount COLA Ohio Public Employees Retirement System

Board Approved CPI COLA (Cap 2.25%) CPI-based COLA capped at 2.25% 85% purchasing power restored 2-year delayed implementation for 2010-2012 retirees First COLA – delay for future retirees to second pension anniversary (24 months after retirement) plus 1-year freeze for those who rush to the door. Triggers – 30 or more years amortization = freeze Upward trigger to 3% subject to inflation/funding/amortization period

Ohio Public Employees Retirement System Questions/Feedback Ohio Public Employees Retirement System