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Pension Spotlight: Ohio


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Pension Spotlight: Ohio

Chart 1


Credit Fundamentals By Sector

  • State of Ohio: We consider Ohio well positioned to manage its pension liabilities, but challenges exist. This view considers historic pension funding discipline that has been only adequate, as total plan contributions have performed under the level necessary to maintain static funding. In addition, reported aggregate pension funded ratios remain slightly below 80%, measured with what we view as a somewhat optimistic assumed rate of return. Over time a high discount rate may result in unanticipated increases to state contributions during volatile market conditions.
  • Local governments: Overall costs have been manageable for most municipalities and counties in the state, averaging approximately 7% of governmental expenditures in recent years. Although manageable, we recognize that this may lead to difficult budget decisions to meet contribution increases. Somewhat aggressive assumptions and statutory contributions may require cost escalation in the future. If the state were to increase statutory contribution rates, we believe that most local governments could manage the increases given their generally strong financial position.
  • School districts: School districts have been able to absorb retirement costs without exhibiting budgetary pressures, though challenges may arise should future cost escalate. Absent additional state aid or other revenue offsets, districts will face difficult budget decisions to maintain balance.
  • Other sectors: S&P Global Ratings maintains ratings on various issuers that also participate in cost-sharing multiple-employer (CSMEs) plans, including higher education institutions. While pension costs are currently manageable, fiscal 2021 will likely bring budgetary challenges as these institutions face weakened revenues, coupled with increasing COVID-19-related expenses. Should pension-related contributions increase materially, this could further pressure operating margins in an already difficult fiscal year.

Pandemic-Induced Recession Pressures Ohio Payroll Growth

S&P Global Economics' recent forecast estimates the country's recovery will enter a slower growth phase heading into 2021 and won't get back to its pre-pandemic levels (real GDP of fourth-quarter 2019) until late 2021 (see "The U.S. Economy Reboots, With Obstacles Ahead," published Sept. 24, 2020, on RatingsDirect). If market returns do not meet assumptions, anticipated pension contribution increases may take up a larger portion of an entity's budget and crowd out other discretionary costs. We consider Ohio's slow population growth and declines in public sector employment a risk to pension plan stability. Payroll growth assumptions for all four plans may be difficult to achieve year after year, and could reduce plan contribution levels and compound cost escalations.

Plan Summary

All statewide plans are subject to the oversight of the Ohio Retirement Study Council (ORSC). ORSC ensures compliance with state statute as well as reports on the actuarial soundness and health of public retirement systems throughout the state. Ohio local governments participate in two CSMEs: the Ohio Public Employees Retirement System (OPERS) and the Ohio Police & Fire Pension Fund (OP&F). Local school districts participate in two CSMEs: the State Teachers Retirement System (STRS) and the School Employees Retirement System (SERS) of Ohio. The state carries a fifth plan, the State Highway Patrol Retirement System (SHPRS), which we exclude from this report as the plan's responsibility is limited to the state. The city of Cincinnati is unique in Ohio in that it carries its own single-employer retirement plans, which are also excluded since they only apply to that city. Of the plans noted above, state employees only participate in the OPERS plan, with state employers accounting for over 30% of the OPERS liability. Contributions are statutorily determined for all four statewide plans but have the stipulation that amortization periods not exceed 30 years. Calculated amortization periods will change from year to year due to actual experience differing from assumptions.

All else equal, if the amortization period is calculated to exceed 30 years as a result of negative experience, a plan must be developed so that the amortization period is reduced to 30 years or lower. In the past, the state has enacted various pension reforms that have included benefit changes, such as updates to retirement eligibility, altering cost-of-living adjustments (COLAs), or changes to the benefit calculation formulate. Except for STRS, the plans' amortization practices underlying the statutory contributions are longer than our guideline of 20 years. The longer periods, combined with a level percent of payroll amortization method, could result in persistent underfunding as contributions are likely to be deferred into the future.

Collectively, other plan factors also show risk: Discount rates are well above our guideline of 6.0% and asset allocations may be aggressive given the reduced funding flexibility due to a high number of plan beneficiaries compared to active participants contributing to the plan. Below is a chart that reflects contributions for the most recent year compared with our static and minimum funding progress (MFP) metrics, with the net pension liability projected forward assuming continuation of that practice with all else held constant. Under our static funding and minimum funding progress calculations, holding current plan details constant, trends above 0% indicate an estimated growth in unfunded liabilities over time, while trends below 0% reflect an estimated amortization of unfunded liabilities. This chart is not a look into the future and may not reflect any recent contribution reforms, if any. Rather, it represents an illustration of the most recent contribution sufficiency for the largest plans in the state.

Chart 2


The state enacted pension reforms in 2012 to strengthen the plans' funded positions. Reforms allowed for greater participation in hybrid and defined-contribution plans, adjustments to COLAs, increasing retirement eligibility, and benefit formula changes. Additionally, STRS employee contributions increased to 14% as of July 1, 2017, and OP&F employee contributions increased to 12.25% as of July 1, 2015.

Plan Details


As of Dec. 31, 2019, OPERS served approximately 1.2 million, predominately non-uniformed, employees across nearly 3,700 employers in the state. With a total pension liability of $111 billion, the system is the largest in the state and the 12-largest nationally in terms of its net asset base. The system carries three main plans, a traditional plan (defined benefit), combination plan (hybrid plan), and a member-directed plan (defined contribution).

Statutory contribution rates have remained consistent since 2011, with an employer rate of 14% and an employee (local employees) rate of 10%. While the state has voluntarily contributed towards other postemployment benefits (OPEBs) in the past, there are no dedicated statutory contributions. The plan lowered its discount rate to 7.2% in 2018, which increased the reported liability future contributions. However, we still consider the discount rate elevated relative to our guideline of 6.0% for a typical plan and indicative of high volatility in the investment portfolio. The funded ratio has remained fairly stable in recent years, but contributions have consistently fallen short of our MFP metric. OPERS also faces increasing challenges given the demographic maturity of the plan, with a ratio of active members to retirees of 1.3 in 2019, down from a high 2.0 10 years ago, reducing the ability for employee contributions to be increased to offset benefit payments.

Although still requiring legislative approval for the changes to take effect, the OPERS' governing board-approved COLA changes are estimated to reduce the $24 billion unfunded liability by approximately $3 billion and smooth investment losses from previous years. OPERS has also considered an increase in the retirement age to 62 from 55, and an increase in employees' salary set-aside to 11% from 10%. We view the proposals to manage cost and liabilities as potentially reasonable measure to preserve the plan's funding and are monitoring legislative actions.


All full-time police and firefighters participate in OP&F. The plan offers pensions as well as a health care stipend. We view the plan's statutory contributions negatively since they do not result in full funding. The rates are as follows and at the statutory maximum:

Table 1

Ohio Police & Fire Pension Fund Contribution Rates
(%) Employee Employer
Police 12.25 19.5
Fire 12.25 24.0

OP&F's discount rate, at 8%, far exceeds our guideline and is among the highest of all the large state plans. This means that much of the funding burden is placed on ever-riskier assets and could lead to volatile and escalating costs in the future. Due to limited statutory contributions, the plan fell short of not only our MFP metric, but also static funding. We expect this to continue, meaning OP&F unfunded liabilities are expected to grow if all assumptions are met.


Teachers, faculty members of public school boards, and state-supported colleges and universities participate in the STRS pension plan that serves 1,121 employers. STRS administers three plans: a traditional defined-benefit of which 91% of its members participate, a defined-contribution, and a combined plan that reduces the defined-benefit benefit by half (from 2.2% to 1.0% of pay). Employees and employers each contribute a statutory funding amount of 14% of pay.

The overall funded level continues to show slight improvements over the past four years, with the calculated funding period of 16.6 years in 2019. A notable change made by the board and remaining to date is reducing its COLA to zero in 2017, which lowered the liability. However, the risks of slow funding progress and contribution volatility over time persists due to the statutory contributions and aggressive assumed return. However, we view the plans' shorter amortization length, coupled with closed funding period, positively. The STRS board plans to phase in further changes to its plan through 2026 to strengthen the plan.


SERS administers benefits for retired school employees in non-teaching positions. Plan benefits includes pensions, as well as OPEB Medicare Part B reimbursements. Contributions are capped at 24% with employees contributing 10% and employers 14% and contributions being allocated to not only these plans, but also in part to some other smaller plans. Once the pension funded ratio exceeds 90%, then any excess will go toward the OPEB plan, which was funded at 15.6% in 2019. We believe that some of its funding assumptions are aggressive and could lead to contribution escalations. In particular, the 7.5% assumed return, above our 6% guideline, increases the risk to participating employers. We also believe employers could be exposed to future contribution volatility over time as a result of possible market shock events or sustained poor asset performance.

After the SERS board approved that COLAs be discretionary as of Jan. 1, 2018, a three-year COLA freeze was enacted until Jan. 1, 2021. Furthermore, after April 1, 2018, changes were made so that future retirees' COLAs will also be delayed an additional three years until their fourth benefit anniversary. If the board opts to provide a COLA, it will be capped at 2.5% and tied to CPI-W with a 0% floor.

State OPEB Position Likely Improved Following Benefit Changes

The ability to modify plan benefits and assumptions in the state partly mitigates concerns surrounding liability and cost growth; frequent changes over the past 10 years and significant OPEB reform across the nonschool-related plans exemplify this flexibility. OPEBs are not statutorily required for the retirement systems but are offered through each plan.

The OPERS board recently voted to change the structure of OPEB health care benefits for active employees and current retirees and we view this positively given the reduction of risk associated with claims volatility and increasing medical costs. Effective for 2022, the board changed the benefit structure for pre-Medicare retirees from a coverage model to that of a stipend, and reduced the stipend for post-Medicare retirees. The changes are estimated to extend the life of the OPERS health care trust fund to 19 years from 11. These reforms have somewhat offset liability growth and rising future contributions resulting from past underfunding, though immediate benefits to employer budgets will be limited. Local employers have not made contributions for OPEBs since 2018 under the OPERS funding formula, which shifted previously OPEB-allocated contributions to the pension plan. Benefit payments since then have been made from accumulated trust assets.

Similarly, as of Jan. 1, 2019, OP&F's OPEB plan position was strengthened with similar changes. It transitioned from paying 75% of covered retiree health care costs to pension-like stipends for members to buy their own coverage. The health care stipend program is funded by 0.5% employer contributions, included in the statutory employer contribution rates above, and a portion of investment income.

The STRS OPEB plan is 174% funded while SERS is predominately funded on a pay-as-you-go-basis, though the net liability of $2.5 billion is fairly manageable when spread across the multitude of employers.

Guidance and FAQ Links


Table 2

Defined-Benefit Plan Details As Of 2019 Comprehensive Annual Financial Reports
Dec. 31 June 30
OPERS OP&F STRS SERS S&P Global Ratings' view
Funded ratio (%) 82.44 69.89 77.40 70.85 Poorly funded plans increase the risk of rising contributions for employers.
Discount rate (%) 7.20 8.00 7.45 7.50 A discount rate higher than our guideline indicates higher market-driven contribution volatility than what we view as within typical tolerance levels around the country.
Total plan ADC (Mil. $) 3,448 806 3,325 810 All four plans' statutory contributions have generally matched the actuarially deteremined amount, which we view as a plan toward 100% funding.
Total actual contribution (Mil. $) 3,448 805 3,325 810 Total contributions to the plan that were made last year.
Actual contribution as % of ADC 100 100 100 100 Historically contributing 100% of ADC demonstrates some commitment to funding obligations.
Actual contribution as % of MFP 81 71 96 84 Under 100% indicates funding slower than what we view as minimal progress last year.
Actual contribution as % of SF 103 93 122 104 Under 100% indicates negative funding progress last year and expected increasing unfunded liability if this continues.
Amortization method
Period Closed Open Closed Closed Contributions are statutory for all plans, so "open" refers to a plan that has hit its "cap."
Length 23 29 16.6 25 Amortization length (dependent variable) is calculated based on the statutorily determined contributions. Length greater than 20 generally correllates to slow funding progress and increased risk of escalation due to adversity. The state limits amortization length to 30 years, otherwise a plan will have to be developed to reduce funding period.
Basis Level % of payroll Level % of payroll Level % of payroll Level % of payroll Level % explicitly defers costs, resulting in slow or even negative near-term funding progress. Escalating future contributions may stress affordability.
Payroll growth assumptions (%) 3.25 3.25 3.00 3.50 The higher this is, the more contribution deferrals are incorporated in the level percent basis. There is risk not only of market or other adversity causing unforeseen escalations to contributions, but also of hiring practices not keeping up with assumed payroll growth, leading to contribution shortfalls.
Longevity Generational Generational Generational Generational A generational assumption reduces risks of contribution “jumps” due to periodic updates from experience studies.
OPERS--Ohio Public Employees Retirement System. OP&F--Ohio Police & Fire Pension Fund. STRS--State Teachers Retirement System. SERS--State Employees Retirement System. ADC--Actuarially determined contribution. MFP--Minimum funding progress. SF--Static funding.

This report does not constitute a rating action.

Primary Credit Analysts:Moreen T Skyers-Gibbs, New York + 1 (212) 438 1734;
Randy T Layman, Centennial + 1 (303) 721 4109;
Secondary Contacts:Todd D Kanaster, ASA, FCA, MAAA, Centennial + 1 (303) 721 4490;
Timothy W Little, New York + 1 (212) 438 7999;
Geoffrey E Buswick, Boston + 1 (617) 530 8311;
Thomas J Zemetis, New York + 1 (212) 4381172;

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