The ORSC was created in response to financial crises involving local police and fire pension funds. Prior to 1967 police and firefighters were members of local pension funds rather than a statewide fund. In the mid-1960s, many of Ohios 454 local police and fire pension funds faced financial disaster. They had routinely disregarded the financial impact of benefit increases and, as a result, many were close to financial insolvency. As a result, they were consolidated into a statewide fund in 1967. At that time, the local pension funds transferred assets totaling approximately $75 million to the Ohio Police and Fire Pension Fund and accrued liabilities of approximately $490 million. The cities were given a 67-year period, beginning in 1969, to pay their unfunded accrued liabilities. As of December 31, 2005, the remaining unfunded accrued liability totaled nearly $36.2 million.

Because of this financial crisis, the General Assembly realized there was a need for continuing oversight of the state pension funds to ensure they remained financially solvent, unlike the local police and fire pension funds. The creation of the ORSC was a direct result of the consolidation of those funds.

The Ohio legislature learned early on that it was caught in the line of fire between competing interest groups, and that it was losing the ole ratchet game. Give a benefit improvement to one group this year, and the next year another group demands equal treatment while the first group is seeking favorable consideration for yet another benefit improvement. And so the game goes around again and again.

Committed to a fair and fiscally sound retirement program for Ohios public employees, the Ohio legislature saw a real need for independent advice, both fiscally and policy-wise. Hence, the Council was created to provide leadership before the legislature when the retirement systems and interest groups are divided in their objectives.

Today, additional support for the creation of permanent pension oversight councils comes from the National Conference of State Legislatures, the American Legislative Exchange Council and other national organizations dedicated to public employee retirement systems. Frequently, legislators find that they have either inadequate information, uncertain understanding, or both, when they are called upon to make decisions about public pension plans. Legislators are accustomed to dealing in two-year budgetary cycles, whereas decisions about public pension plans typically involve significant long-term costs, such as 30-year pension obligations. If not made carefully and with foresight, such decisions can seriously threaten the budgetary stability of state and local governments years later when the pension obligations become due. They can also result in an unfair burden on future generations of taxpayers, and adversely affect the credit rating of the state or local governments debt. Moreover, continuing Congressional interest in regulating governmental pension plans makes the need for such councils even more apparent as a step toward avoiding federal intervention.

In short, the merits of a permanent pension oversight council, such as Ohios, are several. First, pensions are an increasingly complex subject area requiring a degree of expertise and knowledge; once acquired, it should continue to be available. Second, pension laws demand continuous supervision and attention. A single, ill-conceived retirement bill could have serious fiscal consequences that are not fully recognized for many years later. Third, there is a need for continuity of policy based on sound pension principles rather than special interests. Change of policy should always be possible, but it should be accompanied by knowledge of the past. Fourth, permanent pension councils can apply consistent policy to the perpetual stream of retirement bills. A great deal of pension law grows by patchwork, yielding in time to favoritism and special interests in the absence of consistent application of sound public policy. Finally, legislative term limits make the establishment of permanent pension councils essential if legislators are to have an independent source of information to help them place retirement issues in the widest possible context of public policy.

Purpose - The general purpose of the Council is to advise and inform the state legislature on all matters relating to the benefits, funding, investment, and administration of the five statewide retirement systems in Ohio: the Public Employees Retirement System, covering all state and local government workers; the State Teachers Retirement System, covering teachers at public schools, colleges, and universities; the School Employees Retirement System, covering non-teaching school employees; the Police and Fire Pension Fund, covering full-time police officers and firefighters; and the State Highway Patrol Retirement System, covering state troopers. In addition, the council provides legislative oversight with respect to the Ohio Public Safety Officers Death Benefit Fund, a state-funded program providing death benefits to the survivors of law enforcement and public safety officers killed in the line of duty, and the Volunteer Fire Fighters Dependents Fund, a program providing benefits to disabled volunteer firefighters and their survivors. The Cincinnati Retirement System is the only municipal retirement system in Ohio, and falls outside the jurisdiction of the Council.

The five state retirement systems have combined assets of over $174 billion (as of 1/1/07), and provide retirement, disability, and survivor coverage to over 1.5 million members, retirees, and beneficiaries. Additionally, they are authorized to provide comprehensive medical coverage to retired members and their families, at the boards discretion. These systems were created in lieu of Social Security coverage for Ohios public employees, with several local police and fire pension funds in existence before the turn of the century. The State Teachers Retirement System was created in 1920, the Public Employees Retirement System in 1935, the School Employees Retirement System in 1937, and the Highway Patrol Retirement System in 1941. Today, the Public Employees Retirement System and the State Teachers Retirement System are ranked in the top 20 of the nations largest pension plans.

Statutory Duties - The Ohio Revised Code mandates that the Council shall perform the following statutory duties: (1) Make an impartial review from time to time of all laws governing the public retirement systems and makes recommendations to the legislature on any changes the ORSC finds desirable with respect to benefits, sound financing of benefit costs, and prudent investment of funds [R.C. §171.04(A)]; (2) Report to the governor and legislature on its evaluation and recommendations with respect to the operations of the public retirement systems and their funds [R.C. §171.04(B)]; (3) Study all proposed changes to the public retirement laws and reports to the legislature on their probable costs, actuarial implications and desirability as a matter of sound public policy [R.C. §171.04(C)]; (4) Review semiannually the policies, objectives, and criteria of the systems investment programs [R.C. §171.04(D)]; (5) Have prepared, at least once every ten years, an independent actuarial review of the annual actuarial valuations and quinquennial actuarial investigations prepared by each system [R.C. §171.04(E)]; (6) Have conducted a fiduciary performance audit of each system at least once every ten years [R.C. §171.04(F)]; (7) Provide each Council member with copies of all proposed rules submitted by the retirement systems and submit any recommendations to the Joint Committee on Agency Rule Review [R.C. §171.04(G)]; (8) Review the police and fire contribution rates and makes recommendations to the legislature that it finds necessary for the proper financing of OP&F benefits [R.C. §742.311]; and (9) Prepare an independent actuarial study every three years on the required employer supplemental contribution to be made on behalf of academic and administrative employees of higher education electing an alternative retirement plan [R.C. §171.07].

Outside of its statutorily mandated duties, the Council may establish a uniform format for any report that the boards of the state retirement systems are required to submit to it. The Council also may request that the auditor of state perform or contract for the performance of a financial or special audit of a state retirement system.

Composition - The Council is composed of fourteen members: three members of the House appointed by the Speaker; three members of the Senate appointed by the President; three members appointed by the Governor, one representing the state, another representing local governments, and the third representing public education institutions; and the five executive directors of the state retirement systems, who are nonvoting members. The law stipulates that no more than two of the three House members, Senate members, or gubernatorial appointees may be of the same political party. Council members serve without compensation, but are reimbursed for actual and necessary expenses incurred in the performance of their official duties.

Meetings - The Council meets on a monthly basis, generally the second Wednesday of each month. The Councils meetings are open to the public and its records are available for public inspection. All legislation involving any of the five state retirement systems comes before the Council. The Council staff provides a complete analysis of the content, policy implications, and fiscal impact of such legislation, along with a specific recommendation. The nine voting members of the council act upon the staff recommendation, with at least five affirmative votes required for the Council to take action on any piece of legislation. Any action by the Council is reported to the state legislature, which usually follows the Councils advice.

Personnel and Budget - The Council also has its own consulting actuary, Milliman, and its own investment consultant, Evaluation Associates, a subsidiary of Milliman. Milliman conducts reviews independent of the actuaries employed by each system as needed, whereas Evaluation Associates conducts a semiannual review of the policies, objectives, and criteria of the systems investment programs. Further, in the past the Council has engaged the services of the William M. Mercer Company to undertake a comprehensive disability study of the Police and Fire Pension Fund and, most recently, independent actuarial audits of the Police and Fire Pension Fund and the Highway Patrol Retirement System. The Council has also contracted with Independent Fiduciary Services to complete independent fiduciary audits of the State Teachers Retirement System and the Police and Fire Pension Fund. These consulting arrangements provide tremendous credibility, expertise, and independence to the Councils various oversight responsibilities.

Each year the Council adopts an annual budget for the period July 1 through June 30 that is paid out of the investment earnings made on the assets of the five state retirement systems, which total over $174 billion. By law, each system pays a proportionate share of the Councils annual expenses; the Council receives no legislative appropriations.

Functions - The Council performs several different functions. Obviously, the Council works closely with each of the state retirement systems in developing legislation, gathering and disseminating information, and responding to federal regulations. For example, the Council played a significant role in the enactment of legislation expanding the investment authority of the five systems to the prudent expert standard and requiring an actuarial analysis be attached to all retirement legislation having any measurable financial impact on the systems (S.B. 82 - eff. 3/6/97). Investment earnings constitute the largest source of revenue in each system, financing up to 65% of benefit costs. Simply put, the more investment income earned, the less contributions required from employers and employees, and ultimately Ohio taxpayers, who are the ultimate guarantors of the retirement benefits promised by the legislature. In order to monitor the systems' investments in light of their expanded investment authority, the Council recommended and the General Assembly enacted a requirement that the ORSC review the systems' investment programs twice each year (S.B. 190 - 7/13/00).

The Council monitors all federal legislation having an impact on governmental pension plans and ensures compliance with all federal regulation of such plans. Recent examples of such activity include authorizing the establishment of excess benefit plans allowed under Section 415(m) of the Internal Revenue Code (S.B. 190 - 123rd G.A.) and state compliance with the Taxpayer Relief Act of 1997, which limits the amount of nonqualified service credit members may purchase (H.B. 416 - 123rd G.A.).

The Council also undertakes studies of specific retirement and health care issues pursuant to legislative mandates and requests. In the last five years, for example, the Council issued the following reports:

Qualified Domestic Relations Orders, January 7, 2002

Transfer of University of Akron Members from SERS to PERS, March 11, 2002

Investment Performance Review, April 17, 2002

OP&F Adequacy of Contribution Rates, June 6, 2002

Investment Performance Review, November 13, 2002

Investment Performance Review (Fourth Quarter 2002), April 9, 2003

Review of the Adequacy of the Contribution Rates to OP&F, SERS, and STRS, November 5, 2003

Investment Performance Review (Second Quarter 2003), November 6, 2003

Review of the Adequacy of the Contribution Rates to HPRS and PERS, February 11, 2004

Addendum to the Review of the Adequacy of the Contribution Rates to OP&F, SERS, and STRS, February 11, 2004

Review of Contribution Rates Necessary to Actuarially Fund Post-Retirement Healthcare Benefits for HPRS, OP&F, PERS, SERS, and STRS, February 11, 2004

Investment Performance Review, May 12, 2004

Investment Performance Review, November 17, 2004

Investment Performance Review, May 11, 2005

Supplemental Contribution Rate for Members Who Elect to Participate in an Alternative Retirement Plan, June 28, 2005

Investment Performance Review, December 14, 2005

Adequacy of OP&F Contribution Rates, January 9, 2006

Investment Performance Review, May 10, 2006

Investment Performance Review, December 13, 2006

Fiduciary Performance Audit of the State Teachers Retirement System, December 2006

Fiduciary Performance Audit of the Ohio Police and Fire Pension Fund, December 2006

In addition, the Council publishes the following reports and updates them as needed: A History of Benefit Changes in the Public Employees Retirement Systems of Ohio; Benefits Provided by Ohios Public Pension Systems: Comparative Tables of the Five Statewide Pension Systems; Acquiring Service Credit in the Public Pension Funds of Ohio; and Pension Profiles. The Council also publishes annually its Evaluations and Recommendations Regarding the Operation of the State Retirement Systems and their Funds. These reports serve not only to keep the public updated and informed about developments in Ohios five public pension funds, but also to make the public aware of the Council and its function. These reports can be found on the Council's website: www.orsc.org. The website also contains copies of all legislative analyses prepared by staff, pension-related brochures, and an archive of all changes to the laws governing the retirement systems.

Several state agencies rely on the Council for technical assistance and information in performing their statutory duties. The Legislative Service Commission often turns to the Council for assistance in drafting pension legislation or preparing fiscal notes on such legislation. From time to time, the Attorney General calls upon the Council when interpreting the meaning and intent of a particular state pension enactment. The state personnel and tax departments also use the Council as a pension information resource, as do individual legislators and their staffs with respect to constituent matters.

Nationally, the Council has a long-standing relationship with each of the major national associations dealing with public pension plans: the Governor Finance Officers Association, National Association of Public Pension Attorneys, National Association of State Retirement Administrators, National Conference of Public Employees Retirement Systems, National Conference of State Legislatures, and National Council on Teacher Retirement. These national associations have invited Council staff to speak at educational conferences/workshops, and have referred individuals from other states to the Council for general information and assistance. Most recently, the Council director was selected to represent the perspective of state officials and the interests of state governments in reforming the Social Security system on the Task Force on Social Security Reform for the National Conference of State Legislatures. The Council maintains an extensive library of information on both private and public pension plans, including Social Security and Medicare, and regularly exchanges reports and studies with other state agencies and interested parties.

Public Policy - Because of its knowledge of and perspective on all five state retirement systems, the Council is in a unique position to recommend reform measures that reflect consistent, sound principles of pension policy rather than isolated responses to political pressures and crises. The Council has adopted the following set of principles, which are observed in its review and recommendation of bills affecting the pensions and other retirement benefits of public employees. These principles are reviewed periodically.

I. Normal Age and Service

" The normal retirement age should be set in a reasonable relationship to the employability limits of the average employee, which is generally age 65 for regular public employees and age 52 to 55 for protective and safety force employees. " The normal service for regular public employees should be 30 years and for protective and safety force employees 25 years, based upon the career expectations found in most other states. " Retirement benefits should be actuarially reduced for retirement prior to normal retirement age, except for long-service retirement at any age after normal service requirements are met (30 years for regular public employees and 25 years for protective and safety force employees). " Intersystem communications should be established and maintained to assure that identical statutory provisions, common to the affected systems, are uniformly construed.

II. Benefits

" The retirement benefit should provide an adequate standard of living at the time of retirement. The benefit should be related to a members final average salary, determined on the basis of the three highest years of salary. Any reduction in the number of years used to determine final average salary should be carefully weighed for the abuses that it will invite in making such determinations. " The measure of adequacy should be based upon a minimum of 30 years of service for regular public employees and 25 years of service for protective and safety force employees. " Minimum benefits should not be set so high as to distort the benefit formula significantly. " Flat benefits (i.e., those not related to service, age and/or payroll-based contributions) should be examined very critically for their impact on contribution rates. " The retirement benefit should be adequately maintained during the period of retirement. There should be a plan of pre-funding post-retirement increases. When possible, post retirement adjustments should follow some validly recognized economic indicator. Post retirement increases based on factors that offset the effects of age, service, and salary should be avoided.

III. Financing of Benefits

" The cost of benefits should be shared between employees and employers, with the employers paying for the cost of unfunded accrued liabilities. " Unfunded accrued liabilities should be amortized over a reasonable period of time, related to the average working career of the members, but not to exceed 30 years. " There should be equal treatment in the burden of pension financing between generations of taxpayers. Ad hoc post-retirement increases should be financed separately and not merely added to the unfunded accrued liabilities of the pension funds. " Concepts of the financial limits that can be reasonably borne by members and employers will be continually reviewed by the Council and its staff.

IV. Membership Coverage and Treatment

" There should be equal pension treatment among the various groups of non-uniformed public employees and, as nearly as practicable, retirement benefits should be uniform. " The nature of the services public employees perform for the state or local governmental units should determine the retirement system under which they are covered. Protective and safety force employees are considered a special category of public employees deserving of a special set of benefits. " Maximum mobility of memberships and service credits among the five Ohio retirement systems should be fostered and encouraged.

The Council recommends to the Ohio General Assembly that no proposed increase in pension benefits be seriously considered or granted until there is established adequate financing to cover its cost.

Various national associations, including NCSL, have established pension principles to assist state legislatures in effectively managing public pension plans and to influence Congress on matter relating to public pension policy. The Council staff served on the NCSL Pensions Committee when it revised its publication, Public Pensions: A Legislators Guide. This publication is intended primarily as an educational tool, setting forth a few broad principles of good public pension policy and making several specific recommendations concerning pension reform measures.

Legislative Recommendations - In recent reports prepared for the state legislature, the Council, in consultation with its independent actuary, has raised particular concerns and made specific recommendations with respect to the state retirement systems. In 1991, the Council warned of the growing imbalance between the systems health care costs and health care revenues, which if left unchecked could jeopardize the actuarial funding of basic pension benefits. The Council recommended, among other things, that the systems negotiate on a collective basis with health care providers to establish managed care programs, and that the systems segregate pension reserves from health care funds. Managed care programs were established in all five systems as an integral part of their overall cost containment efforts. Also, upon the recommendation of the Council, the legislature has capped the Medicare Part B reimbursement in three of the five systems to save on costs.

In 1992, the Councils actuary raised concerns regarding the adequacy of the police and fire contribution rates to support the benefits provided by the pension fund. Of particular concern was the pay-as-you-go financing of retiree health care benefits. Two key recommendations made by the Council were that no future legislation creating additional liabilities to the fund be enacted and that retiree health care costs be limited to 6.5% of payroll. The legislature followed the advice of the Council and refrained from enacting any benefit improvements for police and fire for two legislative sessions. Also, the OP&F retirement board formally adopted a goal to limit post retirement health care costs to 6.5% of payroll, which it maintained until the fund became more financially stable.

In 1993, the Council focused attention on the important role that investment earnings play in the overall funding of benefit costs in each system. The Council favorably recommended passage of legislation that expanded the investment authority of all five systems. The legislation, which authorized the systems to invest up to 50 percent of their assets in equities and up to 10 percent in foreign stocks and bonds, marked the first major revisions in the systems investment authority in more than a decade. Since then, the Council was instrumental in the passage of legislation abolishing the legal lists and further expanding this authority to the prudent expert standard (S.B. 82, eff. 3-7-97). Because the legislature has given the systems greater investment authority, the legislature has recognized that it has a responsibility to periodically review the systems investment performance. This was recently codified in S.B. 190 (eff. 7-13-00), which requires the Council to review the systems investment performance twice a year.

In 1994, the Councils actuary continued to raise concerns regarding the adequacy of the police and fire contribution rates. The actuary based such concerns on the fact that more members are retiring at age 48 than assumed; more members are going out on disability retirement than assumed; and both health and disabled retirees are living longer than assumed. The actuary also cited the fact that demographic pressures alone will make it difficult to contain retiree health care costs as an additional basis for concern. The Council recommended, above all else, that the study into the causes of the high rates of disability among both police and firefighters be undertaken to determine if changes in the statutory provisions and/or administrative procedures would be appropriate. The Council not only engaged the services of William M. Mercer, Inc. to conduct that study, but also played an instrumental role in the enactment of legislation giving the board the necessary tools to prevent certain abuse in the use of disability retirement (H.B. 226 - eff. 8-25-95).

Based in large part on the concerns raised by the Council and as a matter of good public policy, the Ohio General Assembly created the Joint Legislative Committee to Study Ohios Public Retirement Plans to review the laws and operations of all five systems not only for the financial security of Ohios public employees but also for the financial interest of Ohios taxpayers. As indicated above, the Committee engaged the services of the Council staff to conduct the review. The William M. Mercer study considered best industry practices in both the private and public sectors to formulate its recommendations regarding effective disability management. In 1998, the recommendations included in the study completed by Mercer resulted in the passage of H.B. 648 (eff. 9-16-98). Because of the changes made in H.B. 648, the OP&F disability program is now recognized as one of the best programs in the country.

In 1999, the Councils director recommended that actuarial audits of all five retirement systems be performed at least once every ten years. The purpose of a ten-year actuarial audit is to provide an independent critique of the reasonableness of the actuarial assumptions and methods in use and the accuracy of the data and the resulting actuarially-computed contributions and liabilities of the systems. This was codified in 2000 with the enactment of S.B. 190 (eff. 7/13/00).

In 2003, based on concerns regarding the administration and operations of the retirement systems, the Council voted to have fiduciary performance audits of STRS and OP&F completed. The Council recommended that this type of audit be conducted on a regular basis for all five systems. The legislature codified this requirement for all the retirement systems in 2004 (S.B. 133; eff. 9/15/04).

Conclusion - Perhaps the observations of the Governors Operations Improvement Task Force (OITF) and the National Conference of State Legislatures (NCSL) sum up the effectiveness and continued need for the Ohio Retirement Study Council:

OITF

It appears that the retirement programs are financially strong. Employees can and should have a sense of comfort and security from both the level of annual funding and the ongoing competent management of their retirement funds. Overall, the State has a long and successful track record regarding the retirement programs.

The ORSC plays an important role in the ongoing success of the five retirement funds. The State and the funds were insightful when they established the ORSC.

NCSL

"...the two best legislative sources in the United States for reliable, accurate and timely information on pension issues are the Ohio and Texas pension commissions. Mr. Hutras and his staff are invariably well-informed and helpful...they have a national reputation for quality of work..."