The stock market’s end-of-the-year losses in December caused each of Ohio’s state pension systems to lose money for the 2018 calendar year.
“Obviously, any time we do not meet our target return it is not good for the [pension] system,” Mark R. Atkeson, executive director of the Ohio Highway Patrol Retirement System (HPRS) told The Center Square via email.
“That said, we operate on a calendar year, and the timing of the December losses negatively affected our fund at year-end,” Atkenson said. “The loss in 2018 was due largely to a drop-off in December that immediately rebounded in January. Year-to-date 2019, HPRS is up approximately 11.1 [percent].”
According to the Dayton Daily News, the HPRS took a 4.73 percent loss. The Ohio Public Employees Retirement System (OPERS) took a 2.99 percent loss, the Ohio Police and Fire Pension fund a 1.78 percent loss, the State Teachers Retirement system a 1.75 percent loss and the School Employees Retirement System (SERS) a 1.28 percent loss. There are about 1.9 million people who either currently rely on pension funds or will have to rely on them when they retire.
“Last year was a down year for all investors – the Dow Jones Industrial Average was down 3.48 percent, and the S&P 500 was down 4.38 percent. OPERS’ defined benefit portfolio lost 2.99 percent in 2018,” Michael Pramik, a spokesperson for OPERS, told The Center Square via email. “Pensions measure returns over periods of decades and do not base investment decisions on one year’s worth of performance – whether good or bad.”
OPERS has also bounced back so far this year. In the first quarter of 2019, which ended on March 31, the pension fund was up 7.15 percent.
Although SERS also faced a loss during the calendar year of 2018, spokesperson Tim Barbour said that they calculate returns based on the fiscal year, rather than the calendar year. In Fiscal 2018, SERS had a 9.68 percent return on investment.
“Ohio SERS did not have a fiscal year loss. Losses during the last quarter of 2018 were primarily due to U.S. equity losses. During the fourth quarter (October 1, 2018 – December 31, 2018), the U.S. stock market was down [14.3 percent], which marked the worst quarter for equities since 2011,” Barboud told The Center Square via email. “Ohio SERS constantly evaluates the performance of its investment portfolios and makes adjustments to improve portfolio and total fund performance. The volatility of U.S. equities continues to be a challenge and SERS is addressing that by moving toward a more passive equity investment strategy.”
Greg Lawson, a research fellow at The Buckeye Institute, told The Center via email that one bad year will not shake the pension system that badly, but that these results demonstrate how unstable the system is. The Buckeye Institute is an Ohio-based, free-market think tank.
“In order to fund defined-benefit pensions at the required ratios, the systems have had to seek out riskier investments to meet necessary rates of return,” Lawson said. “While this can yield big returns, it also opens the door to serious losses. Additionally, and problematically, Ohio has been paying increasingly high investment fees to outside fund managers. This takes away significant funding for the actual plan benefits.”
Lawson said that the current structure of the pension system is likely unsustainable into the future. He said that when the systems can’t fund the pensions on their own, then the burden will likely fall on taxpayers.
The Buckeye Institute advocates for major pension reform, including running pensions more like a 401(k) or an IRA. Lawson said this is the only way to avoid a taxpayer bailout or a deep cut in pension benefits.
According to the Mercatus Center, Ohio's underfunded pension obligation is more than $300 billion.