Legislative action on pensions shores up system, defuses rhetoric

The 2011 legislative session was marked by passage of legislation to limit lawsuit damages, restrict the collective bargaining rights of public employees and the legal rights of teachers, revamp the workers compensation system, and consolidate state agencies. Yet when asked to name the session’s biggest accomplishment, Senate President Pro Tem Brian Bingman identified an issue that largely flew under the public radar:

The biggest thing is going to have to be pension reform. The Legislature stepped up and made some tough decisions and took our pension liability from $16 billion down to $10 billion. And at the same time we’re protecting the commitments we made to the people in the system. I think that was huge.

The precarious funding status of public pension systems has received growing attention in recent years nationally and in Oklahoma.  To some, unfunded pension liabilities are at a “crisis level”, a “ticking bomb” that can be defused only by significantly reducing the retirement benefits for public employees. Yet rather than pursuing radical changes, the Oklahoma legislature opted for incremental reforms within the current structure of defined benefit retirement plans. While these reforms will significantly strengthen the financial viability of the system, they will leave current and future retirees in a more uncertain financial position and may not put an end to the pension debate.

Of several dozen retirement bills introduced in 2011, five made it through the legislative process and were signed by the Governor. Of these, HB 2132, authored by Senator Mike Mazzei and Rep. Jeff Hickman, was at once the simplest and most consequential. With HB 2132, no retirement system will be allowed to grant Cost of Living Adjustments (COLAs) for retirees unless the additional benefit is fully funded by the Legislature at the time it is enacted. Until now, the actuarial assumptions of the state pension systems have been based on annual two percent COLAs without additional funding to cover their cost.  According to the bill’s official fiscal impact statement, changing the COLA assumption reduces the total unfunded liabilities of the state pensions systems by $5.2 billion, or almost one-third, and boosts the funded ratio of the individual systems by eight to 16 percentage points.

While doing away with unfunded COLAs is a major step towards ensuring the long-term stability of the state’s pension systems, the change does create genuine concern for current and future retirees that their benefits will erode over time due to inflation. In a statement quoted by the Oklahoma Public Employees Association, Senator Bingman acknowledged this concern:

We understand that OPERS [Oklahoma Public Employees Retirement System] retirees’ benefits are the lowest in the system and COLAs will be needed in the future. We will be studying this issue to determine when and how we can provide funding for COLAs going forward.”

The other significant pension bills passed this session, SB 377 and SB 794, primarily concern the retirement age for new teachers and state employees, respectively.  The  normal retirement age for new teachers and state employees will be raised from 62 to 65; however, those who qualify under the rule of 90 (age plus years of experience) may be able to receive full retirement benefits starting at age 60, while others will qualify for partial benefits starting at age 60, compared to age 55 under current law. SB 794 also does away with special treatment for elected officials compared to other public employees.

Although most Democratic legislators, and a handful of Republicans, opposed the pension bills, the legislation had a bipartisan pedigree: the strategy of tackling the unfunded liability in the pension systems by prohibiting unfunded COLAs and adjusting the retirement age was proposed initially last fall by then-Treasurer Scott Meacham, a Democrat, and was endorsed by the Oklahoma Pension Oversight Commission.

It remains to be seen if this year’s reforms are accepted as a long-term solution to the pension systems’ funding problems, or whether they are treated as prologue to a more radical overhaul of public pension benefits.  Recently, both Treasurer Ken Miller and a Senate select committee on pensions have signaled an interest in exploring defined contribution or hybrid plans for new employees that would involve doing away with traditional defined benefit retirement plans (click here for an explanation of the difference between defined benefit and defined contribution plans). According to Treasurer Miller:

With an increasingly mobile workforce and an overtaxed state budget, policymakers should consider the merits of a defined contribution or hybrid model that would offer choice, flexibility and portability to new hires.

However, as then-Treasurer Meacham noted, switching to a defined contribution plan would do nothing to solve the problem of unfunded liabilities. In fact, it  would make the problem worse as the state would need to continue making payments under the old system even as current employee contributions are taken by the new system.  A report prepared  for the Oklahoma Teachers Retirement System (OTRS)  warned that without new members joining the system, OTRS would face a shortfall of $1.4 to $4.5 billion, depending on COLA assumptions, and would ultimately run out of funds. In addition, as advocates for public employees have argued, defined benefit plans provide more secure benefits for retirees with higher investment returns and lower administrative costs.

There is little doubt that the pension debate will continue. But we can be hopeful of a calmer and more reasonable debate if this year’s measures defuse some of the overheated rhetoric about “ticking time bombs” and systems in imminent danger of collapse.