The pension crisis is over

defusebombOklahoma’s seven public pension systems  have a combined unfunded liability of $11.6 billion as of June 30, 2012. This large  number alone is often put forward to make the case for doing away with traditional defined benefit pensions for state workers. Others point to the fiscal crisis in cities like Detroit and Stockton, California, or to the size and growth of the federal debt, and draw the conclusion that a major pension overhaul is needed in Oklahoma. The alarming rhetoric obscures the real progress that Oklahoma policymakers have made in recent years to put our public pensions on sound footing. 

Without question, Oklahoma’s pension systems have faced serious challenges for a long time. Over several decades, lawmakers allowed problems to build by offering current and future retired workers more generous benefits than what was adequately paid for. In 2006, the Oklahoma Pension Oversight Commission issued a report titled “Crisis in the Oklahoma State Pension Systems”, declaring that “a crisis state has been reached,” and warning that “without definitive action in the near future, the eventual cost of restoring the systems to financial health may be prohibitively expensive.” As recently as 2010, the total unfunded liability of the pensions systems totaled $16.1 billion, and the systems had a combined funded ratio of just 56 percent, third worst in the nation. The state’s largest pension plan, the Oklahoma Teachers Retirement System (OTRS),  by itself accounted for $10.4 billion of this total liability. Its funded ratio was just 47.9 percent and its funding period – the length of time it would take to be fully funded – was nearly fifty years.

Yet over the last decade, legislators have awakened to the state’s pension problems and have enacted strong reform measures. These include:

  • In 2003, the legislature began increasing employer contributions to the Oklahoma Public Employee Retirement Systems (OPERS).  The state contribution rose from 10 percent of salary in 2004 to 16.5 percent in 2011;
  • In 2006, the legislature passed SB 1894, the Actuarial Analysis Act, requiring an actuarial determination that any future increase in retirement benefits is fully funded and imposing constraints on how retirement bills can be enacted;
  • In 2011, the legislature approved a series of reforms that included raising the retirement age for new teachers and state employees, and prohibited the granting of future retiree COLAs (cost-of-living-adjustments) without full funding.
  • In 2013, the legislature approved HB 2078 to shore up the Oklahoma Firefighters Pension and Retirement Systems, including increased employer and employee contributions, additional dedicated tax revenue, and stricter eligibility requirements for benefits.
  • Also in 2013, the legislature passed SB 847, which provides that future revenue surpluses above the cap on the Rainy Day Fund will be allocated to a new Pension Stabilization Fund to address unfunded pension liabilities.

None of these reforms represents a magic bullet. But together they are bearing fruit, stabilizing the systems and putting them on a course toward long-term solvency..

  • Total unfunded liability of the seven systems has dropped from $16.1 billion in 2010 to $11.6 billion in 2012 and the funded ratio has increased from 56 to 65 percent. 
  • The funded ratio for OPERS (public employees) has improved from 72.0 percent in 2005 to 80.2 percent in 2012. In 2013, dedicated revenues to OPERS slightly exceeded the system’s “actuarial required contribution’, or the amount of contributions needed to pay for benefits accruing and pay off its unfunded liability over the next twenty-five years.
  • For OTRS (teachers), the funded ratio has risen from 49.5 percent in 2005 to 54.8 percent in 2012. More significantly, employer and employee contributions and dedicated revenues are now within 1.2 percentage points of the system’s actuarial required contribution. The system’s funding period – the length of time the actuaries project it will take to be fully funded – has fallen to 22 years.
  • The unfunded liability for OFPRS (firefighters) declined from $1.5 billion in 2010 to $1.1 billion in 2012. Passage of this year’s landmark reform bill  “will make the firefighters’ pension system more stable and assure future firefighters will have a pension they can count on receiving “, according to Speaker T.W. Shannon.

It should now be time to officially declare the “Crisis in the Oklahoma State Pension Systems” to be over. The reforms enacted in recent years have substantially increased funding to the state’s pension systems, while preventing future imbalances caused by approval of unfunded benefits. Continued discipline will certainly be needed to ensure that these gains are preserved, along with continued legislative tweaks to ensure that funding is adequate to meet obligations.

Despite the success of these pragmatic fixes, lawmakers have begun discussing a much more radical change.  A push is underway to eliminate defined benefit pension plans for future public employees, and replace it with a type of plan that could create more risk for public employees. Whether such a policy shift would be in the best interest of the state and its employees is a debate worth having, and one that we intend to explore in future blogs posts. But we should not proceed hastily due to a crisis mentality. Thanks to sound actions of Oklahoma’s elected officials over the past decade, the crisis has been addressed and Oklahoma’s pension systems are now on a stable and sustainable path. 

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Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

8 thoughts on “The pension crisis is over

  1. Come on David….55% funded at OTRS and meeting the ARC once in a generation is sustainable? With tremendous competition for limited resources, the state will never be able to pay teachers and public workers fairly on the front end if we do not make reasonable changes on the back end.

    1. Oklahoma has had a “great compromise” with its teachers. If you dedicate your service and expertise as people with college degrees to Oklahoma’s children and accept compensation that is not always competitive with private sector employment, you can be assured of a state backed pension upon your retirement.

      Zealots now in our state government are wanting to renege on this compromise by changing the OTRS from an defined benefit retirement system to a defined contribution retirement system. This abdicates the state’s responsibility to its teachers and places the burden of retirement savings back on poorly compensated teachers. This smells eerily like more political pandering as I’m sure securities companies would love to have the business this creates with individual teachers while absolving the state of a financial burden it owes, but simply doesn’t want to pay!

      Ken, don’t create something due to out of state interests and their influence. Wait for the majority of Oklahoma constituents to ask for it before creating a need that is being fixed as noted above.

      1. One cannot have a contract with someone not yet employed. All retirement changes being considered would affect only FUTURE employees.

        Besides, I am not in favor of reducing the share of state dollars going to teacher compensation, but allocating those dollars more effectively on the front end for CURRENT teachers! Which is why I believe that the OEA is actually working against the best interest of their declining membership by fighting changes. The playbook of the OEA is as predictable as it is unfortunate. When one cannot attack the merits of a proposal, attack individuals and motives. “Securities companies” already make too much money off Oklahoma pension assets, which is why we are trying to reduce their fees under a unified system…hardly pandering.

        Do you really feel the majority of Oklahomans would not favor a DC-style plan for taxpayer-funded retirements when they themselves have an employer-sponsored DC plan, if they are lucky? And other than the interest groups, and those that pander to them, the feedback on a shared governance service model has been all positive…perhaps because it is just common sense.

        Personally, I would be happy to see the question on the ballot to let our constituents decide directly. After the runaway failure of SQ 744, I doubt the OEA would want to take that chance.

        1. Once again, our argument in support of DC plans is that you have something I do not have therefore you shouldn’t have it? One has only to read the horror stories in the aftermath of the 2008 mortgage scandal to see how DC plans provide for a secure retirement (sic). I have a better idea for our elected officials, why don’t you pass laws that prohibit a corrupt banking sector, wall street brokers, and dishonest insurance executives from operating in this state, and empower our AG to go after the crooks. Instead your answer is to force new employees to give their hard earned money to brokers at fees 3-4 times that of institutional investing. Perhaps we need to get GASB standards that factor in the occasional corruption/scandal. P.S. There is no proof that consolidating all pension funds will reduce investor costs. There is only speculation. There is proof however that DC plans do not provide a secure retirement, and only enrich the private investors that have no skin in the game.

      2. Just for the record, the David who responded to Ken’s comment was a different David than the one (David Blatt) who wrote the blog post

  2. The fact is that pensions are a better form of retirement for workers. So long as their employers (be it public or private) make the required annual payments into the system, and don’t use those accounts as their own personal bank accounts when they face bankruptcy.

    Pension plans even perform better typically as an investment than 401ks.

    So lets be real about what we are really talking about trying to do with reforming public (or private sector) employee retirement benefits.

  3. I am trying to keep my pention plan and I was told to go online to set up credit or debit card payments. where do I go on this website?

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