COMMENTARY: Pension reform – Keeping promises and reducing liabilities
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Published: 06-Jun-2013

OKLAHOMA CITY – It’s early, but here’s a cautious prediction: real pension reform will be a major topic for the 2014 legislative session. Don’t take my word for it. 

Among the trio of Republicans now running state government, Senate President Pro Temp Brian Bingman, R-Sapulpa, is the most cautious.

When he does speak directly on an issue, it tends to play out in the manner he suggests. Enactment of major workers compensation reforms was his top priority this year, and it got done.

Give the quiet man his due, for the signature achievement in a relatively lackluster year at the Capitol.

Bingman said last week, in his post-session “exit interview” with Capitol reporters -- that pension reform will be a Senate priority in 2014. From Bingman’s lips, to God’s ears? The question is, what form will reform take? 

A credible possible approach is detailed in a study from the Oklahoma Council of Public Affairs (OCPA): “Saving Workers’ Retirement: First Steps Toward Public Pension Reform.” 

The group makes a strong case for changes that could, over three decades, yield a sustainable program in the largest state pension plan, the Oklahoma Public Employees Retirement System (OPERS).

OCPA’s proposal would put all new state employees into a defined contribution (DC) plan. 

In a defined benefit (DB) structure like most of our pensioners now have, retirees more or less get a guaranteed income stream, regardless of how markets perform or how effectively pension managers invest money.

In defined contribution systems, market performance matters, and an employee’s own willingness to pay in feeds the “corpus” of a fund. The latter also matches the preferences of younger workers, who want the portability of a 401-K type program, without having to commit to decades of government service. 

The prevalence of defined benefit (DB) plans in public (government) pensions, including those in Oklahoma, is contrary to the private sector trends over three decades. 

“In 1985, a total of 89 of the Fortune 100 companies offered their new hires a traditional defined-benefit pension plan, and just 10 of them offered only a defined-contribution plan. Today, only 13 of the Fortune 100 companies offer a traditional defined-benefit plan, and 70 offer only a defined-contribution plan,” economist Peter Orszag wrote in Bloomberg Businessweek. 

The OCPA narrative accompanying the reform proposal asserts the sharp discrepancy between current public and private retirement programs is, in large measure, “simply embedded in the logic of government action.”

Public employees are “a reliable voting base.” Nonetheless, legislators grant favors “in ways that won’t raise the ire of private taxpayers.” 

As a result, when direct pay increases were avoided, past Legislatures frequently increased benefits, including pension COLAs.

The late state Sen. Gene Stipe, D-McAlester – the longest-serving elected official in state history -- often crafted pension “sweeteners” for state employees in years when a direct pay hike was not achievable. Stipe is responsible for much of our current pension system dysfunction.

Back to the present: While Sen. Bingman has not specified what kind of pension reform he has in mind, in 2011 his close ally Sen. Mike Mazzei, R-Tulsain collaboration with state Rep. Randy McDaniel, R-Oklahoma City, crafted the historic reforms that brought long-term unfunded liabilities down from over $16 billion to under $10.6 billion.

That bright glow didn’t last, as anemic fund investments ballooned liability back up to $11.5 billion this year.

Gov. Fallin signed moderate pension “tweaks” this spring, but vetoed McDaniel’s bill to start an optional DC plan for new hires.

In response to a question from CapitolBeatOK, Fallin said she wants to work with legislators next year on reforms, to include a defined contribution plan with “cash basis” management. 

Those ideas, and her push for consolidation of the several state pension plans into a single administrative unit, have merit. 

But Jonathan Small, fiscal policy analyst who guided OCPA’s pension research project, argues passionately it’s time for Fallin, Bingman and Shannon to think big, really big. 

In an interview with CapitolBeatOK soon after publication of the reform plan on June 6 (Thursday), Small said:

"Half-measures, such as an optional defined-contribution plan, or a ‘cash balance’ plan, are not going to solve our problem. Our defined benefit plans increased liabilities for taxpayers by over a $1 billion in Fiscal-Year 2012."

He continued, "Optional defined contribution plans and 'cash balance' plans (which are still defined benefit plans), don't stop the accumulation of long-term promises and liabilities for new employees. A competitive defined contribution plan is the fairest for OPERS employees and for taxpayers, and ensures that retirement benefit promises cannot be broken or mishandled by politicians."

Small concluded, "It’s past time for Oklahoma to join the modern world and enact a defined-contribution plan."

You may contact Patrick B. McGuigan at Patrick@capitolbeatok.com and follow us on Twitter: @capitolbeatok.

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