Oklahoma pension reformers seek ‘sustainability’ and ‘intergenerational fairness’
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Published: 18-Feb-2013

OKLAHOMA CITY – Within reach at the state Capitol is a new wave of pension reforms, seeking long-term sustainability for government retiree systems as well as “intergenerational fairness.”

In 2011, pension reforms captured about 35 percent of the state's unfunded liabilities, including an end to more-or-less automatic cost-of-living-adjustments (COLAs).

Last year's effort to improve the financing of one government pension system failed when firefighters and municipal governments opposed financing changes.

This year the state representative driving the reform push is optimistic the Legislature will change the firefighters’ retirement calculation system -- saving hundreds of millions of dollars over several decades. Firefighters' unions seem ready to accept financing changes that could take their system toward 80 percent solvency, over the next few decades. 

Most significant among three pension reforms -- which cleared the House Economic Development and Financial Services Committee last week -- was House Bill 2078. State Rep. Randy McDaniel, an Oklahoma City Republican, said it “is a difference-maker in saving the system.”

Like most state pension plans, the Oklahoma Firefighters Pension and Retirement System is financed by a blend of revenue streams, including in this case a state insurance premium tax, employers (municipal governments, for the most part), employees themselves, and investment returns.

H.B. 2078 would increase the insurance premium allocation to 36 percent, from 34 percent of the tax collected. Municipal employers would see their share of the tax rise to 14 percent of an employee’s pay, from the current 13 percent. The employees of the various fire departments would see their share of financing increase to nine percent, from the present eight.  The financing package involves reallocation of burdens for sustaining the fund, without a state tax increase. 

The bill also would vest employees after 11 years, rather than the present ten years. 

In an interview with CapitolBeatOK, McDaniel said the funding shift would affect current firefighters. (In contrast, most of this year’s envisioned reforms would impact only “new hires” in state systems.) The Oklahoma Municipal League (OML) and the several firefighters’ associations are supportive of the reforms, in contrast to last year’s opposition, McDaniel said. 

In dialogue with state Rep. Richard Morrissette, an Oklahoma City Democrat, McDaniel agreed, “there is some dissent” among firefighter union members. State Rep. Rebecca Hamilton, also a Democrat from the state’s capital city, pointed out that many years ago the firefighters fund “loaned” money to help the state bridge a short-term budget crunch. 

McDaniel, a retirement specialist, said that in the 1980s and 1990s, “everything seemed good in terms of funding.” Past pension policy decisions were often skewed by overly optimistic expectations for rates of return on state investments.  He told CapitolBeatOK, we “can’t fix past problems, but can make system better and more rational and adequately funded, going forward.  … In short, we can’t fix the past but must try to address the future.”

The strongest argument for H.B. 2078, McDaniel contended, is that it would take what is now the state’s most challenged government retirement program’s funding adequacy from 61 percent to 75 percent or better within three decades. (In the private sector, 80 percent is considered adequate funding for actuarial purposes – proportion also widely accepted for public sector pensions.)

An estimated $9 million in new annual revenue would flow into the firefighters’ fund. Additionally, the proposal changes the so-called DROP (deferred retirement plan) by limiting the “draw” a retired firefighter can make by returning to new employment in a fire department.

The panel approved the reform 9-2, with some Democratic members of the panel missing the final vote. It now moves to the House Calendar Committee, a new “traffic cop” scheduling legislation for floor consideration. 

McDaniel’s proposals aim to fashion “sustainability” and “intergenerational fairness” for taxpayers and new hires in the state system. He is seeking reform in both more fiscally sound and adaptive to the modern marketplace, where workers rarely stay in a job for an entire career.

H.B. 1325 would effect the payout, upon retirement, for new state government employees. The OPERS system would calculate retirement payments based upon the average of the highest five years of a worker’s last 10 years of employment – rather than upon the last three, as in current law. 

The change, dubbed “smoothing” or “anti-spiking” among retirement specialists, is projected to save perhaps $1,000 a month for the system. With implementation, after two or more decades, H.B. 1325 could capture between $30 million and $50 million annually. 

House Bill 2079, a third proposal, makes technical changes to the Oklahoma Teacher Retirement System. OTRS Director James Wilbanks testified in favor of the revisions, explaining the most significant would allow a new process for retirement contracts, allowing the system to accept contract earlier, i.e. in advance of 90 days before an employee’s retirement.

While OTRS is the weakest of the retirement systems, on paper, under Wilbanks it has had the best recent investment performance. The “request bill” from Wilbanks drew little discussion and advanced from the committee on a 10-1 vote.

Later this week, the committee, of which McDaniel is chairman, will consider House Bill 2077, a proposal to create an option for new state employees to vest in a defined contribution system, rather than the defined benefit systems that are now the pervasive state model. McDaniel and other advocates argue the “DC” system is more accommodating to younger workers, who want the portability of a 401-K style systems because they typically do not plan to spend their entire careers in public service.  

Three years ago, Oklahoma’s various government pension systems were facing more than $16 billion in unfunded liabilities.
 
Reforms passed in 2010-11 captured about 30 percent of the long-term gap, pulling it under $11 billion in the 2012 assessments. However, poor market performance for the firefighters fund, in particular, drove the unfunded liability back above $11 billion. 

While firefighters and the OML were hesitant to support McDaniel’s fire system reforms last year, lengthy negotiations during the interim (from June through January) brought consensus, even if reluctant from some groups, around advancing this year’s proposed reforms. 

Oklahoma is one of many states tackling pension system reforms. Frank Keegan, a national analyst, has written searing commentaries and news stories detailing the near-term crisis facing municipal retirement systems, and looming for state systems, including Illinois and California.

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

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