CapitolBeatOK Staff Report
State Treasurer Ken Miller is finalizing recommendations to correct Oklahoma’s huge unfunded pension liability and expects to make them public within the coming days.
Miller, chairman of the Pension Oversight Commission, said he will first meet with Governor Mary Fallin and then with the commission at a special meeting.
“The severity of Oklahoma’s pension crisis is well established. Most policymakers recognize the seriousness of the problem and the need for action,” Miller said. “The solutions will not be complex, but they will be politically challenging.”
Miller said no one expects the state to reverse overnight a problem that has been decades in the making.
“Our citizens, public employees, pensioners and ratings agencies all expect state officials to chart a course to solvency and long-term stability,” he said.
Miller said his recommendations would likely include a two-step approach to reforming the systems.
“Step one is to correct the immediate problem,” he said. “Step two is to develop a cost-effective pension system designed to meet the demands of a modern workforce and a leaner government.”
Miller said step-one reforms would stop unfunded mandates and restore fiscal health to the pension systems:
• Eliminate all unfunded mandates on state pension systems
• Establish a minimum age for retirement eligibility for all new, non-public safety employees
• Dedicate future surplus revenues and one-time funds to the fiscal restoration of the state’s pension systems.
Step-two reforms would center on designing a cost-effective pension system that would:
• Offer choice, flexibility and portability to future workers
• Provide uniformity among existing systems.
Miller said the centerpiece of the plan to address the immediate problem would be to eliminate unfunded cost-of-living adjustments, or COLAs.
“This annual increase is the single biggest strain to the system and has led to the pension hole the state has dug itself into,” he said. “Ending this practice would effectively set down the shovel.”
Miller said banning unfunded COLAs alone would immediately raise the funded status of the state’s seven pension systems. This change would allow the state’s second largest plan, the Public Employees Retirement System (OPERS), to reach 100 percent funded status in 17 years.
The largest and most indebted of the plans, the Teachers’ Retirement System (OTRS), cannot estimate a time it would be able to meet obligations if unfunded COLAs were to continue. With the unfunded COLA ban, the system can become fully funded within 35 years.
OTRS has unique elements that have contributed to its status as the worst-funded plan. Of the state systems that allow employees to convert unused sick leave for additional service credit, the teachers’ plan is the only one that awards this benefit without requiring employer funding. This practice drains approximately $25 million each year from the pension’s balance.
“As with COLAs, our state cannot continue to grant pension benefits without funding them,” Miller said.
Members returning to work after retiring cause another strain on the systems. This practice, commonly referred to as “double-dipping,” lengthens the years that benefits are paid out of the system due to the financial incentive of drawing full retirement benefits in addition to a salary.
Many members in OTRS retire as soon as eligible then immediately re-enter the classroom. Approximately one-third of all teachers who retired in 2008 were re-employed with a school the following calendar year.
Minimum Retirement Age
Adopting a minimum age for retirement eligibility would reduce system outlays and provide better predictability of cost. Currently, some members can retire as young as 50 with the right combination of age and years of service.
With life expectancies climbing, a retiree could feasibly collect benefits for a third of their life. For new, non-public safety hires, the state should establish a minimum retirement age; one that reflects a healthier workforce with more productive years.
Commit Excess Funds to Debt Reduction
Some surplus revenues, such as cash reserves and those in excess of the rainy day fund cap, could be dedicated to the state’s pension systems until all plans reach a minimum 80 percent funded status, the level at which systems are considered actuarially sound.
“While budget writers will be pressured to return to pre-recessionary spending levels, good stewardship requires addressing debts first,” Miller said.
He said the state could also dedicate a portion of profits from the sale of non-essential state assets to help pay down our pension debt.
Consideration of Future Plan Design
Miller said that once public pension plans are on a path to solvency, policymakers should re-evaluate the pension structure to see if current defined-benefit plans are in the best interest of tomorrow’s retirees and taxpayers.
“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,” he said.
Step two of the reform process should seek additional uniformity in contribution rates, benefits and investment return assumptions among the defined benefit plans currently in place, Miller continued.
At risk are increased borrowing costs for the state, which will result in less availability of funds for critical services, and potential damage to the state’s credibility.
“Failure to enact reforms will not just affect public workers; the repercussions of the state’s unfunded debt will be felt by businesses and taxpayers alike,” he said.