On Thursday, the Oklahoma state Senate Select Committee on Pensions will meet shortly after the upper chamber ends its work for this week. On the eve of the hearing, at which representatives of public employee groups will be heard, CapitolBeatOK interviewed state Sen. Mike Mazzei of Tulsa, the panel’s chairman.

Mazzei began the interview with the observation, “This issue is the one that could implode us if we don’t act sensibly, and soon.”

So, what’s the biggest single problem he sees when he looks at Oklahoma’s pension systems?

Mazzei replied that is, “the potential for forced massive tax cuts or budget cuts, or both, that would have to implemented if we don’t act to address the problems inherent in our pension systems.

“You don’t have to look far to see what could become part of Oklahoma’s future. Go to Illinois, and you see that a combination of pension problems and the budget deficit have led the state government to enact a massive state income tax hike.”

Asked to name the pension issue that most concerns him at this moment, he paused briefly, then responded, “There is some good news, and some bad news, and that leads to my answer.

“A few years ago, [former] Senator Mike Johnson and I worked together to get some new revenue streams into the teacher retirement system. We also made some changes in administration of systems with the 2006 actuarial act.

“Those reforms had the effect of stopping the bleeding that had been going on for many years, bleeding that came from a process that granted new benefits to future retirees, but without paying for those benefits. The ‘good news’ side of that is that it caused an upgrade in our state’s ratings by S&P, Moody’s and some others.

“That set of reforms was worth, in practical terms, about $20 million in interest rate payments to our state, so it was gratifying.”

Sen. Mazzei continued, “Now the bad news is that we were notified by one of the rating agencies, by S&P in February 2011, that if the financial picture gets worse for our pensions they will, without a doubt, downgrade us.

“To be clear, the bad news is that if we don’t do anything and our retirement systems get worse, there will be a rating downgrade for us. I agree with some who say that won’t be as bad for us as for a state like California, but I believe it could and would be the start of a bad long slide. That is not something to deal with, if we can take steps, 1, 2, and 3, to avoid that scenario, now.

Concerning the most important reform that could be made quickly to save Oklahoma’s fiscal bacon, Mazzei responded, “The biggest thing we could do would be to require that COLAs [cost-of-living adjustments] always be funded. This seems obvious, but actually it’s not always obvious.

“I’ve received word from all six state pension systems that if that requirement were put in place — if COLAs are required to be actuarially funded — their assumptions for that purpose would shift from 2% assumed increases to zero, in terms of COLAs. That one change alone is what you’re focused on; and it leads to a drop from $16 billion in projected unfunded liability to $10.8 billion.

“Looking back, the reason it’s a big deal is that such a strong focus on COLAs was not part of that 2006 legislation that made thing better but didn’t reach to the COLAs issue. To sum up, that is absolutely the most important thing we can do, going forward.

Asked to name other, perhaps incremental, steps, Mazzei had a list ready from memory:

“Well, in terms of making the case for further changes, the Senate Select Committee has been a good experience. We’ve had good involvement from the members, both Democrats and Republicans.

“I’ve been very encouraged because we’ve had liberals like David Blatt of the Oklahoma Policy Institute, and conservatives like the analysts at Oklahoma Council of Public Affairs, show up with serious analysis and serious ideas.

“I also have a sense that there seems to be support for changes at some point to defined benefit plans as we go forward, including increasing the retirement age in some of the retirement systems (if not in the public safety area, increasing or reforming the vesting periods, changing how final average salary is computed, away from the last three years to the last five years.

“These are important. None of these bring immediate upfront savings like the COLA reforms would, but if we do all of this, we get to a brighter future.”

He concluded the interview, saying, “There are some more things that might be desirable, but I must say that if we could these done, the matters just discussed, that would be significant positive progress.”

The select committee on pensions will meet at the Capitol in room 511-A, on Thursday morning (March 24) after the full Senate ends its work for the week.