Legislator makes new push for OK pension reforms, in midst of gloomy national funding picture

OKLAHOMA CITY — The Oklahoma legislator who has led recent pension reform efforts plans a new round of changes for the state’s half-dozen government pension programs. 

The House Pension Oversight Committee chairman, Rep. Randy McDaniel, R-Oklahoma City, conducted interim hearings this week on possible pension tweaks.In a national context, analysts for State Budget Solutions, a non-partisan group pressing state and local governments to change their approach to budgeting, say that moderate reforms will not be enough to improve unfunded liability ratios in most states. 

In a national teleconference this week, SBS noted that many American states have fallen short of “discount rate” assumptions – that is the amount of growth needed from investments now to cover future benefits. Assumed discount rates color analysis of projected payout to government retirees.

Briefly stated, the higher the rate, the smaller the liability of a retirement program will appear.

Traditional discount rate assumptions, including those for the Pew Center on the States, put investment return estimates at 7 to 8 percent. But the most recent (August 31) Moody’s Citibank pension liability index pegged the rate at 4.86 percent.

SBS takes a critical view of return assumptions in most state pension systems, saying the closest thing to a “risk-free” rate would be pegged to the 15-year performance of treasury notes – 3.225 percent as of August 21. 

Some government pension funds have performed much closer to that three or four or five percent range for returns on investment. SBS contends a lower discount rate is the most realistic, even virtuous, basis for pension plan management. 

Despite the national picture, McDaniel remains upbeat about performance for the Sooner State’s pension programs. He points out that Oklahoma’s pension fund investments have, over time, performed at or above the traditional discount rate (7 percent or higher) even during the turmoil of the last five years. 

Concerning the critical national report from State Budget Solutions, McDaniel commented, “Investment returns are critical to the financial condition of the state pension system. Investment decisions as well as target rate of return assumptions need to be determined with care and incorporate best practices.” 

This week, McDaniel — chairman of the House Pension Oversight Committee — conducted interim hearings on possible future reforms. 

Among other changes, McDaniel proposes a defined contribution plan for future state government hires in “nonhazardous duty plans.” He advocates benefits portability for employees, recognizing the increasing mobility of modern workers.  (Most employees presently are in “defined benefit” plans, with much higher long-term payouts anticipated, but a lack of portability – that is, the option for a worker to “take” a retirement plan with her or him when leaving government, as is the case with 401 K plans.)

Public employee associations have pressed for benefit increases while the state economy remains comparatively healthy.

McDaniel points out that a 2 percent cost-of-living adjustment for government workers would have a $325 million price tag (about $100 million more than the last fiscal year’s increased in tax revenues). 

Last spring, in McDaniel’s House Bill 2979, a salary calculation limitation was enacted, which will effectively reduce future retirement payouts to more sustainable levels. He is considering a proposal to extend such limits to medical center employees within the state’s public higher education system.

For the Oklahoma Teacher Retirement System (which includes Higher Education employees), McDaniel is suggesting that clinical-related income be excluded from final average salary calculations. 

As recently as 2010, Oklahoma ranked in the bottom three of all American states in pension funding adequacy, at only 56 percent sufficiency. Under state estimates (based on a healthy discount rate), the total gap across six programs was estimated at more than $16 billion. 

However, major reforms in 2011 – which included an end to automatic assumption of COLAs — resulted in a dramatic $5.5 billion improvement, leaving the funding gap at $10.6 billion two years ago.

A sluggish investment market boosted that liability by $1 billion in 2012.

That is the context of McDaniel’s continued push for reforms to assure long-term stability. State’s pension funding ratios went from 56 percent in 2010, to 67 percent in 2011, before slipping to 65 percent adequacy in 2012. 

Nationally, Oklahoma’s government pension programs fall in the broad middle in terms of sustainability. The state made neither the “best” nor the “worst” list in the critical SBS analysis.

McDaniel stresses that the broadly “positive” picture for Oklahoma is no justification for inaction on further reforms. While not agreeing with all of SBS’ analysis, he stressed likely increased borrowing costs in bond markets, and intensified scrutiny of unfunded obligations in bond ratings. He predicts increased budget pressures due to pension funding requirements. 

Presently, Standard & Poor’s gives Oklahoma government an AA+ rating, with “outlook stable.” For the U.S. as a whole, the rating is AA+, but “outlook negative.” 

You may contact McGuigan at Patrick@capitolbeatok.com.