OKLAHOMA CITY – Committees in both the House and Senate of the Oklahoma Legislature last week advanced measures that would give 401-K style “portability” to the tax-financed pension plans of most new state government employees. The proposals track closely with Gov. Mary Fallin’s advocacy of system sustainability, made in this month’s State of the State address.
The “defined contribution” (DC) system advanced in both bills, modeled on what is now standard practice in private retirement plans, would close the Sooner State’s unfunded pension liability gap in two to three decades, supporters contend.
The system now in place — a “defined benefit” (DB) structure — would likely never reach funding adequacy, in the view of reformers.
House Bill 2630 cleared the Economic Development and Financial Services Committee Wednesday (February 12) with a 12-3 vote.
The author, state Rep. Randy McDaniel, R-Oklahoma City, wrote the historic cost-of-living adjustment (COLA) reforms that reduced state government pension debt by about one-third in 2011.
His new measure would mandate that most new government employees enter a “DC” system.
Earlier in the week, the Senate Pension Committee advanced Senate Bill 2120, on a 5-2 vote. The proposal from state Sen.Rick Brinkley, R-Owasso, would exempt “hazardous duty” (police and fire) new hires, and would not include new classroom teachers for a year.
Further, the Senate bill would apply to officials elected or appointed after November 1, 2015.
Brinkley told reporters, “Let me be very clear — this piece of legislation does not affect anyone currently employed by the state. We believe that for us to continue to attract the best and the brightest, we must provide the next generation of state employees a retirement system that is reflective of their needs, allows an employee to take their retirement plan with them if they choose to leave and prevents politicians and bureaucrats from harming their retirement.
“We have a responsibility to our grandchildren to ensure they are not on the hook for this liability years from now.”
In response to a question from CapitolBeatOK, as to whether or not the reform is enough to protect public employee retirement systems – which slipped about a billion dollars the wrong direction last fiscal year — Senate President Pro Temp Brian Bingman, R-Sapulpa, said, “Kicking the can down the road is no longer an option.”
In his weekly session with Capitol reporters, Sen. Bingman said, “This is a start. Everyone in the private sector has gone to this approach in retirement plans. It is more sound, financially, and employees can take it with them when they leave government service.”
Rep. McDaniel told CapitolBeatOK, “The greatest risk is the political incentive to make unfunded promises. This reform is sustainable for the long term.” His proposal would take effect for new state government employees hired after July 1, 2015.
In support of a “sustainability” analysis, McDaniel pointed to a recent study from the Oklahoma Council of Public Affairs (OCPA), the state’s leading free market think tank.
In “Savings Workers Retirement”, OCPA analysts found that a plan like McDaniel’s, if implemented, could reach solvency in12 to 18 years – assuming, that is, a 7.5 percent compound return on assets (which most of Oklahoma’s retirement plans have achieved, even during the Great Recession era).
Taking a more critical and less optimistic view of the potential impact of such reforms, OCPA’s projection of lower 5 percent returns nonetheless projected pension sustainability after three decades.
In an interview with CapitolBeatOK, Bob Williams of State Budget Solutions (SBS), a national group advocating sound government spending and debt management policies, said:
“Closing defined benefit plans and placing new employees in a defined contribution alternative is the best way to provide retirement security for all; keep our promises to retirees; keep our communities safe and strong and keep politicians out of retirement.
“Even with a pessimistic outlook, it is the surest way of eliminating unfunded liabilities. Oklahoma must of course maintain its commitment to responsibly fund the defined benefit plan through its closing, but once the move to defined contribution is made over the years, unfunded liabilities will be a thing of the past.”
Critics of the two proposals include Auditor and Inspector Gary Jones, a conservative Republican whose critique focuses on reforming the existing DB program rather than creating a new DC structure.
With a more critical perspective is state Rep. Richard Morrissette, D-Oklahoma City.
Morrissette asked, “Why are we trying to fix a system that isn’t broken? … Taxpayers and state employees are better off with the current system than the system these bills will create.”
Gov. Fallin commended “the quick progress being made on the issue of pension reform. Moving to a 401K-style pension model for new hires will make Oklahoma better able to recruit and hire qualified employees for state government by giving them more portable and flexible retirement benefits.”
She said reforms along the lines progressing in the House and Senate “will help to ensure that we can pay our retirees the benefits they have earned.”