Oklahoma pension problems: $823 million annual debt, or $3.4 billion in savings after 30 years?

OKLAHOMA CITY – This sentence make even a policy wonk yawn: The annual amortization cost for Oklahoma’s government pension plan is $823 million.

Translated into plain English, as a leading pension reformer in Oklahoma puts it, $823 million amount is “what it costs to serve the debt from the unfunded pension liabilities of the past.”

Now that we have your attention:

Edging toward final approval at the state Capitol is a proposal that would shift the Sooner State’s largest government pension plan (the Oklahoma Public Employees Retirement System, or OPERS) away from the billions it faces in unfunded liabilities for the “defined benefit” pensions most public employees now receive.

Across all seven state plans, current unfunded liabilities are projected at $11.5 billion, making the OPERS reform one with potentially high returns.

Going forward (while preserving the status quo for existing workers), all new employees would become part of a plan that would be solvent in 19 years, and on a guide path to $3.8 billion in savings after three decades.

That money, in turn, would be available for other government purposes.

The state’s leading free-market think tank, the Oklahoma Council of Public Affairs (OCPA) financed an independent analysis of the proposed shift, incorporated into House Bill 2630 and sponsored by state Rep. Randy McDaniel, R-Oklahoma City.

It took decades for Oklahoma’s government pension system to get in deep trouble.

When the state’s tax coffers were comparatively tight, legislators would nonetheless sweeten the pot for employees with pension cost-of-living adjustments – without financing. In good years, the Legislature would occasionally boost basic pay.

Bottom line: For a century, Oklahoma lawmakers gave state workers pay hikes and pension boosts without making underlying reforms or providing adequate funding in the system.
For just the past few years, the reverse has been the case – an end to automatic COLAs and some pay restraint, and the beginnings of pension reform.

Changes made early in this decade slashed unfunded liability from more than $16 billion to around $10.6 billion, but last year that underlying debt edged back up nearly $1 billion.

Even in recent history, the state has met its actuarially required contribution (known as the “ARC”) only once in a decade (2012). In typical years, the state has only reached about 70 percent of the ARC.

On behalf of the status quo, the state’s powerful public sector employee unions and associations, and some elected officials challenge the premises of Rep. McDaniel’s bill. For starters, they project that the existing OPERS system will be adequately funded in 14 years or so. But that projection is based on many assumptions – including a “discount rate” of 7.5 percent or higher.

Trouble is, as Jonathan Small, vice president at the Oklahoma Council of Public Affairs summarizes things, over a decade’s time, “only one of the systems has maintained its assumed rate of return.” As the Great Recession demonstrated, lower returns can quickly become “the new normal” – and for years at a time.

In some ways, the argument at the state Capitol right now is over the difference between phrases like “fully-funded” and “debt-free.”

Fully-funded pensions result only from sustained decades-long high performance, management prudence and broad economic strength.

Debt-free means just that: After enough funds accumulate, the system is solvent, forever-and-ever, Amen. 

Bob Williams, president of State Budget Solutions, a national group fighting for fiscal restraint in the states – with a particular focus on pension problems – told Oklahoma Watchdog that McDaniel’s proposal is “the best that can pass in Oklahoma this year.”

McDaniel concludes case for the move away from defined benefits for future employees, as a way promote employee freedom and supporting worker mobility with 401-K style plans, government responsibility in keeping retirement promises to public employees, and system sustainability for taxpayers.

In this writer’s youth, a wise old African-American janitor who served as mentor to a white kid learning the value of hard work put it this way: “If your outgo exceeds your intake, it will be your downfall.”
McDaniel’s self-appointed mission is, in slow motion, to assure that the payout from taxpayers and employees equals the benefits anticipated in retirement.

The measure, with a few amendments added after recent discussions, cleared a Senate committee to the floor this week. If it prevails in the full Senate, it will return to the House, where McDaniel is optimistic about passage.
You may contact Pat at patrick@capitolbeatok.com