Most new state employees would no longer be included in Oklahoma's traditional pension retirement plan under a proposal to be pushed next year by the governor.
Gov. Mary Fallin vetoed a bill this year that would have given new employees the choice of opting out of the traditional pension program in favor of a defined contributions plan.
She felt the voluntary opt-out did not go far enough to improve the fiscal condition of the state's pensions.
“I didn't think it would have an impact on the system because it's voluntary,” Fallin said. “I thought they were making political statements more than being serious about pension reform. If we're going to do pension reform we need to do truly pension reform and not make it voluntary and make it kind of window dressing.”
Her veto was intended to send a message to the Republican-controlled Legislature, state Treasurer Ken Miller said.
“Sometimes bold leadership prevails and you have to get some attention in order to make something a priority,” said Miller, a Republican as is Gov. Mary Fallin. “Mary vetoed that bill because she knows that something much better, much more stronger is needed.
“It did send a message to the public and to the Legislature that major reform is needed and this has to be a priority next year,” said Miller, who also is chairman of the Oklahoma Pension Commission and was asked by the governor to advise her on pension changes.
Republican legislative leaders say they expect interim studies later this year to look at proposals to change the state's pensions.
Defined or combined?
Current state employees would remain with the defined benefit plan.
Miller said exceptions to requiring new employees to go to a combined benefit plan might be given to police, firefighters and troopers because of the risk they face in their occupations.
Under Fallin's proposal, new employees would take part in a defined contribution plan similar to a 401(k) plan, which would provide employees with a payout when they retire based on the amount of money contributed and investment gains or losses.
Fallin said making a defined contribution plan the only option would meet the needs of a modern workforce and catch up with the private sector and many other states by moving toward a 401(k)-style retirement plan that provides portability, flexibility and choice. When Oklahoma's pension systems were created, it was common for a worker to spend 25 to 30 years in the public sector. Today, the average state employee leaves much sooner, usually for the private sector, she said.
State savings would come from the excess agency contributions flowing to the system from new members having a defined contribution plan, she said. It would reduce over time the current unfunded liability of the pension system and result in savings.
Under the present Oklahoma Public Employees Retirement System plan, state employees contribute 3.5 percent of their pay and the agency contributes 16.5 percent. Under the defined contribution system, the state match would be about 6 percent, Miller said.
Some of the 10.5 percent differential would go to help shore up the pension plan's unfunded liability, he said. Once that's done, the money could be used for cost-of-living adjustments for those on the pension plan.
“We shore up the unfunded liability much, much quicker, “he said. “Then you have money to pay for COLAs.”
Fallin also wants to consolidate the staff, boards and offices of several pension plans into one. Oklahoma has seven pension plans, six of which have independent boards, staff, offices, consultants and investment managers.
About 220,000 employees and retirees are part of the state's pension system; those covered include teachers, agency workers, police, troopers, firefighters and judges.
The state spends $80 million to $100 million each year to administer the pensions; Fallin and Miller estimate the state could realize at least 15 percent in savings by consolidating the pension plans. A large part of the savings, from $15 million to $50 million, would be a reduction in fees charged by each of the pension plan's investment managers.
Two years ago, the state's pension system had a $16.5 billion unfunded liability, making it among the worst in the country. New laws passed in 2011 reduced the unfunded liability by nearly one third or about $5 billion.
Most of the savings came from a measure that requires the Legislature to fully fund cost-of-living adjustment increases for those on the state's pension system. Sluggish market returns were key factors in increasing the liability by $1 billion last year, putting the unfunded liability at $11.5 billion.
Miller said the state's pension funding rate remains the biggest obstacle to Oklahoma obtaining a top AAA credit rating. Oklahoma has an AA2 rating.
“We have a balance sheet problem because of pension debt and we have to fix that,” he said. “What we've seen the private sector do and what we see state after state after state begin to do is move away from defined benefit to defined contribution of some type.”