Gov. Henry Bellmon warned the 1988 Oklahoma Legislature that an action it was about to take could “destroy the sound financial health of the state's retirement systems.”
The Legislature ignored Bellmon's advice and passed the bill over his veto.
That was the first of several fiscally unsound legislative decisions over the following 25 years that have left the state's seven pension funds with $11.4 billion in unfunded obligations, according to state Auditor and Inspector Gary Jones.
The bill the Legislature passed that day boosted the pension benefits of 500 to 600 elected officials who had held other state jobs before being elected, Jones said. Those who benefited include many state lawmakers who voted for the change. The elected officials were not required to make additional payroll contributions to help fund their future benefits.
The pension boost was so great that many retired elected officials are now receiving annual pensions that exceed their former pay and some are getting pension payments that exceed $100,000 a year, records show.
Jones estimates the cumulative impact of those pension boosts over the past 25 years to be in the range of $1 billion.
Some other officials privately have questioned whether that estimate is too high. However, there is agreement that the 1988 pension boost and other legislative actions, like the lifting of salary caps upon which benefits would be paid and the granting of cost of living increases to retirees without providing additional funds, have contributed to the $11.4 billion in unfunded pension obligation that exists today.
Jones says the state could have avoided the pension crisis if it had paid its actuarially required contribution each year to keep the systems healthy, but chose to spend the money on other priorities.
“One of the main problems we've had in the state of Oklahoma … is we have treated pension obligations as if they were not a true obligation,” Jones said at a recent state House committee meeting. “When you owe a bill, you pay a bill.”
“The state of Oklahoma says we have a balanced budget,” he said. “If we ignore the pension obligation each year that we owe to fulfill those requirements, we have not balanced our budget.”
Jones said the state failed to meet its pension obligation in 11 of 12 recent years, which allowed the unfunded pension obligation to balloon to more than $16 billion in 2011 before a series of reforms passed by the Legislature and some good recent investment years began cutting into the unfunded liability.
How to deal with the remaining $11.4 billion in unfunded liabilities is currently one of the hottest issues at the state Capitol.
State Treasurer Ken Miller and Gov. Mary Fallin are pushing for drastic changes that include consolidating administration of the state's seven pension systems under one board and requiring future state employees, with the exception of hazardous duty workers like police officers and firefighters, to participate in a 401(k)-style defined contribution plan rather than the current defined benefit plan. Miller and Fallin's plan would allow all current state workers to continue under the defined benefit plan.
Many state employees are opposed to the plan, contending it would reduce future employees' benefits.
Miller said the state is currently paying $80 million to $100 million a year to administer its pensions.
“Common sense” suggests “significant savings in investment management fees could be achieved by combining administration of the plans,” he said.
Miller said he initially estimated $120 million to $150 million in such costs could be saved over 10 years, but also quoted from a study that indicated $15 million to $50 million a year might be saved. Critics have challenged those numbers and the assumptions on which they are based.
Switching future employees to a 401(k)-style plan would provide future workers with a plan that is more portable, more flexible and “fairer to the taxpayers … , most of whom have an employer-sponsored defined contribution plan, if they are lucky,” Miller said.
Miller acknowledged the Oklahoma Education Association has opposed the plan as an attempt to save the state money “on the backs of teachers,” but contended the proposed changes “would only affect future hires, but could provide for increased funding for current classrooms and teacher salaries.”
“I do not believe the share of state dollars going to education should be reduced, but allocated more effectively to provide a fair retirement, better take-home pay and more money in the classroom,” he said.
The state auditor said he doesn't see how the proposal will fix the pension system.
“The problem we've got today with this $11 billion unfunded situation is the proposals out on the table today don't fix the problem,” Jones said. “I've been good with math since I was little and I will tell you folks, the numbers don't add up.”
Switching future employees to another plan doesn't provide the extra money to pay off the current unfunded obligations, he said.
Miller bristled at Jones' remarks.
“One can't say the math doesn't work when there is currently no math to disprove,” Miller told The Oklahoman later.
Miller said details of the plan are yet to be worked out, but one way to come up with money to pay the accumulated $11.4 billion pension liability would be to have the state pay less employer contributions into the new plan in the form of matching funds for employee 401(k) contributions and use the savings to reduce the unfunded pension liability.
However, Jones questioned how the state could do that while using those same savings to provide teachers with better take-home pay and more money for their classrooms.
Jones acknowledged the state could save some money on management fees by consolidating funds but cautioned the pension funds could quickly lose any potential savings if investments made under a new board do not perform as well as they have in the past.
“The investment strategies of our pension plans have been very good. They've been some of the top in the nation,” he said. “If we change those boards and we change those investment strategies, .5 percent difference in earnings takes us from being high to being average, or a little above average.”
That much difference in investment earnings would cost pension systems $110 million a year, he said.
“So when we look at changing the makeup of these pension boards, let's keep in mind, we're going to lose a lot of expertise and a lot of knowledge that people have used in those investment strategies,” Jones said.