IT'S been said that compound interest is one of the greatest powers in the world. Through it, small changes today can generate large results years down the road.
The same rule applies to public policy. Laws that appear to have a limited impact upon enactment can foster major change as time goes by. Unfortunately, those changes aren't always positive.
State Auditor Gary Jones estimates a special retirement benefit that Oklahoma lawmakers granted to elected public officials in 1988 has cost the state more than $1 billion since the law was passed. That law — since repealed — created a different retirement formula for elected officials that effectively doubled their benefits.
Jones recently told The Journal Record that elimination of the double benefit has helped, but he warned that many officials are still grandfathered into the old formula. Taxpayers will continue paying those inflated benefits for years to come. In one case, Jones noted a district attorney making $121,000 per year will get $171,000 annually in retirement benefits thanks to the old formula. The formula was “better than winning the lottery” for its beneficiaries, Jones said.
It's distressing that statutory changes — which appear little more than legislative self-dealing — have cost taxpayers more than $1 billion since their enactment. It's encouraging that lawmakers have ended that special benefit. But the main lesson of the whole episode is that small changes can have major long-term impact.
Now state lawmakers are considering pension reforms they hope will incrementally generate positive results in the future. Currently, Oklahoma's state pension funds are only 65 percent funded, with over $11 billion in debt. The Oklahoma Teachers Retirement System is only 55 percent funded with around $8.4 billion in unfunded liability. These figures are actually a significant improvement compared with several years ago when lawmakers voted to require funding for any cost-of-living adjustment and altered the minimum retirement age in certain cases.
Still, an enormous funding gap remains, and some gains made through 2011 reforms have since been lost due to other factors. Gov. Mary Fallin and state Treasurer Ken Miller are pushing to move new state government employees into a 401(k)-style system similar to that used by many private businesses. They're also seeking to consolidate the administration of all state pensions.
In recent testimony before a legislative committee, Miller noted that pension obligations ultimately reduce funding for core government services; greater efficiency would free up money for those services. For example, K-12 education receives about 35 percent of state appropriations. “The larger the amount spent on the back end for retirement, the less will be available on the front end for classrooms and teacher salaries,” Miller said. By shifting to a 401(k)-style plan for new teachers, he said the state could redirect the savings “for increased funding for current classrooms and teacher salaries.”
Oklahoma spends from $80 million to $100 million annually to administer state pensions. An independent analysis concluded administrative consolidation could save from $15 million to $50 million per year. That translates into up to $500 million over a decade.
In a state budget involving more than $7 billion in annual appropriations, the savings Miller touts are incremental. But as Jones showed with his review of the elected officials' retirement formula, small figures gradually become large ones. Here's hoping proposed pension reforms harness the compounding effect to taxpayers' benefit this time.