UNFUNDED liabilities of public employee pensions continue to threaten the long-term financial stability of Oklahoma's state government in spite of recent improvements.
From 2000 to 2010, the unfunded liability of Oklahoma's state pension systems increased from $6 billion to $16 billion, about $1 billion per year. Reforms passed in 2011 reduced the unfunded liability by about $5 billion, thanks mostly to requiring that cost-of-living adjustments be fully funded.
Unfortunately, underwhelming market returns caused the liability to increase another $1 billion in 2012, putting the unfunded liability today at $11.5 billion. Without further reform, that liability will likely continue to grow with serious long-term consequences.
In a recent meeting with The Oklahoman's editorial board, state Finance Secretary Preston L. Doerflinger said the pension systems' unfunded liability is the “true debt issue” facing Oklahoma government. He noted Oklahoma's pension debt is routinely cited by ratings agencies, impeding efforts to improve the state's credit rating. Lawmakers are quietly working to address that challenge.
State Rep. Randy McDaniel, an Edmond Republican who chairs the House Pension Oversight Committee, has filed legislation to allow most state and county workers the opportunity to transition to defined contribution plans, moving to the 401(k)-style model common in private business. That's a step in the right direction.
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 minimum employee contribution is 3 percent with contributions up to 10 percent matched by the state. That allows state savings while long-term market returns typically increase employee benefit.
Reportedly, lawmakers have considered mandating the transition to a defined contribution system for some state workers, such as new employees, but a voluntary transition is more likely in the short term.
Even if lawmakers ordered a comprehensive move to a 401(k) system today, the state would still be on the hook for existing liabilities in the current system. When this issue came up in 2011, officials with the teachers' retirement system said it would take at least $1.4 billion to fully fund that plan as it closed out.
House Speaker T.W. Shannon, R-Lawton, told our editorial board that any transition would likely be gradual and incremental to create “savings over a period of time without creating too much unaffordable chaos within the system.”
Still, the consequences of failing to act are worse than doing too much too fast. Just look at Illinois. That state's pension crisis has led Standard & Poor's to downgrade Illinois' rating to the worst of any state in the country. In January 2011, Illinois lawmakers raised personal income taxes by 66 percent and business taxes by 46 percent, partly to address pension debt. By 2020, Illinois' pension contributions are expected to consume around 30 percent of the revenue generated by corporate income taxes, personal income taxes and sales taxes. By 2045, pension payments are projected to require up to half of those tax revenue sources, forcing major cuts to areas like education and roads.
That's a path Oklahoma must avoid. The sooner lawmakers begin implementing additional meaningful pension reforms, the less jarring the transition process will be and the greater the benefit to Oklahoma taxpayers.