The unfunded liability of the retirement fund for Oklahoma public school teachers, which just two years ago was one of the most underfunded plans of its type in the nation, went up slightly in the past year.
But the Oklahoma Teachers Retirement System still is on target to eliminate its unfunded liability in 22 years, according to a report presented Wednesday to the system's Board of Trustees.
“We're still on the path towards 100 percent funded,” said James Wilbanks, the executive director of the state agency. “We are on the right path. We're moving towards a fully funded status.”
The increase in the system's unfunded status from $7.6 billion to $8.4 billion, as of June 30, is based on investment losses incurred during the stock market downturn in 2008, he said.
As a result, its funded ratio dropped from 56.7 percent on June 30, 2011, to 54.8 percent a year later. That means that if all teachers and retired teachers cashed in their pensions at once, the pension plan could pay 55 cents instead of 57 cents on the dollar.
The Teachers Retirement System, in which retirees receive a set monthly amount based on time of service and salary, has nearly 158,000 members. About 88,000 are active teachers and about 53,000 retirees and beneficiaries.
The downward numbers are attributed to the system's practice of adjusting losses and gains in investments over a five-year period, Wilbanks said.
“We're still recognizing losses from the fiscal year 2008 and fiscal year 2009,” he said. “We defer those losses over a five-year period and that's done to smooth out the value of assets so that the funding ratio never gets whipsawed from one year to the next.”
Wilbanks said he's encouraged that the Teachers Retirement System, which two years ago was projected to never reach a fully funded status, still is expected to be 100 percent funded in 22 years.
A report prepared by Gabriel Roeder Smith & Co., of Irving, Texas, states that projections show it will take about 15 years for the pension fund to reach 80 percent funding. Most experts prefer plans to be funded at 80 percent.
The projection is based on an 8 percent market growth on investments each year and no changes being made to the contribution and benefit provisions of the plan, according to the report.
The pension fund's unfunded liability improved dramatically two years ago after legislation was passed and signed into law that reduced its unfunded liability from more than $10.4 billion to $7.6 billion. Key to shoring up the teachers' retirement pension, the state's largest defined benefit plan, was passage of House Bill 2132, which requires the Legislature to fully fund cost-of-living adjustment increases for those on the state's pension system.
The teachers' retirement fund, formed in 1943, had been underfunded for decades. In the past, benefit increases were granted to members of the retirement system without those benefits being funded by the Legislature. The money came out of the pension system.
The Gabriel Roeder Smith & Co. report found that the Teachers Retirement System during the 2012 fiscal year received 116 percent of the amount of money it needed from the state to fund the plan for the 2012 fiscal year, which ended June 30. In 2011, it received only 78 percent of what is called the annual required contribution from employers and dedicated state revenue.
The pension fund required $588.3 million in the 2012 fiscal year from the state as its share to pay benefits and expense as well as debt service; it received $681.6 million, Wilbanks said. Of the $681.6 million, $281.8 million came from dedicated revenue sources, he said.
The Teachers Retirement System gets 5 percent of the annual collections from each of the corporate income tax, the personal income tax, the sales tax, the use tax, the lottery and other taxes.
Nearly half, 47.8 percent, or $134.7 million, comes from personal income taxes. The state's contribution for the 2013 fiscal year is projected to be $286 million.
Wilbanks said discussions to reduce or gradually eliminate the personal income tax would have an adverse effect on the Teachers Retirement System unless another funding source was found. Lawmakers earlier this year considered several proposals to reduce the personal income tax's top rate of 5.25 percent, but couldn't agree on a plan.
“If there are going to be continued discussions about reducing or eliminating the personal income tax,” he said, “we're going to be in the position of protecting that revenue that comes to the system and engaging in the discussions of, if there's an income tax reduction that means we're losing revenue. Where is that going to be made up? Any significant revenue loss would jeopardize us being on the path towards fully funded.”