Oklahoma Pension Reform ‘ A Defined Contribution Conversion

According to a recent report by Pew Charitable Trust, Oklahoma’s pension plans were only 65% funded in 2012. Recognizing that unfunded pension liabilities will continue to imperil the state’s fiscal health and will crowd out other budget priorities, Governor Mary Fallin signed House Bill 2630 – The Retirement Freedom Act. Starting November 1, 2015, HB 2630 establishes a defined contribution (DC) system for all new state employees in the Oklahoma Public Employee Retirement System (OPERS) that are neither hazardous duty employees nor teachers. In signing the bill, Governor Fallin stated, “Oklahoma pension systems currently have $11 billion in unfunded liabilities. The system as it stands today is not financially sound or sustainable. Moving future hires to a 401k-style system helps to ensure we can pay our current retirees and employees the benefits they have already earned.”

This is likely to be the most significant state reform in 2014.

Several key legislators articulated the need for reform and were able to make a case for voting on the bill to their colleagues, including the co-authors of the bill, Rep. Randy McDaniel and Senator Rick Brinkley. Rep. McDaniel observed, “The new retirement system has many advantages for employees and the state. The primary attributes include more individual freedom and less government debt. Future employees will have an entire career to build up personal retirement savings. They will have greater freedom to pursue their goals while also reducing the burden on taxpayers and the state. The costs are predictable and affordable. Since the benefits are required to be completely paid for upfront, new unfunded liabilities are not created.”

They were aided by a determined cadre of stakeholders who worked for months to overcome the status quo and got the most reform they could achieve this time around. Jonathan Small of the Oklahoma Council of Public Affairs notes, “The reforms will provide a secure future and retirement and that it is a plan that keeps initial promises to those who have accrued benefits. It also establishes a firm debt elimination plan and structures a plan that is very difficult to be manipulated by politicians, one that employees and taxpayers can trust.” He and others acknowledged that there are further reforms in the future. Small conceded, “We agree that next lawmakers should tackle moving all new teachers into a defined contribution plan.”

The Tulsa World editorial board noted, “The change will give the state’s overburdened retirement system stability and predictability. More important, it changes the psychology of a state employment. State workers will have ownership of their retirement funds and responsibility for their own futures. State employees will be able to make their own retirement investment decisions and won’t be bound to their jobs by their pensions. The shift from pensions to defined contributions is an overdue reform, and one that clearly is in the best interest of the state and its workers.”

But there are those who express concern that this bill does not go far enough to deal with the current liabilities facing the state. HB 2630 could be characterized as a “soft freeze” – as opposed to a “hard freeze” – because it does not include current employees. Additionally, the measure excludes hazard duty employees and teachers which make up a substantial population of public employees in the state. While the change will result in increased savings and significantly lower unfunded liabilities for those under the reform in the coming decades, the costs of those pension systems which were not reformed will continue to be of concern. Pension expert, Bob Williams of State Budget Solutions was said, “It does not apply to any current government employees or retirees. It does not do anything to reduce the current unfunded pension liability – although it will keep it from growing for the newly covered employees.” Oklahoma taxpayers will be on the hook for these existing pension liabilities for the next several decades for these costs.

HB 2630 is reminiscent of Michigan’s 1996 pension reform into DC plans, and it ranks up there as one of the few reform bills creating mandatory DC plans for all new employees. HB 2630 does not solve all of Oklahoma’s pension problems, but it’s a good first step.

Like other places where reform has happened, it often comes in stages. San Diego and San Jose had several salvos of reform for years before the people overwhelmingly supported substantive reform at the ballot November 2012. Incremental change is a good thing and stopping the bleeding, as it were, might be the best that any jurisdiction may be able to do until the political climate changes and allows for more aggressive changes. Oklahoma, included.