Tulsa Pension System Is Underestimating its Debt and Investment Risk by Millions

Policy Brief

Tulsa Pension System Is Underestimating its Debt and Investment Risk by Millions

The Tulsa Municipal Employees’ Retirement Plan (MERP) released an annual report this year stating that it was $118.9 million in debt, or about $300 in debt for every citizen living in the city limits. This means the city only has 77.7% of the assets needed to pay out all of the pension benefits it has promised to city employees. This is in stark contrast to the city’s situation a decade ago, when the system was fully funded.

Taken at face value, MERP’s estimate of its unfunded liabilities is worrisome enough. Unfunded liabilities have soared since the end of 2003, and the funding ratio has steadily declined. This has been largely driven by a divergence in the growth rate of MERP’s assets and liabilities.

However, Reason’s recent analysis of the MERP system suggests that Tulsa is currently underestimating its debt by as much as $500 million, and is facing millions more in additional pension costs due to an unrealistic expectation on its investments over the next 30 years.

We built a model of the Tulsa pension system based on the 2014 actuarial valuation of MERP and tested it under various scenarios for solvency. We find three primary problems that Tulsa policymakers should address in the near term:

  1. The current expected rate of return is exposing taxpayers to the probability of increased unfunded liabilities;
  2. The current discount rate is overly optimistic, relative to best practices for private sector defined-benefit systems; and
  3. The current debt amortization method being used is creating unnecessary costs for taxpayers.

This brief provides analysis of each of these problems, and the threat they pose for Tulsa taxpayers. Unless otherwise noted, our figures are adjusted for inflation and adopt the assumptions and methods of MERP to keep the comparative analysis consistent.


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