March 2, 2013
By Michael McNutt
Gov. Mary Fallin is calling for a major overhaul of Oklahoma's pension system, wanting to consolidate the staff, boards and offices of several pension plans into one and change to a defined contribution instead of the traditional plan for new state employees.
“While our state tax-supported bond debt is low, our $11 billion unfunded pension liability represents 7 percent of our gross state product,” Fallin wrote in state Treasurer Ken Miller's Oklahoma Economic Report that was distributed Friday on the Internet. “That means every Oklahoman is on the hook for $2,900 in pension debt.”
Fallin said Oklahoma has seven pension plans, six of which have independent boards, staff, offices, consultants and investment managers.
About 220,000 employees and retirees are part of the state's pension system; those covered include teachers, agency workers, police, troopers, firefighters and judges.
The state spends $80 million to $100 million each year just to administer the pensions, she said. She estimated the state could realize at least 15 percent in savings by consolidating the pension plans.
“Over a 10-year period, this change alone could provide an additional $120 million to $150 million that could instead be used toward paying retirement benefits,” Fallin said. “But more importantly, it would direct the focus on the financial health of the state and the pension systems as a whole rather than on individual member benefits. A centralized board would not mean that the seven plans' funds would be combined, only the funds' administration, investment and financial oversight.”
Fallin, who has led efforts since taking office two years ago to streamline and consolidate the state's information technology, said the state's pension rate remains the biggest obstacle to Oklahoma obtaining a top AAA credit rating. Oklahoma has an AA2 rating.
“As with past efforts to right-size government, there will be those who fight to maintain the status quo,” she said. “But now is the time to address our unfunded pension debt and right-size Oklahoma's pensions by eliminating duplication and inefficiencies in our current system and developing a fiscally responsible benefit structure for the future.”
Miller said Friday he will work with the governor to get the Republican-controlled Legislature to support the proposed changes.
“I appreciate the governor's important leadership on this issue,” said Miller, a Republican as is Fallin. “She is spot-on with her recommendations and has my full support.”
Leaders show support
The idea of consolidating the pension boards has been floated at the state Capitol in the past 30 years, but this is the first time two key statewide elected officials have publicly pushed the concept.
A House of Representatives committee earlier this week passed two bills that dealt with the state's pension system but contained no substantive language, called shell bills. It's believed the bills could be used to contain Fallin's two proposals. The author of both measures is House Speaker T.W. Shannon, R-Lawton.
State employees now pay into the retirement system to receive monthly pensions through a defined benefit plan based on a formula that takes into account their salary and duration of government work.
Under Fallin's proposal, new employees would take part in a defined contribution plan similar to a 401(k) plan, which would provide employees with a payout when they retire based on the amount of money contributed and investment gains or losses.
“To meet the needs of a modern workforce and provide cost certainty to state government outlays, we must catch up with the private sector and many other states by moving toward a 401(k)-style retirement plan that provides portability, flexibility and choice,” Fallin said. “When Oklahoma's pension systems were created, it was common for a worker to spend 25 to 30 years in the public sector. Today, the average public employee exits for the private sector much sooner.”
Unfunded liability dips
Two years ago, the state's pension system had a $16.5 billion unfunded liability, making it among the worst in the country. New laws passed in 2011 reduced the unfunded liability by nearly one third or about $5 billion.
Most of the savings came from a measure that requires the Legislature to fully fund cost-of-living adjustment increases for those on the state's pension system. Sluggish market returns were key factors in increasing the liability by $1 billion last year, putting the unfunded liability at $11.5 billion.