In his final meeting as Chair of the Oklahoma Pension Commission, State Treasurer Scott Meacham announced a plan to shore up the states underfunded pension systems.
At the beginning of the presentation, Meacham detailed the problem, which equates to more than twice the state budget in unfunded liability to the state’s pension systems. Although the systems’ investments have performed well in the past year, the recession has taken its toll on the state retirement systems. Currently, all seven of the systems have a total unfunded liability of $15 billion, $3 billion in the state employee retirement system, OPERS.
“The pension systems cannot earn their way out of the hole that has been dug over decades,” he said. “If decisive action is not taken to address the underfunded status, the financial health of the systems may rapidly deteriorate to the point of severe problems.”
Meacham said the “primary culprit” for the current situation is lack of discipline.
“For decades, benefit increases have been granted to members of the retirement systems without those benefits being funded by the legislature,”he said. “The result has been that each benefit increase has served to only make the unfunded liability ‘hole’ grow until now the funded status of Oklahoma’s pension systems has reached crisis levels.”
Meacham’s proposed solutions to the problem, which were adopted unanimously by the Pension Commission include:
Note: With the exception of the COLA, changes would apply to new hires.
Revise current law to provide that a Cost of Living Adjustment (COLA) may not be granted by the legislature or the board of any retirement system unless accompanied by funding at an actuarial determined level to fully fund the COLA on a current and future basis;
Revise the definition of “compensation” on which benefits are paid so that the definition for the Oklahoma Teachers Retirement System (OTRS) is consistent with that of the Oklahoma Public Employees Retirement System (OPERS).
For OPERS and OTRS, adopt a uniform eight-year vesting period and a retirement age of 65.
Calculate benefits in the OTRS and OPERS systems based upon the average ompensation earned during the five years immediately preceding retirement.
Amend the OPERS law to eliminate the provision that allows up to 120 days of unused sick leave to be exchanged for an extra year of employment for purposes of calculating retirement benefits.
Change the OTRS post retirement employment rules to be consistent with those of OPERS (one year before a retired employee can be rehired by another employer in the retirement system).
According to Meacham, eliminating the assumption of a two-percent unfunded COLA, the plans should all reach 80 percent funded in 25 years. (OPEA has been told that elimination of the COLA assumption would raise OPERS funding from 66 to 76 percent.)
Meacham dismissed claims by some that switching from the current “defined benefit” plans to “defined contribution” plans for new hires can solve the pension problems.
“Making that switch would serve only to make the problem worse,” he said. “First, the payroll on which future contributions will be made shrinks as new hires enter the new system. Second, the unfunded liability that with an open plan can be repaid over an open-ended period must be paid over a finite period that requires greater annual contributions to pay off the liability over a shorter time frame. Finally, with a shrinking state employment and hiring freeze in place, there will be very few new hires from which contributions can be ‘saved’ to help fund the liability in the old system.”
Meacham pointed out that a study conducted in 2003 determined the lack of feasibility of making such a move.
“OPEA is encouraged by the measured proposal,” said OPEA Policy and Research Director Trish Frazier. “In the past few months, the discussion has been to eliminate the pension systems and replace them with a much more risky defined contribution or 401(k) type plan. However, we do have concerns about the COLA issue.”
“While the elimination of the COLA assumption helps save the pension systems, OPEA is concerned that the legislature will never fund a COLA,” continued Frazier. “State retirees need relief from rising costs.”