Before the 2020 legislative session was interrupted, the Oklahoma House of Representatives passed a cost-of-living-adjustment (COLA) increase of between two and four percent for retired government workers. As the COVID-19 crisis has continued to unfold, it’s clear that state revenues will be falling dramatically over the next few months. While state savings and federal relief will help weather the coming storm, there is another factor that will affect the state pension system.

The stock market came crashing down last month, ending the longest bull-market run in history at 10 years. That crash has caused ripple effects throughout the economy and the state’s pension system will not be immune. Because the majority of Oklahoma government pension plans are defined-benefit (DB) plans, retirees are guaranteed a return regardless of how the market performs. Throughout much of the bull market, state pensions have had an estimated rate of return of 8 percent. That rate dropped to 7.5 percent in 2017. Over the last 10 years, the average actuarial return on investment for the two largest pensions, Oklahoma Public Employees Retirement System (OPERS) and the Teachers’ Retirement System of Oklahoma (TRS), has been 6.8 percent and 7.3 percent respectively. Even with historic growth in the market, pensions have only been able to stay near expected returns.

Oklahoma has worked to reduce the pension system’s unfunded liability, but the kind of shock the market is currently experiencing could jeopardize those gains. As of April 1, the annual return for 2020 is ‒23.15 percent. Add in the increased base costs for all retirees due to the COLA and it’s clear that Oklahoma pensions will be feeling a strain over the next year or so. While most pension systems in Oklahoma have increased their funding ratio to above 90 percent, it will be particularly troublesome for the two least-funded pensions in the state—TRS and OFPRS (the Oklahoma Firefighters Pension and Retirement System), which are each near 70 percent funded.

Another trouble spot will be how the state reacts to this increase in unfunded liability (which could exceed $800 million). With the state likely facing revenue shortfalls for the next two years, it won’t be possible to make a direct cash payment to the pension system. The other option would be for pensions to try to raise their annual return. With interest rates now near zero, using low-risk investments isn’t viable. The only other way would be to move to riskier investments that could provide higher returns. This is certainly not ideal for a system that has guaranteed benefits to 150,000 retirees.

The current crisis has bolstered the need for long-term reform to the state’s pension systems. Risking current retirees benefits by allowing unfunded liabilities to grow is unacceptable and unnecessary. Converting all newly hired teachers to a defined-contribution (DC) plan would safeguard the system from any massive increases in unfunded liability.