Budget & Tax
House votes to roll back Oklahoma pension reforms
March 24, 2022
House lawmakers voted to roll back a 2014 pension reform that was projected to save taxpayers $3.8 billion over 30 years and instead provide state workers retirement benefits that are not available to the typical private-sector worker in Oklahoma.
House Bill 2486, by state Rep. Avery Frix, eliminates a defined-contribution retirement plan, similar to a 401(k) plan in the private sector, and instead places most state government workers in a defined-benefit plan.
In a defined-benefit plan, state government employees receive a guaranteed, specified amount in retirement payments, while in a defined-contribution plan they contribute and invest in funds over time to save for retirement.
Lawmakers voted in 2014 to shift all new state government employees (aside from teachers or those working in hazardous positions, such as police and firefighters) into a 401(k)-style retirement plan. That law was authored by current Oklahoma State Treasurer Randy McDaniel, who then served in the Oklahoma House of Representatives.
When she signed the reform into law, then-Gov. Mary Fallin noted, “The system as it stands today is not financially sound or sustainable. Moving future hires to a 401(k)-style system helps to ensure we can pay our current retirees and employees the benefits they have already earned.”
In a 2014 interview, McDaniel said the cost of defined-contribution plans is predictable for state government, and also noted that defined-benefit plans involve moral hazard that causes politicians to rapidly inflate the system’s unfunded liability by increasing benefits without covering the cost.
“An issue that is overlooked in the mathematical data is the issue of political incentives to harm the system by making unsustainable financial promises,” McDaniel said. “Unfortunately, those incentives are real, and they greatly impact the situation we face today. It’s easy to make promises when someone else is going to have to pay for those promises at some point in the future.”
State Rep. Denise Crosswhite Hader, R-Piedmont, said she asked McDaniel for his thoughts on HB 2486.
“I did reach out to him and asked him if this was a step forward or backward, and he said it would be backward,” Crosswhite Hader said.
“That does not surprise me at all,” responded Frix, R-Muskogee.
State Rep. Gerrid Kendrix, an Altus Republican who has a background in finance, said the legislation could eventually cause significant financial challenges for state government.
“What I want to make sure is that we don’t put our state in a position to where we’ve got a liability there that we’ve got to raise those taxes again,” Kendrix said, adding that he feared the legislation will “put the state on the hook for more money that we can’t project specifically at this point.”
“Will this add to that liability in the future? Absolutely,” Frix responded.
He said that issue exists with any pension system and that pension managers would need to make “smart, strategic investments” so the funds “will be there to pay those liabilities in the future.”
Supporters of the bill said it will attract more people to work in state government jobs.
“We don’t pay the same rate as the private sector does for many, many jobs, many professional jobs,” said state Rep. Scott Fetgatter, R-Okmulgee. “And therefore we are in a crisis all across this nation competing for good workforce.”
He said the bill would encourage people to stay in state government positions for a longer duration.
State Rep. Ross Ford, R-Broken Arrow, similarly said the legislation would make state employees view their work as a career and not a job.
But Crosswhite Hader, who previously worked as a state employee, said the legislation would effectively force people to remain in jobs long after they are ready to leave because the retirement benefit will not be as portable as a 401(k).
“If you put us back into defined benefit, you trap that employee,” she said. “Because then what happens is they have to stay to get their benefits.”
When workers tire of a job but stay anyway, she said they are “no longer a good employee.”
State Rep. Chad Caldwell, R-Enid, noted the state’s pension systems were “an absolute and total disaster” prior to a set of reforms that included the change being rolled back by HB 2486.
“We fixed this system once,” Caldwell said. “Now we’re going to unwind it.”
He noted the state of Illinois has a pension system for state workers that is similar to that mandated by HB 2486.
“They’re $9 billion in the hole—nine billion with a B—mainly because of stuff like this,” Caldwell said.
State Rep. Mark Lepak, R-Claremore, noted that defined-benefit plans are a rarity today because of the financial problems they create.
“These kinds of plans in the private sector have gone away for the most part because they’re too expensive to maintain,” Lepak said. “And people leave anyway, especially those in their mid-40s and lower. The statistics are they’re going to change jobs seven times in their lifetimes.”
Frix suggested there would be electoral benefits for those who supported the bill.
“This is something that’s supported by the state employees that live in each one of our districts,” Frix said.
HB 2486 passed the Oklahoma House of Representatives on a 68-23 vote.