Budget & Tax, Good Government
Lawmakers vote to increase state’s unfunded liability
February 28, 2020
Members of a House committee have voted to increase benefit payments to some state government retirees, but have chosen not to provide an appropriation to fund the additional expense. Instead, lawmakers voted to raid pension system assets to cover the cost of the higher monthly payments, which will reduce the systems’ solvency.
Lawmakers advanced the bill despite having no firm estimate of the associated cost.
House Bill 3350, by Rep. Avery Frix, would provide a “cost of living adjustment” (COLA) for some state government retirees of up to 4 percent.
“It’s been about 12 years, going on 13 years, since our retirees have received a cost-of-living adjustment,” said Frix, R-Muskogee. “At one time in our state, our systems were some of the worst-funded systems in the nation. They have come a long way, mainly because of sacrifices that retirees have made, also because of some tough decisions this body has made. And now it’s my opinion that these retirement systems can support this.”
The bill applies to retirees currently receiving payments from the Teachers’ Retirement System of Oklahoma, Oklahoma Public Employees Retirement System, Oklahoma Firefighters Pension and Retirement System, Oklahoma Police Pension and Retirement System, Oklahoma Law Enforcement Retirement System, and Uniform Retirement System for Justices and Judges.
Under the bill, individuals who have been retired for less than two years would receive no increase in benefit payments. Those retired for two to five years would see a 2 percent increase, and those retired for five years or more would get a 4 percent increase.
Those provisions were described as part of a compromise that will ensure the legislation sails through the Legislature.
“That’s the agreed-upon amendment between the House and Senate,” explained Rep. Chris Kannady, R-Oklahoma City.
The passage of an unfunded pension mandate threatens to revive a practice that previously caused Oklahoma government pensions to be some of the worst-funded in the nation. From 1975 to 2019, there were 19 COLAs authorized by lawmakers with the most recent approved in 2008. Most lacked dedicated funding, which meant benefit increases were provided by raiding pension assets.
By 2007, the best-funded state pension system was 83-percent funded and the worst (the teachers’ system) was only 52.6 percent funded.
Following 2010, lawmakers enacted several reforms, including the Oklahoma Pension Legislation Actuarial Analysis Act and a law that required full funding of COLAs. Since that time, the pensions’ funded status has increased significantly.
However, two systems remain funded at a level well below what many experts say is required to remain actuarially sound: The teachers’ and firefighters’ systems are only 72.4 percent and 70.8 percent funded, respectively.
Both systems’ funded status could further decline if HB 3350 becomes law.
A legislative staff summary of HB 3350 included no estimate of the measure’s full cost, and only stated that the bill is “currently under review.”
However, when similar legislation was filed last year that provided an across-the-board benefit increase of 4 percent for all state retirees, officials estimated it would increase Oklahoma’s unfunded liability by more than $850 million. More than half of that unfunded liability—$486 million—would have been imposed on the teachers’ retirement system.
HB 3350 evades the provisions of prior pension reforms through language that redefines “nonfiscal retirement bill” to include “a cost-of-living benefit increase pursuant to the provisions of Sections 2 through 7 of this act.” Thus, the bill exempts itself from existing financial safeguards and is counted as having no fiscal impact despite an actual cost that may total several hundred million dollars in unfunded pension liability.
When a House study was conducted on the COLA issue last November, Teachers’ Retirement System of Oklahoma Executive Director Tom Spencer cautioned lawmakers against enacting unfunded benefit increases that drain retirement system assets.
“It’s kind of like saying, ‘Are you going to get hurt less if you stab me once or stab me twice?’” Spencer told lawmakers when asked if his system could handle an unfunded 4 percent COLA. “It’s kind of one of those questions. Is all hell going to break loose? No. But in a perfect world, I don’t like the idea of adding on liability without something going to it.”
HB 3350 passed the House Rules Committee on an 8-0 vote.