Budget & Tax

Officials urge caution in passing unfunded pension benefits

November 19, 2019

Ray Carter

Because several Oklahoma state pension systems are now fully funded or close to it, they can withstand the financial blow should state lawmakers increase benefit payments without paying for them, officials told lawmakers at a recent study.

But several pension officials also said a state law that prevents passage of unfunded cost-of-living adjustments, or COLAs, has been a significant reason state pension systems are on sounder footing today and cautioned against returning to legislators’ prior practice of raiding pension assets to provide COLAs.

“If COLAs are not funded by the Legislature, and the plans are required to fund them, the plan is basically taking out a mortgage to pay for them,” said Joe Fox, executive director of the Oklahoma Public Employees Retirement System (OPERS). “They’re not free. They are costly. And the fund will have to pay for that through future contributions to the plan.”

Under legislation passed by the Oklahoma House of Representatives this year, retired state workers’ benefits would have been increased by 4 percent. But that bill, which did not advance in the Senate, included no funding to cover the additional cost, making the measure an unfunded mandate. The Legislature’s fiscal staff estimated the bill would increase Oklahoma’s unfunded liability by more than $850 million.

From 1975 to 2019, Fox noted 19 COLAs were authorized by lawmakers with the most recent COLA being approved in 2008. Many of the COLAs approved in the 1980s lacked dedicated funding, causing the funded status of OPERS to significantly decline during that decade as pension assets were drained.

“If we have changes in our benefit structure—in other words, if COLAs are granted—it’s going to eat into that money even more so,” Fox said.

At the start of the decade, lawmakers approved the Oklahoma Pension Legislation Actuarial Analysis Act, which required that benefit-increase legislation be filed in odd-numbered years and undergo a fiduciary analysis, and allowed such bills to pass only in even-numbered years. Reform legislation also required funding of COLAs. Such reform measures have been credited with ending lawmaker’s prior practice of routinely passing unfunded benefit increases.

In 2007, the best-funded state pension system was 83-percent funded and the worst (the teachers’ system) was only 52.6 percent funded, which was “not good at all,” said Tom Spencer, executive director of the Teachers’ Retirement System of Oklahoma (TRS).

Today, the two worst-funded systems—the teachers’ and firefighters’ systems—now are 72.4 percent and 70.8 percent funded, respectively, while several other state pension systems are 100-percent funded or close to it.

Some sources suggest an 80-percent funded ratio signifies a pension plan is “actuarially” sound. However, the American Academy of Actuaries has called that a “mythic standard.” In an issue brief, the academy declared, “Pension plans should have a strategy in place to attain or maintain a funded status of 100% or greater over a reasonable period of time.”

Along with reforms that required funding for benefit increases, lawmakers have also been forced to take other actions to shore up Oklahoma’s state pension funds, including directing additional state tax dollars to the systems. That funding, which might otherwise go to other needs, was necessary because of the state’s huge unfunded status, officials said.

“So much of our money is going to pay that past unfunded liability,” Spencer said. “So once you get at 100 percent, it doesn’t cost that much to stay at 100 percent.”

When state pension plans are near 100-percent funded status, it also reduces the system’s exposure to stock market swings, one official said. In addition to receiving payments from employers and workers, the systems generate income from investment returns.

Ginger Sigler, executive director of the Oklahoma Police Pension and Retirement System, said that system was just 74.9 percent funded in 2010, but is 102.5 percent funded today. She said being fully funded allows investment managers to be more cautious and protects retirees from the impact of economic downturns in the stock market.

“We have been able to take less risk, and when you have less risk you may not make as much, but when the market turns down you’re not going to lose near as much,” Sigler said.

Chase Rankin, executive director of the Oklahoma Firefighters Pension and Retirement System, was one of several speakers who told lawmakers that reforms preventing passage of unfunded COLAs greatly benefited state retirement systems.

“I look at sort of a roadmap,” Rankin said. “Are we going up the hill, or are we skiing down? There was a time when we were on that downward trend, and thanks to some of the legislative changes we’ve done—some of the sacrifices through no COLAs and things like that—we are on that positive trend and it would take quite a bit to bump us off that at this point.”

While several directors said their systems could survive an unfunded COLA, due to their current funded status, Spencer was among those who urged caution. The teachers’ pension system’s funded status remains well below many other systems, and its financial weakness caused lawmakers to pare back prior unfunded COLAs even when pension solvency was not a political priority. When COLAs were passed for all systems in 2006 and 2008, retirees in most systems received a 4-percent increase, but the bump for teachers was limited to 2 percent, Spencer noted.

Given financial reality, he voiced concern about raiding teacher retirement assets to boost benefit payments.

“It’s kind of like saying, ‘Are you going to get hurt less if you stab me once or stab me twice?’” Spencer said when asked if his system could handle a 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.”

Rep. Avery Frix, a Muskogee Republican who authored the legislation to pass an unfunded COLA this year, said he remains committed to enacting a COLA.

“There’s a lot of retirees across our state that have sacrificed since 2011 to allow these systems to improve significantly,” Frix said. “And I think it’s time that we look at this very seriously next session to provide them a cost-of-living adjustment.”