In 2020, Oklahoma lawmakers voted to increase state pension benefits without providing funding for the new payments, increasing unfunded liabilities.

At the time, supporters of the unfunded-benefit increase argued that systems that are 80-percent funded can absorb the hit and are effectively fully funded.

But during an Oct. 31 study conducted by the House Banking, Financial Services and Pensions Committee, state pension directors told lawmakers the 80-percent rule is a myth.

“I’ve heard it said, ‘If you’re 80-percent funded, that’s where you want to be,’” said Joseph Fox, executive director of the Oklahoma Public Employees’ Retirement System (OPERS). “Well, there’s no rhyme or reason for that and no one can really trace that back to any given person. I would say 100-percent funded (is the goal), because then you don’t have any unfunded liability and you’re guaranteeing your retirees that you’re going to have money there to pay for them. And I think that’s the level you want to stay at.”

COLAs During Election Years

For years, Oklahoma lawmakers routinely passed unfunded “cost of living adjustments” (COLAs) that increased state pensions’ unfunded liabilities. The unfunded benefit increases were typically enacted during election years.

That steadily drained state pensions and left Oklahoma in bad financial shape.

“We have a history of granting COLAs, essentially every other year, through our plan—2000, 2002, 2004, 2008, cost-of-living adjustments were passed for our retirees and they were not funded,” said Sarah Green, executive director of the Teachers Retirement System of Oklahoma (TRS). “There has not been a funded COLA in our plan history.”

In the late 1990s, Fox noted the Oklahoma Public Employees’ Retirement System was over 90 percent funded. But the Oklahoma Legislature then chose to reduce state government’s employer contributions to the system and also passed numerous unfunded benefit increases.

By 2011, OPERS was only 66 percent funded.

Similarly, the pension plan for state judges was almost 150 percent funded in the 1990s, and lawmakers chose to reduce contributions and impose many unfunded benefit increases. The system’s funded status quickly plunged to 80 percent, Fox said.

Green noted that the Teachers Retirement System had a funded ratio of only 1.75 percent upon its creation in 1943. While the pension system’s finances improved from that catastrophic level over the ensuing decades, the system was never well funded.

In 1990, the teachers’ system was ranked as the fourth-most-poorly-funded system in the nation with a funding ratio of only 39.1 percent. By the end of the 1990s, the funded ratio had increased to only 49.8 percent.

At one point, officials estimated it would take 62 years for the Teachers Retirement System of Oklahoma to achieve fully funded status.

By 2010, the Teachers Retirement System of Oklahoma had $10.4 billion in unfunded liability and was only 47.9 percent funded.

Finally, Oklahoma lawmakers adopted several reforms starting in 2011 that dramatically improved the state’s financial standing. Those reforms included putting all new state government hires into a 401(k)-style “defined contribution” plan rather than the “defined benefit” plans that generated so much financial strain, and lawmakers also passed a law prohibiting unfunded benefit increases.

Oklahoma state pensions were among the nation’s worst-funded in 2007, ranking 46th nationally. But, by 2019, the systems’ funded status ranked 14th best in the United States.

Officials said all state pension systems are in much better shape today than they were prior to 2011.

However, lawmakers returned to their old ways in 2020, passing a law to impose another unfunded COLA (the legislation exempted itself from the ban on unfunded COLAs) with negative consequences for state retirement systems.

During the 2024 legislative session, lawmakers also passed another bill that increased benefits in the Oklahoma Police Pension and Retirement System (OPPRS) without providing funding for the additional payments.

Sean Ruark, deputy director of the Oklahoma Police Pension and Retirement System, said OPPRS is 96.5 percent funded today. The system was fully funded until lawmakers enacted the unfunded increase in retiree benefits during the 2024 legislative session with passage of Senate Bill 102.

That had immediate negative impact on the system.

“We went from a very strong funded-ratio position of 106 percent last year, FY23, down to 96 percent this year,” Ruark said. “And basically, that’s a result of the passage of Senate Bill 102.”

OPPRS officials hope to achieve fully funded status again within five years, but that goal requires healthy investment returns and assumes lawmakers do not enact additional unfunded benefit increases.

The reforms passed starting in 2011 have improved the Teachers Retirement System of Oklahoma’s funded status dramatically, but it still cannot cover all obligations, Green noted. Officials estimate the system is currently 72.9 percent funded—and that’s a slight rebound from when the system fell to 67.3 percent funded after passage of the unfunded COLA in 2020.

Chase Rankin, executive director of the Oklahoma Firefighters Pension and Retirement System (OFPRS), said OFPRS is currently 71.7 percent funded with $1.3 billion in unfunded liabilities. The unfunded “cost of living adjustments” passed by state lawmakers in 2020 harmed the system’s finances, which had otherwise improved dramatically since 2010 when the system was only 53.4 percent funded.

“We all want to be at 100 percent,” Rankin said.

Duane Michael, executive director of the Oklahoma Law Enforcement Retirement System (OLERS), said OLERS is 80.4 percent funded today and projected to achieve 100 percent funding status within 15 years if investment-return goals are achieved and lawmakers do not impose additional unfunded liabilities on the system.

“We don’t have a lot of room for unfunded COLAs,” Michael said.

If lawmakers allow state pension systems to achieve 100-percent funded status, there are significant financial benefits, officials noted.

Fox said the Oklahoma Public Employees’ Retirement System is currently 102.7 percent funded, while a separate pension system for judges is 104.7 percent funded.

At OPERS, for every $1 in future benefits, Fox said eight cents comes from the employee, 31 cents comes from the state, and 61 cents comes from investment earnings.

But systems that are not 100 percent funded cannot generate that level of investment return, officials told state lawmakers.

Joseph Newton, an actuarial with Gabriel, Roeder, Smith & Company who has done work for the Teachers Retirement System of Oklahoma, said that system could achieve fully funded status in 11 years if there are no more unfunded COLAs and the system achieves projected investment returns.

Newton noted that only about 50 to 60 cents per $1 in benefit payments made by TRS currently come from investment returns. But if the system becomes fully funded, that figure will increase because “now you have a larger asset base that starts to generate a lot more investment earnings.”

If TRS becomes fully funded, officials project up to 74 cents out of every $1 in benefit payments will be covered by investment earnings, Newton said.

In contrast, in a pension system that is only 80-percent funded, Newton said “you’re having to contribute a lot more to buy the same benefit.”

Pension Reforms Made Oklahoma a National Leader

In addition to urging lawmakers to stop imposing unfunded COLAs, one expert also warned against efforts to roll back other reforms enacted since 2011.

For example, in recent sessions lawmakers have debated a proposal to eliminate the state’s “defined contribution” (401k-style) pension plan and shift all state workers again into a defined-benefit plan, based on arguments that the guaranteed retirement income would make state employment more attractive to new workers.

But experts warned lawmakers during a separate study conducted by the House Banking, Financial Services and Pensions Committee that reversing course would do little to improve employee recruitment and much to harm funding for a wide range of services, including schools.

At the Oct. 31 meeting, Zachary Christensen, managing director of the Reason Foundation’s Pension Integrity Project, warned that rolling all state workers into a defined-benefit plan would also have negative financial consequences.

“When you’re making a decision like that—especially when you’re backtracking and you’re undoing a cost-saving reform that was done over a decade ago, you need to keep in mind that that’s going to pack in a lot of risk and that could turn south very quickly with a couple of bad years’ returns,” Christensen said.

Reason Foundation researchers estimated that state costs would increase by $1.5 billion over 30 years if pension reforms are rolled back.

Christensen also noted that Oklahoma’s pension reforms have made the state a national leader and urged lawmakers to stay the course.

“All over the country, we’re talking to different states and we’re usually saying, ‘Well, look: It can be done. You can get to full funding. Look at OPERS. Look at how Oklahoma did it. It can be done,’” Christensen said. “You just have to make the right choice. You have to make a very good reform and stick to it long enough.”