Budget & Tax
Unfunded mandate proves headwind to state retirement system
November 1, 2022
Although the funded status of the Oklahoma Teachers’ Retirement System (OTRS) improved dramatically for a decade, an unfunded benefit-increase mandated by lawmakers in 2020 effectively eliminated four years’ worth of continued progress, according to data presented to lawmakers.
As a result, the teachers’ retirement system will not achieve full funding for at least 14 more years.
Sarah Green, executive director of the Oklahoma Teachers’ Retirement System, told members of the House Banking, Financial Services and Pensions Committee that as of June 30, 2022, OTRS had $7.3 billion in unfunded liabilities and was 73.5 percent funded. Officials predict it will take another 14 years for the system to become fully funded at current rates.
Many officials say a pension system must be at least 80 percent funded to be considered financially sound, although debate exists regarding that figure. While OTRS falls below that level, the system’s financial stability is still much improved compared to just over a decade ago.
In 2010, OTRS was only 47.9-percent funded, which was a significant factor in Oklahoma’s state pensions ranking among the least-funded in the country at that time.
Green noted that repeated legislative approval of unfunded cost-of-living adjustments (COLAs) was a key cause of the system’s abysmal funding status.
“From 1999 to roughly 2008, the Legislature passed unfunded COLAs every other year,” Green said. “So 2004, 2006, 2008. Our funded ratio really took a hit at that time.”
That rapid decline in state pension stability prompted lawmakers to make it more difficult to pass pension-benefit increases without funding. The reform dramatically improved the stability of OTRS, which saw its funded status surge from 47.9 percent in 2010 to 72.9 percent in 2018.
But lawmakers chose to return to their old habits in 2020 and passed another unfunded benefit increase that caused OTRS’ funded status to fall to 67.3 percent that year. OTRS did not return to its 2018 funding level until the end of the 2022 state-budget year when the system achieved a 73.5 percent funded status. And that increase owed much to an atypical one-year return on stock market investments.
“In FY21, we earned 33 percent return on our investments,” Green said. “And so that helped us quite a bit.”
Such high returns are not sustainable or likely. In fact, in FY22 the retirement system experienced a 9.55-percent loss on investments. And the system’s return on investment for the past five years has averaged slightly below the 7 percent assumed return on investment used by pension managers when making fiscal forecasts of system stability.
Despite current economic conditions that have created downward pressure on stocks, OTRS has been forced to bank on stock returns to generate sufficient funding to meet the pension system’s obligations to teacher retirees.
“We do have a little riskier portfolio,” Green said, “because we do have some ground to make up from the unfunded liability.”
Failure to maintain pension system funding not only harms those who depend on the system for retirement income, but all taxpayers because poor pension funding leads to higher interest rates on all state debt.
“The other thing about our funded ratio increasing is that it improves our state’s credit rating as well,” Green said. “And so we need to stay on that upward trajectory because it has an impact on the state’s credit rating.”