Budget & Tax, Education

Unfunded retirement bill wins House approval

March 10, 2020

Ray Carter

Legislation that increases state payments to retired government workers, but does not include a direct funding source, has passed the Oklahoma House of Representatives without opposition on a 99-0 vote. The measure is expected to boost the state’s unfunded liability by $800 million to $900 million.

The legislation was passed amidst a background of stock market volatility that has reduced state pension earnings and falling oil prices that could significantly hamper lawmakers’ ability to cover associated pension costs.

House Bill 3350, by Rep. Avery Frix, would provide a “cost of living adjustment” (COLA) of up to 4 percent for some state government retirees.

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 two percent increase, and those retired for five years or more would get a four percent increase.

Frix, R-Muskogee, said 85 percent of state government retirees will receive the four percent increase.

He also said the legislation’s cost will extend the current time frame required for state pension systems to achieve fully funded status by another two years. If HB 3350 becomes law, the cumulative funded ratio of Oklahoma state pension systems would decline by two percent with one system’s funded status declining by 2.9 percent.

Republicans and Democrats held a joint press conference to hail the bill’s passage and insisted the state could handle the associated costs.

“We want to do the best that we can for our state retirees, and we don’t want to see our pensions be eroded, go in a negative trajectory based on upon all the hard work and money that’s been put into them over the years to bring them up to a solvent position,” said House Speaker Charles McCall, R-Atoka.

Around $300 million is already diverted from other uses each year to shore up Oklahoma government pension systems due in part to unfunded COLAs enacted in decades past. 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.

Early in the last decade, lawmakers enacted several reforms, including a requirement to fully fund 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.

Past estimates indicated more than half of any increase in unfunded liability created by a new COLA would accrue to the teachers’ retirement system.

McCall indicated that the $300 million in extra pension funding may be adjusted in future years to offset the associated costs of HB 3350.

“What we have control of is our commitment to funding, putting additional dollars into these pension funds each year,” McCall said.

He also noted some state pension systems are fully funded or close to it, which could allow lawmakers to redirect funding from those systems to their poorly funded counterparts.

“When they reach a certain solvency level and you’re continuing to contribute to those, then I think it’s fiscally prudent to consider the COLA,” McCall said.

House Minority Leader Emily Virgin, D-Norman, said the House Democratic caucus has supported a COLA for several years.

“We were very grateful to find a great Republican partner in Representative Avery Frix,” Virgin said.

HB 3350 evades the provisions of prior pension reforms through language that redefines “nonfiscal retirement bill” to include “a cost-of-living benefit increase” enacted through HB 3350. Thus, the bill exempts itself from existing financial safeguards and is counted as having no fiscal impact despite an actual cost in the hundreds of millions.

HB 3350 now goes to the Senate for consideration.