Pension Deficit Disorder
BY JULIE DELCOUR Associate Editor
Sunday, February 03, 2013
2/03/13 at 7:29 AM
Oklahoma's seven public pension plans all operate separately, with their own boards, buildings and investment advisors. That autonomy or rugged individualism comes at a price: The five largest plans spend a combined $80 million to $100 million annually on administrative expenses.
That's a luxury in a state suffering from extreme Pension Deficit Disorder. Despite reforms over the past two years, Oklahoma has $11 billion in unfunded pension liabilities, still one of the worst records in the U.S.
That number equals about 7 percent of the Gross State Product, with about $2,900 of pension debt per citizen, says state Treasurer Ken Miller.
Further reduction of liabilities is needed. At stake are the financial futures of more than 220,000 past and present state workers, the state's credit rating and other considerations.
The $16 billion crisis
In 2011, with unfunded liabilities reaching $16 billion, five pieces of legislation passed that led to a $5 billion reduction in unfunded liability. The Legislature raised the retirement age for incoming public workers from 62 to 65 and passed a law requiring any authorized cost-of-living adjustments be funded.
Some hard work has gone into pension reform by former House Speaker Kris Steele, Senate President Pro Tem Brian Bingman, Sen. Mike Mazzei, R-Tulsa, and Rep. Randy McDaniel, R-Edmond, among others.
Miller believes there is another way to help: reduce up to 10 percent of administrative costs annually by establishing a single oversight board.
"We need one board that's in charge that can look after the financial health" of the pensions systems. A centralization of oversight would not mean, Miller emphasizes, that funds in each system would be commingled. Each plan would remain individual, but one centralized board would manage the seven systems. That's how the majority of states operate. But not in Oklahoma, where the five largest pension plans spent more than $80 million last year in personnel and other administrative costs, including investment management and consulting fees just to support their plans.
"Streamlining would provide up-front cost savings and would create more uniformity, accountability and comparability among the plans, as well as more transparency and oversight of external consultants and managers," says Regina Birchum, Miller's chief of staff and deputy treasurer for policy.
The change does not require a constitutional amendment, and could be accomplished by the Legislature. Political realities, however, usually trump common-sense measures. Eliminating individual boards would be very controversial. Yet the idea makes sense.
The Oklahoma Pension Oversight Commission, which Miller chairs, has only advisory powers - no teeth. For years, the Legislature was warned that Oklahoma was headed toward a crisis in its pension systems, which cover more than 220,000 past and present teachers, police, firemen, judges and other public employees.
The biggest crisis has existed in the largest system - the teachers plan, with $8 billion in unfunded liabilities. Thanks to changes over the past two years, that plan is now on target to eliminate its unfunded liability in 22 years.
Its funded ratio, as of June 2012, is about 55 percent, meaning that if all teachers and retired educators cashed in their pensions at once, the program could pay 55 cents on the dollar.
Across the nation, about 3,400 state and local pension programs have made big adjustments to address a $1.4 trillion shortfall. Some are restructuring, reducing or capping pension benefits; some (such as Oklahoma) are raising retirement ages for new workers; some are asking employees to contribute more to their retirement plan. All but a few have centralized their administrative operations.
Oklahoma must continue to be aggressive in reducing unfunded liabilities. A downgrade in the state's bond rating could lead to higher borrowing costs and siphon off funds otherwise available for essential state services.
Years ago, in a white paper on the ailing retirement systems, Oklahoma Policy Institute Director David Blatt noted:
"Real political will is needed to ensure that addressing long-term fiscal obligations becomes a short-term priority. It will always be easier for the Legislature to dedicate funding for new spending priorities and tax cuts than to show the long-term thinking needed to make sure that the pension system is properly funded."
Several approaches might strengthen the underfunded pension systems. Do we really need seven different systems when most states have far fewer? Does the old model of providing workers with a pension meet the demands of today's worker or would some other option such as a 401k-type plan work better? The average tenure of a state employee is only six years. So is portability of retirement benefits worth exploring?
At a minimum, Miller's suggestion for centralization of administrative functions deserves a good hard look by lawmakers.
Julie DelCour, 918-581-8379