Unfunded pension liabilities have become an increasingly troubling problem for states across the country, including Oklahoma. According to Pew Charitable Trust, Oklahoma’s pension plans were only 65 percent funded in 2012, and Oklahoma received a grade of “F” in The Heartland Institute’s 50-State Pension Report Card in 2010. Although many states have chosen to ignore this problem or use accounting gimmicks to hide it, Oklahoma has taken a significant step forward in reforming its pension system, using a model other states should follow.
In May 2014, Gov. Mary Fallin (R) signed House Bill 2630, The Retirement Freedom Act. Under the new law, starting November 1, 2015, all new state employees in the Oklahoma Public Employee Retirement System, excepting only hazardous-duty employees and teachers, will be enrolled in a defined contribution (DC) system. Defined contribution gives retirees direct control over retirement and allows them to move in and out of jobs without losing accrued pension benefits. This also allows governments to budget more accurately, because the benefits are paid directly to the employee and are a set amount of money each year.
In her signing statement, Fallin argued the state’s $11 billion pension debt was a problem that had to be addressed, as it continues to crowd out other areas of the state budget: “Oklahoma pension systems currently have $11 billion in unfunded liabilities. The system as it stands today is not financially sound or sustainable. Moving future hires to a 401k-style system helps to ensure we can pay our current retirees and employees the benefits they have already earned.”
Jonathan Small, vice president for policy at the Oklahoma Council of Public Affairs, commended legislators for the needed reforms. “Lawmakers and the governor deserve praise for actions this week to implement and require a defined contribution plan, a 401k-style retirement plan, for all new non-hazard duty state employees. Modernizing state employees’ retirement benefits in this manner will help the state keep its promise to current retirees and employees while making sure to continue to address the state’s pension debt of $11 billion,” Small said.
Oklahoma is the third state to require its new employees to participate in defined contribution plans. Michigan made the move to defined contribution in 1996; Alaska did the same in 2005. Currently, six states — Colorado, Florida, Montana, North Dakota, Ohio, and South Carolina — offer employees the option of remaining in a traditional defined benefit plan or switching to a 401k-style plan. Other states have hybrid plans that combine DB and DC plans. Another 10 states offer either mandatory or optional participation in hybrid retirement plans that combine both defined benefit and defined-contribution plans.
Taxpayers cannot afford to continue over-promising and underfunding state pension plans. Oklahoma has taken several steps in the right direction with these new reforms, which should serve as a model for other states facing similar problems.
The following articles examine state pension reform from multiple perspectives.
The State Public Pension Crisis: A 50-State Report Card
This Heartland Institute report examines problems currently facing public pension systems, including the enormous burdens public employee pensions pose in some locations. The report ranks each state according to the operation and relative disposition of the pension plans in the 50 states and suggests ways states might go about solving their pension system problems.
Saving Workers’ Retirement: First Steps Toward Public Pension Reform in Oklahoma
This pension reform plan from Oklahoma Council of Public Affairs would ensure current state employees and retirees get the retirement they were promised, set in motion a plan to pay down unfunded liabilities, and establish modern retirement-savings plans for state employees.
Oklahoma Pension Reform — A Defined Contribution Conversion
Lance Christensen of Reason Foundation examines Oklahoma’s pension reform and the various reactions of supporters and opponents.
Keeping the Promise: State Solutions for Government Pension Reform
This report from the American Legislative Exchange Council describes the variety of pension plans governments use today and the advantages and disadvantages of each. It also provides several tools legislators can use to ensure governments can affordably fund retirement benefits for their employees.
Research & Commentary: Defined Contribution vs. Defined Benefit Pensions
John Nothdurft, director of government relations at The Heartland Institute, provides a bullet-point comparison of defined-benefit pension and defined-contribution retirement plans.
The Real Cost of Public Pensions
Jason Richwine discusses how to calculate the cost of public defined-benefit pension benefits, compares the cost of these benefits to private-sector retirement plans, and refutes two of the most common arguments that suggest public pension benefits are modest.
The Municipal Government Debt Crisis
This study by The Heartland Institute and Truth in Accounting (TIA) is the comprehensive analysis of Cook County’s taxing districts. “It reveals how officials in many districts have been misrepresenting their financial condition by telling citizens their budgets were ‘balanced,’ when in fact they have been accumulating an overwhelming amount of debt,” the authors write. The study found several taxing districts in Cook County, Illinois face an even worse financial burden than cities currently in the news, such as Stockton, California.
Research & Commentary: Public Pensions and the Assumed Rate of Return
Heartland Institute Senior Policy Analyst Matthew Glans examines the problems facing state and local pension funds, how assumed rates of return affect pension fund debt, and proposals to change projected rates of return on pension-fund investments.
Fixing the Public Sector Pension Problem: The (True) Path to Long-Term Reform
Richard Dreyfuss of the Manhattan Institute examines various state pension reform efforts and recommends they borrow a page from the private sector by shifting to defined-contribution plans: “Under such plans, to which employees as well as employers may contribute, investment risk is borne by plan members, not by taxpayers. A majority of Fortune 100 companies have already adopted such plans. Only 16 percent of large companies still offer their retirees medical coverage. By sharing risks with the beneficiaries, states and municipalities would be able to devote far more of their time and resources to the more immediate concerns of today’s voters and taxpayers.”
State Pension Funds Fall Off a Cliff
Barry W. Poulson and Arthur P. Hall consider different measures of historical and current funding shortfalls in state pension plans. Two case studies — Public Employee Retirement Association of Colorado (PERA) and Kansas Public Employee Retirement System (KPERS) —are examined in-depth to explore fatal flaws that caused funding crises in these plans.
The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform
The Reason Foundation considers the looming crisis created by states’ continued use of defined-benefit pension plans, offering solutions and explaining why the current system is a disaster in the making.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
Whether sending an expert to your state to testify or brief your caucus, hosting an event in your state, or simply sending you further information on the topic, Heartland can assist you. If you have any questions or comments, contact Heartland Institute State Government Relations Manager Logan Pike at [email protected] or 312/377-4000.