Pension reform debate begins
(eCap) Debate on potential proposals to reform Oklahoma's pension system began Wednesday during a meeting of the Oklahoma State Pension Commission, even though the matter was not officially on the agenda.
Treasurer Ken Miller, who chairs and the commission and was elected to a second term Wednesday, argued he believes it is in the state's best interest to considering moving from a defined benefit plan to a defined contribution system and to discuss consolidating some of the systems' governing boards into one entity. The changes, he said, could help reduce and potentially eliminate the plans' unfunded liabilities and give the state "control of its balance sheet."
State Auditor and Inspector Gary Jones contended officials should be cautious about making changes to the systems because they could result in reduced investment returns and increased unfunded liabilities.
"A small change in the return on investments and we could increase the unfunded liabilities, said Jones.
At issue were discussions that took place during this year's legislative session and will continue during the legislative interim and next session concerning possible pension system reforms. Miller said the Legislature ran out of time this session to consider the issue, so a formal proposal was never advanced.
During Sen. Rick Brinkley's legislative update, Miller said he expected a proposal to convert at least the Oklahoma Public Employee Retirement System from a defined benefit plan to a defined contribution plan for new employees to be "a top issue next legislative session."
Miller went on to say, however, he believed it too early for the commission to take a position on the issue since he expected an in-depth discussion during what is expected to be a joint interim study.
Brinkley, R-Owasso, submitted Interim Study Request 2013S-016 to examine improvements to the state's pension systems as a joint study with the House. The request was assigned to the Senate Pension Committee that Brinkley chairs. That means he will decide whether or not the study is held. Rep. Randy McDaniel, R-Edmond and chair of the House's special Pension Oversight Committee, submitted Interim Study Request 2013H-012, an analysis of the state's retirement systems. House Speaker T.W. Shannon, R-Lawton, will decide by July 17 whether McDaniel's study will be heard.
Brinkley and McDaniel each requested that their studies be conducted jointly.
Miller acknowledged he had asked the commission's management consultant, NEPC LLC, for a report on potential savings resulting from some of the ideas discussed this session but never formally put down on paper, including consolidating the systems' governing boards. Jones said that concerned him because it made it appear the commission was taking a position on the proposal. "It's extremely important that when we put out numbers that are perceived as coming from this commission that we discuss that," Jones said. "Otherwise, it could lead the Legislature to make a decision based on a false assumption."
Miller said he disagreed that legislators would have viewed the numbers as coming from the commission or reflecting a position being taken by the panel.
Vice Chair Douglas Lawrence agreed with Jones. "We need to be careful about what we say and who we way it to."
Miller said he always was clear and never said the savings calculated by NEPC represented a commission endorsement of the proposal. "I agree," he said. "We need to be careful and I believe we are."
Jones took his concern a step further, applying it to future proposals to change the systems and the impact it could have on their unfunded liabilities. He noted the systems often are recognized for the quality of their management and their investment returns consistently are in the top 10 percent of public funds.
Miller responded by saying he believed the state could benefit from a volume discount on investment fees that could result from packaging the systems together, even if the same investment strategies were maintained. He also stressed that consolidating the systems' governing boards would give the state control over its balance sheet, rather than leaving it in the hands of systems' boards of directors. That, he said, was one of the biggest limits to efforts to improve the state's credit rating.
"Gov. Fallin couldn't be more on target than she is with her proposal to move from a defined benefit plan to defined contribution plan and to consolidate the governing boards," said Miller, adding, "Once this proposal is vetted, I think it will be a winning issue and a winning policy for the state."
Miller and Jones again debated the issue during discussion of a subcommittee report on how to improve the financial condition of the state pension plans. Commissioner Louis Trost led the panel and said the solution was relatively simple: The state needed to annually fund the pension systems' actuarially required contribution, the minimum amount to be contributed to the funds to meet their obligations. Figured presented by Trost showed the state had failed to fund $3.4 billion of the actuarially required contribution (ARC) from fiscal year 2002 to fiscal year 2010. Fiscal year 2011 was the first year the state fully funded the contribution, Trost said.
"We feel the most important thing the Legislature can do is to revisit the (proposed 2011) ballot measure that required the ARC be funded," said Trost, referring to a joint resolution proposed by McDaniel that called for a vote of the people requiring the annual contribution be funded.
Jones noted that a Pew Research Center report on state pension systems simply said Oklahoma "did not pay our bills" when it came to the retirement systems. "If we would just start paying our bills each year, we would not have this problem," Jones said. He added that transitioning to a defined contribution plan would mean the state "…still has an obligation to pay with (the current) plan."
Miller, again, took issue with Jones' comments, saying state budget writers had to set priorities and chose to fund cores services first, which left insufficient funds to meet the required pension contribution.
"As history shows, Oklahoma doesn't seem to have the funds necessary to dedicate to the (actuarially required contribution)," Miller said.
"That's something I just don't understand," Jones responded. "We are obligated to pay for something we've promised…I have no idea how we can pick and choose what bills we pay and which we don't…I don't think that is a choice the state has. The problem is we haven't paid our bills. We've been deadbeats."
Jones said he believed not only should the state be required to meet the actuarially required contribution but that it should be treated like the Oklahoma's Promise scholarship funding, which automatically is taken off the top of General Revenue Fund collections. Lawrence agreed with that position, noting each pension system received funding differently, rather than from a direct appropriation from the General Revenue Fund by the Legislature.
Lawrence said he believe the pension systems would be "thrilled" to see their money come off the top of the General Revenue Fund, rather than via the "helter skelter" way they are currently funded. Miller said, on one hand, he agreed that would be a better approach, but, he noted, each pension system had played a direct role in setting up the dedicated funding plans. Ultimately, he said, "They have not trust in the Legislature to do it."
Miller noted that the proposal he and Gov. Mary Fallin advocated would continue to provide funding to the existing pension systems "so we don't end up increasing the unfunded liabilities."
He added, "Until we move away from defined benefits, we are still going to have to deal with an unfunded ARC and unfunded liability problems."
Jones moved that the commission again endorse McDaniel's proposal for a constitutional amendment to require that the ARC be funded. The motion passed unanimously.
In his investment performance analysis, Don Stracke, with NEPC, said the composite gains for the state's seven pension systems was 6.6 percent for the three-month period ending May 31, putting it in the top 5 percent of all public plans nationwide. Stracke noted the combined plans typically rank in the top 10 percent of all public plans over various time periods.