Oklahoma Moving in the Right Direction on Pension Reform

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Posted by Will Upton on Friday, May 30th, 2014, 2:56 PM PERMALINK


Earlier today, Oklahoma Governor Mary Fallin signed into law legislation the Oklahoma Public Employees Retirement System, a move that will begin to help the state address it’s $11 billion pension debt. House Bill 2630 would require all new state employees to participate in a 401(k) style defined contribution plan.

Oklahoma is just one of several states to recently address the growing state level pension crisis by enacting sensible pension reforms such as moving public employees to a defined contribution system versus a defined benefit system. The legislation, sponsored by State Representative Randy McDaniel will help to curb the state pension liability without forcing current state employees into the new system.

The changes to the Oklahoma pension system mirror those made in Utah in 2010. Legislation sponsored by State Senator Dan Liljenquist shifted the state pension system to a defined contribution – 401(k) style – plan for new state and municipal employees. Like Oklahoma, the Utah legislation allowed for – then current – workers to remain on the previous state pension plan. The Wall Street Journal, at the time, noted:

The sponsor of the Utah reform was Senator Dan Liljenquist, who watched in horror during the 2008 stock market plunge as the state pension fund lost 22% of its assets. From nearly 100% funded in 2007, it fell to 70% funded by 2009. Utah suddenly faced a long-term $6.5 billion funding gap, and the state would have had to nearly double its annual contributions out of the current budget to make up the shortfall.

Other states continue to look to Utah and now Oklahoma as an example of sound fiscal stewardship when it comes to public pension reform. Gov. Chris Christie in New Jersey may be considering a hybrid pension system much like what was enacted in Rhode Island. The plan has been reported to include, “…a smaller defined-benefit payout supplemented by a 401K-style defined contribution plan.”

Bob Williams, president of State Budget Solutions, has recommended the City of Chicago move to a defined contribution plan to address the city’s staggering unfunded liability of $87.3 billion and save taxpayer dollars. Williams notes the success of a similar reform in Michigan:

In 1997, the Michigan State Employees' Retirement System implemented a DC plan for all new employees. The Mackinac Center for Public Policy found that, from 1997 to 2010, the DC plan saved Michigan taxpayers $167 million in pension normal costs and between $2.3 billion and $4.3 billion in defined-benefit plan unfunded liabilities.

Michigan's DC plan includes an employer contribution equal to 4 percent of salary, plus a 100 percent match on the next 3 percent of an employee's own contribution. That is a far more manageable approach than the Municipal Employees' Annuity and Benefit Fund because, unlike Chicago's current approach, the DC plan cannot develop unfunded liabilities.

Oklahomans should laude Gov. Fallin and their representatives in the state legislature for making real strides in addressing the state’s pension woes. The move to defined contribution for new hires is a tremendous step in the right direction and helps provide a sound, solvent retirement system for state employees.

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