Changing State Pension Plans to Save Them

E-newsletter Issue #106 | January 17, 2013

Oklahoma Rep. Randy McDaniel is blunt in his assessment of state obligations to employees and retirees.

“We have a moral, legal responsibility to keep the retirement promises that have been made,” McDaniel, chairman of his state’s Pension Oversight Committee, said during a December webinar,“Pension Reforms in the South,” sponsored by The Council of State Governments’ Southern Legislative Conference.

The problem, of course, is the same across the country—the cost of those promises has grown as more people retire and contributions haven’t kept up.

That’s prompted 45 states—Oklahoma included—to make meaningful changes to their pension systems in the past two years. Oklahoma manages seven major pension systems for various groups, including state employees, teachers and state police.

Those changes are starting to pay off.

Oklahoma had a total unfunded liability of more than $16 billion before the 2011 legislative session. After lawmakers passed several bills to change the pension system, that unfunded liability fell to $10.6 billion. The biggest change—requiring any benefit increase to be paid for up front—accounted for the $5.5 billion drop in unfunded liability, McDaniel said.

Most systems, he said, absorb any cost-of-living adjustment. But when Oklahoma calculated the cost of a 2 percent COLA, it found that would cost the state $350 million.

That wasn’t the only change Oklahoma made. The state also raised the retirement age for new members from 62 to 65 for everyone, elected officials included, and required timely payments into the retirement system.

With the changes, Oklahoma moved from one of the worst funded pension systems in the U.S. at 56 percent, to number 33 with the systems, as a whole, funded at 67 percent, McDaniel. But he thinks the state has a long way to go.

“A $10.6 billion unfunded liability is still a major challenge,” he said.

Continued attention to the problem is needed, he said, but he expects the state to have budget pressures from addressing the problem adequately.

“We’re investing a great deal of resources into solving this problem and obviously that takes away funding from the other things we want to do,” he said.

Louisiana is facing the same challenges and making the same effort to find balance. Sen. Elbert L. Guillory, chair of Louisiana’s Senate Retirement Committee, said taxpayers are spending nearly $2 billion just on state retirement annually.

“Obviously, when that much money is going into retirement, roads, schools, health, education all suffer,” he said.

Louisiana recognized the potential problem with its state retirement systems as early as 1987—when residents passed a constitutional amendment that required actuarially sound funding for the system. In 2005, the state passed a law reducing benefits for new hires and, in 2006, voters approved a constitutional amendment that new benefit increases must identify the source of funding and be paid for in 10 years, Guillory said.

“Our efforts are designed to protect our workers and to protect the taxpayers,” said Guillory.

West Virginia also recognized early the potential problems its nine retirement systems could face.

Sen. Dan Foster, chair of the Senate Pensions and Retirement Committee, said the state has more than a $5 billion unfunded liability in its pension system. He expects the changes the legislature has made to eliminate that unfunded liability by 2035.

Legislators made changes to the other post-employment benefits retirees receive in 2012, basically reducing the health benefit subsidy and creating a revenue stream going forward. Foster said the unfunded liability for that system, once calculated at $8 billion, is also expected to be eliminated by 2035.

But Foster said in West Virginia, as in other states, more will be needed to shore up the state pension systems. Among the things Foster would like to see: increase the age at which state employees can retire; reduce the average salary calculation to five years; increase contribution rates from 4.5 to 6 percent; and address issues surrounding sick leave and service credit.

“Our goal with our nine state plans is to, of course, reach financial sustainability for the state, but also to keep our promises and provide for a decent retirement for our loyal employees,” Foster said.

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