Oklahoma Has Led the Way on Teacher Pension Funding. Can It Keep It Up?

Are you still working toward your New Year’s resolution? By this time of year, most people have long since forgotten their goals to hit the gym or eat healthier foods.

Pensions are sort of like New Year’s resolutions. Policymakers always promise, to themselves and to their constituents, that this will be the year they’ll finally get their financial house in order and bolster their pensions. But inevitably, something shiny comes along and distracts them.  

Oklahoma is grappling with this dilemma right now. After years of dutifully funneling millions of extra dollars into its beleaguered teacher pension plan, state policymakers are now considering scaling back. Instead, they would like to use that money to fund a list of other priorities: pay raises for active teachers, more money for its school choice tax credit program, plus new investments in reading and math.

It’s likely to be a popular list. But it threatens to derail the state’s progress on pension funding. 

Oklahoma has actually done better on the pension front than most other states. Thanks to a combination of benefit cuts, plus a surge of new contributions, it has dramatically improved the health of its teacher pension plan. 

For example, the system’s unfunded liability, essentially the difference between how much it had promised and how much it had saved toward those promises, shrank from $10.4 billion in 2010 down to $6.1 billion last year. Its funded ratio — a comparison between its assets and its liabilities — has improved from 47% in 2010 all the way up to 80% as of last June. 

Oklahoma’s teacher plan is still not quite as well-funded as the median state and local plan — which was 82.5% funded last year — but the state’s policymakers deserve kudos for making progress. Current and retired Oklahoma teachers should be thankful that their retirement plan is in much better shape than it was 16 years ago.

So how did they do it? First, legislators raised the retirement age from 62 to 65 and extended the amount of time that a teacher would need to work to qualify for a benefit from five to seven years. (This is called the vesting period, and these tend to be longer for teachers than for workers in the private sector. For example, according to a survey of Vanguard 401(k) plans, half of employees are immediately vested in their employer’s retirement contributions.) These policy changes meant that any Oklahoma teacher who started after Oct. 31, 2011, had to wait just a bit longer to qualify for retirement benefits than those who came before them.  

A rising stock market certainly helped the pension plan as well, but the biggest change was on the funding side. From 2001 to 2011, Oklahoma was contributing less each year than what its actuaries said it needed to. Instead of paying off their metaphorical credit card in full, they made only minimum payments, which led to a large financial hole.

But every year since 2012, Oklahoma has put in more than what its actuaries said it needed to. As of last year, individuals were required to contribute 7% of their salaries. Employers like school districts paid 9.5% of each employee’s salary. And the state contributed a percentage of its revenues from sales taxes, cigarette taxes, corporate income taxes, individual income taxes and lottery proceeds. This extra state contribution came out to $456 million last year, and this is the portion that state legislators now want to cut back.

Oklahoma’s teacher pension plan is in much better shape today than it was. But it’s instructive to compare it with the plan Oklahoma offers to other state employees, which is in even better shape than the teacher plan.

That largely comes down to how far legislators went in designing reforms for each plan. In the case of the teachers, Oklahoma’s legislators were more hands-off. Teachers continue to be placed in the same defined benefit pension plan, for example. On average, their benefits are worth 10.67% of their salary, according to the plan’s latest actuarial valuation report. But remember that teachers themselves are paying about two-thirds of that cost, which means that most of the contributions made by the state and its school districts are paying for the plan’s unfunded liabilities, not for benefits for today’s workers. Moreover, the benefit structure is so heavily backloaded that someone would have to teach in Oklahoma for decades just to earn more than what they personally contributed.

Meanwhile, state employees have been enrolled in a portable defined contribution 401(k)-style plan since 2015. Members are required to contribute 4.5% of their salary, their employer contributes 6% and employees qualify for a growing share of those contributions over five years. A bill in the state legislature would raise those contribution rates and drop the vesting requirement altogether. Oklahoma’s higher education employees get an even better deal.

Putting the benefit situation aside, Oklahoma deserves credit for making substantial progress funding its teacher pension plan. According to the latest financial projections, the state’s actuaries expect that the plan could be fully funded by 2034. However, that assumption depends on its investments earning a 7% return every year. They also cautioned that one risk to its projection is that “actual contributions from the state may not be made in accordance with the current arrangement.” 

If Oklahoma legislators go forward with their plans to divert some of the money toward new expenses, they’d be putting all their hard-earned funding progress at risk.