Close Encounters of the Presidential Kind

Donald Trump and Hillary Clinton were my classmates—or so I thought on two different occasions.  Hopefully that’s enough to hook you into reading the rest of this post because essentially it is just an old man’s stories of close encounters with presidents and presidential candidates.  Lately I’ve spent too much time thinking and writing about the Oklahoma Teachers Retirement System and, like many Americans, too much time watching news about our current president, so I need a break from doing real thinking. 

My first close encounter was in the spring of 1959 when, finishing my sixth grade year at Celia Clinton Elementary School in Tulsa, I took my first airplane trip, complete with propellers, rollaway staircase, full meals, coats and ties, and all that went with 1950’s air travel, to Washington, D. C. with my mother and brother.  My mother had written a wonderful essay about being thrifty, using her experience as a girl with her grandmother’s cistern, entitled “Saving for a Rainy Day”, and we entered it in my handwriting and name in a thrift essay contest sponsored by the national savings and loan association.  The essay won first place, and $50, in the local contest, and ultimately first place for elementary school students in the national contest where the prize was an all-expense paid trip to our nation’s capital for the student and one adult.  My brother Clayton got to tag along being the only time in our 70-year relationship I could meaningfully claim superiority.  Undoubtedly my participation in the Savings and Loan thrift essay contest contributed to the ultimate downfall of the S & L’s in the late 1980s and the attendant financial crisis.

Along with the high school and junior high winners, from Florida and Illinois I recall, we toured the usual sights, rode in the Cherry Blossom Parade, met our respective congressmen, mine being Page Belcher, and were supposed to meet then Vice President Richard Nixon.  Somewhere among our family archives is a photo of me at his desk; unfortunately, he was called away, by Rosemary Woods I suspect, to urgent business.  I trust the Savings and Loan industry continued the sponsorship of a thrift essay contest for many years, at least until its demise in the late 1980s, which saddened me due to my fond memories of the experience they had provided.

The following year, 1960, was memorable for Clayton and me as Boy Scouts from local Troup 37 getting to attend the 50th anniversary national scout jamboree in Colorado Springs that summer.  It was a memorable bus trip and adventure with 40 to 50 other scouts and adult leaders formed into a troop from the Tulsa area for two weeks of travel to/from and camping at the jamboree.  One special memory was watching then President Eisenhower’s motorcade parade slowly through the thousands of scouts gathered to greet him.  Somewhere in our family archives is a brief 8 mm film of that event taken by Clayton.  I’m not super anxious to locate that film because I think it also contains footage of me being boosted by other patrol members over the obstacle course wall so that my lack of wall-climbing prowess wouldn’t keep our patrol from receiving an award of excellence at the jamboree.

That fall of 1960 I was in the eighth grade and keenly interested in the presidential contest between Richard Nixon and John Kennedy.  My father was a Roosevelt Democrat, his father had been a Democratic County Commissioner for Washington County, so of course we were supporting Kennedy.  My parents had also recently acquired a laundromat that was located in the 800 block of South Sheridan and at which the four of us worked off and on to clean and maintain.  It was a good lesson in the relentless responsibilities of being a small business owner.  It was also located on the route taken by Richard Nixon’s motorcade from the Tulsa airport to the fairgrounds for a campaign event on Saturday, October 15 of that year.  My parents timed our Saturday cleaning stop at the laundromat to coincide, so along with many others lining both sides of Sheridan, I finally saw Richard Nixon in person.

I was a junior, I think in typing class fourth hour, on Friday, November 22, 1963, at Nathan Hale High School in Tulsa, when our principal announced the news from Dallas.

I was a college freshman “at a school over a thousand miles away from home at a place where I knew nobody, where I was alone and scared” (at least that’s how Senator Ted Cruz described our alma mater when he announced his presidential candidacy two years ago) standing outside with thousands of other students by the newly constructed, Yamasaki designed, building for the Woodrow Wilson School of International Studies as then President Lyndon Johnson spoke at its dedication on May 11, 1966.  I don’t remember any of Johnson’s speech but I do remember feeling unsettled seeing the students, kept back across the street, who were holding signs of protest against the Vietnam War.

Following Senator Eugene McCarthy’s stunning, close second place finish in the New Hampshire Democratic primary, New York Senator Robert Kennedy announced his candidacy for President in Washington, D. C. on Saturday, March 16, 1968.  He then flew back to New York’s LaGuardia Airport and walked past a college junior who was waiting, with a $45 student half-fare ticket, to see if he could get on the American Airlines nonstop flight to Tulsa to be with his best friend for life over spring vacation.  March 31, Lyndon Johnson announced he would not seek re-election; April 4, Martin Luther King was assassinated in Memphis; and June 6, Robert Kennedy was assassinated in Los Angeles.

On Wednesday, September 13, 1972, along with thousands at Broad and Chestnut in Philadelphia in the shadow of William Penn atop city hall, I listened to Senator George McGovern, the Democratic nominee for president that year, at his campaign stop in Philadelphia after being introduced by Senator Ted Kennedy.  Surely school was out at West Philadelphia High School where I taught math.

I can’t think of any close encounters with President Ford so will just go with having watched Chevy Chase on SNL many times.

Nor did I have any close encounters with President Carter, though I was a Carter delegate to the 1980 Tulsa County Democratic Convention (don’t recall for sure but think I was a Fred Harris, not Carter, delegate to the 1976 convention) and visited his presidential library while attending the 1996 Olympics in Atlanta where our son Ethan competed as a member of the USA volleyball team.  My brother Clayton took our father to attend one of President Carter’s Sunday School classes in Plains, Georgia some years after that; pretty sure Clayton has their books President Carter autographed.

I surprised Linda in the early 1980’s with a getaway to New Orleans for her birthday weekend in June.  While there we encountered a street vendor who took our photo standing next to a life-sized cardboard cut-out of President Ronald Reagan.  I kept that photo taped to my office door at Tulsa Junior College for many years, causing students and faculty to be duly impressed with my close relationship to the President.

The build up to the Persian Gulf War under President George Bush (41) in 1990 led to me, as Chair of the first Tulsa City Council and stand-in for Mayor Rodger Randle, bringing words of thanks and encouragement on behalf of their fellow citizens to a local reserve unit that was deploying to the Middle East from Tulsa; I never will forget the look on the faces of those young men and women who were poised to be separated from their families for an unknown future.  That’s as close as I got to Bush 1; except my friend Brenda Burkett has sent this photo which puts me within two degrees of separation: 

At my 15th year Nathan Hale High School Class of ‘65 Reunion several hundreds of us (we were 800 strong originally) were in the Hale auditorium for a group program and recognitions.  I remember only two parts of that program; one was that I was called to the stage along with a few others and we were each given an award, mine, a wooden middle finger, was something like “class politician” because I had recently been elected to the Tulsa School Board.  The other was that our emcee called our attention to a classmate who had just arrived with her husband and introduced her as the new “first lady of Arkansas”.  Being a bit of a political junky that made an impression, though the classmate was one of most in attendance whom I really didn’t remember, or never knew even in school.

Twelve years later it’s February, 1992 and I’m casually following the contenders for the Democratic Party’s nomination when Bill Clinton vaults into the spotlight with an unexpected second place finish in the New Hampshire primary.  I knew he was governor of Arkansas, thought he was first elected in 1978, and that his wife Hillary was my age.  The light went on in my brain realizing that a high school classmate of mine could become the next first lady of the United States.  I even told this to a few friends and believed it for several days until learning that Hillary Rodham Clinton had grown up in the Chicago area, not Tulsa.  With a little research I found that Bill Clinton indeed was elected governor in 1978, served the two-year term, but was defeated by Republican Frank White in 1980.  Then Clinton re-captured the governorship from White in 1982 and was re-elected every two years thereafter until winning the Presidential election in 1992.  My classmate was Gay Daniels who was married to Frank White during this time.

In August, 1993, Tulsa hosted the National Governors Conference.  President Bill Clinton and Vice President Al Gore both addressed the attendees and many Tulsans, including me, at our Maxwell Convention Center.  Clinton Tulsa Speech, 1993

It was during the 1996 election year, late spring I think, when along with others from Tulsa I attended a national housing conference in Washington, D. C.  As a city councilor a couple of years earlier, I had helped established Home Ownership Tulsa as a coalition to promote homeownership and the improvement of Tulsa neighborhoods.  The conference was an opportunity to share experiences and strategies with others around the country and to learn what the Clinton administration had in mind with its newly announced National Homeownership Strategy.  At the conference it was confirmed that President Clinton would speak and that we should arrive for that session early enough to pass through security.  Following his speech we were delighted to learn that he was going to “work the rope line” and shake hands with us.  As he was getting closer to me I had no thought of saying anything, rather just wanted to courteously take his hand and then let him get on to the next attendee.  However, being the consummate people person that he is, when he took my hand and looked me in the eyes he noticeably paused, awaiting what I would say.  So I rose to the occasion and uttered “mmm…mmm…mmm”, then he went on to the next person.    Just as my thrift essay in 1958 contributed to collapse of the Savings and Loan industry and the financial crisis of the late 1980’s, undoubtedly my advocacy of homeownership in Tulsa in the 1990’s contributed to the subprime mortgage crisis and subsequent collapse of our economy into the Great Recession of 2008-2009.

Crushed, I lived with regret for many years that I had failed in my one opportunity to converse with a President.  My failure was enhanced when our son Ethan in fact had lively conversations with both President and First Lady Clinton at the White House following the 1996 Olympics.  Therefore, when, sometime in the mid-2000’s, I noticed three black Suburban’s pulling into the back parking lot of the Hotel Del Coronado where Linda and I were staying for a credit union conference, I knew somebody important had arrived.  Indeed, I learned it was Bill Clinton, there to speak to a group of Japanese businessmen for one of those large honoraria I assume.  So I staked out my position by the hotel courtyard to encounter him when he would leave an hour or so later.  Successfully I caught view of him, of course surrounded by dark suits with earpieces, talking on his cell phone, and as I moved closer for actual engagement was abruptly stopped by a uniformed Coronado policeman.  I got to yell out “We voted for you, Bill” to which he gave me a thumbs up.  No regrets.

Like Bush 1, I had no real close encounter with Bush 2, so my best shot is that the day the invasion of Iraq began in 2003 was also the day my parents committed to move to Inverness Village, which saw them through their final years in comfort and dignity.  Also I watched the second tower collapse on 9/11/2001 with a few others in the Mayor’s conference room outside her office.

One of the many disadvantages of living in a totally red state is the Electoral College “winner takes all” system causes candidates to ignore us.  When I visit with my Iowa cousins I am jealous about the attention they get.  In 2008, at least neighboring Missouri was in play so Linda and I headed to Springfield for a Barak Obama campaign rally on Saturday, November 1, 2008, before the election the following Tuesday.  It was an electric outdoor, late evening event made more fun by finding friends Penny and Joe Joseph and Marilyn Hill and Emily Major also there to share with in the excitement.  Here he is in Springfield that night.

He narrowly lost Missouri to Senator John McCain but the overall result was amazing history for our nation and the world.

My 2016 election encounter with Hillary Clinton is documented in the photo above, taken in 2015, for which identifying the location will win you a free lunch with me and hearing more of my stories.  In the 30 seconds I had with her while the photo was taken I tried to tell her that I thought she was my high school classmate as I’ve explained above.  I expect she had me placed on her Secret Service “watch list”.

When Donald Trump became the real deal throughout 2016 we learned that he was in the same college cohort as my brother Clayton, meaning Class of 1968, that he attended Fordham University in New York City as an undergraduate, and that he subsequently earned a degree from the Wharton School at the University of Pennsylvania.  I did the math and figured if he graduated from Fordham in 1968 and then enrolled in the Wharton School MBA program in Philadelphia that he was likely on the Penn campus while I was pursuing a Master of Science in Education at Penn from September, 1969 through completion in August, 1971, and even took a course in accounting for non-majors at the Wharton School in 1971.  When I did a focused search about his collegiate education this week I learned that his degree from Penn’s Wharton School was his undergraduate degree in economics so he was gone before Linda and I arrive in Philly.

Again, as always, lunch is on me for the first to ID the location of the photo above.

When Two Wrongs Make A Right

Preston Doerflinger wrote this op ed piece for the Tulsa World published 2/22/2017, “There’s nothing ‘broken’ about the state’s insurance plan for employees and teachers”.  Mr. Doerflinger is Oklahoma’s Secretary of Finance, Administration and Information Technology, the executive director of the Oklahoma Office of Management and Enterprise Services, which administers HealthChoice, the state’s health insurance plan, and is a member of the Oklahoma State Pension Commission.  His op ed piece is overall “right on” which makes the “Right”.  In it he explains why it makes sense, and is good government, to have a state managed health insurance plan for over 220,000 Oklahomans (per OMES in 2013) rather than submitting them to the private sector health insurance marketplace.

His arguments that HealthChoice doesn’t have to price for profits to shareholders, that it incorporates the private sector in competitive ways, that its administrative costs are much lower than private sector insurance companies, and that it is able to deliver lower cost medical services statewide are all reasons that it is not broken.  By being so large in the Oklahoma health insurance marketplace HealthChoice has economies of scale and a strong negotiating advantage when servicing members and contracting with medical service providers.  It also is not going to game the system in the way that private sector insurers might, focused only on profits, by either serving a healthier group or by lowballing premiums initially to get their foot in the door.

These are similar arguments I’ve been trying to articulate in my recent posts about why moving away from the current Oklahoma Teachers Retirement System (OTRS) defined benefit plan to individualized retirement plans managed by private investment companies is a bad idea.  Because Mr. Doerflinger can influence legislative decisions through his position on the state’s Pension Commission (from its website:  the Commission makes recommendations on administrative and legislative changes which are necessary to improve the performance of the retirement systems) I have taken the liberty of rewriting his arguments below to fit the facts of ill-conceived legislation proposed to “reform” OTRS.  Quite enlightened is his final paragraph—a most forthright and accurate admonishment—which says:   If legislators are really concerned about state employees and teachers, perhaps they should turn their attention to things that are truly broken — the nearly $900 million budget hole and chronically low teacher and state employee salaries — and not create a false problem using bad information for the sole purpose of benefiting a particular insurance company.

Now for Doerflinger’s “Two Wrongs”.  He opens his otherwise correct argument by stating:  First, HealthChoice is a self-funded plan, not state-owned or subsidized. No matter how many times the authors of these bills repeat “state-funded,” that doesn’t make it true.  Self-funded plans do not operate for a profit and employee health-care costs are significantly less. Self-funded means they are supported by member premiums, not tax dollars.

My quick and dirty legal research, and thirteen years of dealing with HealthChoice, lead me to conclude that he is wrong and wrong where underlined.  Title 74, Section 1301 et seq. of the Oklahoma Statutes begins this way:  This act shall be known and may be cited as the “Oklahoma Employees Insurance and Benefits Act”.  It continues to establish the mechanism for funding and managing the health insurance plan that is HealthChoice.  Most of the funding, as I understand it, for state employees and their families to purchase health insurance comes from the appropriations of state revenues to the agencies that employ them for their “flexible benefit allowances”.  So at least indirectly it is state revenue and the cost of the allowances is part of the state’s budget calculations.

For education employees, who greatly outnumber state employees in the plan, their flexible benefit allowance is a legislative line item amount each year from the State’s general revenues and they cannot choose to keep it all.   The allowance is about $570 per month of which a teacher can choose to keep about $70 if she doesn’t take the health insurance; similarly a support employee can keep about $190.  Family coverage for education employees does come entirely out of their gross income, and is grossly expensive.  So it is either untrue or highly misleading to say that HealthChoice is not funded with tax dollars—if it walks and quacks like a duck, then….

After reading “not state-owned” I expected to find that HealthChoice at a minimum was operated as a state trust, like the Oklahoma Teachers Retirement System for which its board of trustees are the “deciders”, or perhaps some special federal tax code driven entity.  Not so as far as I could discern.  It seems that the Oklahoma Employees Insurance and Benefits Board created by the Act cited above is merely advisory.  Subject to the statutory requirements the “decider” appears to be Mr. Doerflinger’s state agency, the Oklahoma Office of Management and Enterprise Services—in other words himself.  The various funds that collect, hold and process the premiums and medical services payments are state funds also.  If it is “not state-owned” then I am clueless who or what the owner is.

Why then does Mr. Doerflinger go to such lengths to argue the inarguable?  Apparently this is symptomatic of the sad state of current Oklahoma policy-makers, that we can’t have a discussion about the appropriate role of government, or about smart uses of government to benefit our state’s citizens and taxpayers, because many legislators, hopefully not most, have convinced themselves that anything government does has got to be inefficient at best and very bad at worst.

Now for a quick transition from state and education employees’ health insurance to teachers’ retirement.  In 1995 the Oklahoma Supreme Court decided Taylor v. State and Educ. Employees Group Ins. ProgramThe issue was whether the state could take $39,600,000 from OTRS assets to front end the health insurance reserve fund needed to move teachers and education employees into the state’s health insurance plan.  The Court ruled that the transfer was proper since it both benefitted teachers and was to be fully replaced with newly enacted dedicated revenues for OTRS.  The case is interesting history that connects both state plans.  Now here is my version of Mr. Doerflinger’s op ed piece:

Rep. McDaniel and Sen. Stanislawski have offered misguided bills suggesting Oklahoma’s defined benefit retirement plan for teachers and education employees, is “broken” and needs to be replaced with individualized retirement plans managed by private investment companies.

Nothing could be further from the truth. In fact, the arguments in support of these measures are based on false premises put forward by the Oklahoma Council of Public Affairs and some financial advisors, including members of the state legislature, who would profit greatly from the so-called reforms.

So, let’s clear up a few things.

First, the Oklahoma Teachers Retirement System’s current plan is a self-funded plan with respect to the new retirement commitments made to active members each year.  These new commitments are fully funded by employee and employer contributions each year.  State payments into the plan are not subsidies, but rather payments toward state commitments made long ago that were not properly funded.  No matter how many times the authors of these bills say they are “saving workers’ retirement” that doesn’t make it true.  The OTRS retirement plan does not operate for a profit and teacher retirement costs are significantly less.   Self-funded means the retirement commitments being made each year are supported by teacher contributions and their employers’ match, part of their earned compensation. In years where contributions exceed retirement benefit payments to retirees, the excess funds are added to OTRS assets and invested to be used in future years for retirement payments to retirees. With individualized retirement plans managed by private investment companies much more of the funds become profits and are pocketed as fees by the advisors and investment companies.

Second, there already is private competition among investment management companies in investing the $14 billion in OTRS assets.  Over forty different investment companies are competitively selected to invest OTRS assets.  As required by OTRS board policy its investment committee facilitates a competitive process to select companies based on investment performance, management fees and costs, and compliance with OTRS investment objectives.  According to the latest report of the Oklahoma State Pension Commission OTRS investment performance over one year (11.4%), five years (10.7%) and ten years (6.8%), has been the best of more than 200 public pension plans nationwide reviewed by the Commission’s consultants.  These actual results are virtually impossible for individual employees to match if left to manage their own retirement plans as proposed by McDaniel and Stanislawski.

The process followed by OTRS protects its members and state taxpayers by making sure both receive the benefit of solid investment returns with low administrative and sales costs. What the misguided legislative proposals would do is actually tip the scales in favor of individualized retirement plans managed by private investment companies that would significantly drive up costs, while lowering investment returns, for each new teacher’s retirement plan resulting in lower incomes when they do retire.  Any benefits to new teachers put forth by Rep. McDaniel and Sen. Stanislawski are only possible by taking future revenue needed to fund the state’s past retirement promises to current OTRS members and using it to reward new teachers for choosing the more expensive plan the legislation creates.

Third, the current OTRS plan is in good financial shape and not near “broken.” The new retirement commitments made each year by the plan are easily funded with teachers’ contributions and a part of their employers’ match.  The rest of the funding paid by employers and earmarked from state revenues to OTRS is needed to pay the plan’s unfunded liability, i.e. its debt, to active and retired members for retirement income promises made years ago that were not funded.  This debt is owed by the state regardless of what plan, the current one or a new one, that new teachers may select.  The current plan is on track to be fully funded by the state in about twenty years if current revenue streams are left in place.  The only threat to its long run stability on the horizon is the proposed legislation that would divert millions of dollars needed to honor the state’s promises to current teachers from the current plan into high cost, low performing individual plans for new teachers only.

Perhaps supporters of the misguided proposals should compare administrative costs. OTRS sustains operations on much lower administration costs — 0.032 percent versus 0.044 percent for OPERS individualized deferred compensation plans (similar to what the legislation would establish for new teachers).  Additionally, by basing teachers’ promised retirement income as an earned percentage of their working income, OTRS ensures each retiree will have a standard of living in retirement comparable to the years they served the state’s children.

If legislators are really concerned about state employees and teachers, perhaps they should turn their attention to things that are truly broken — the nearly $900 million budget hole and chronically low teacher and state employee salaries — and not create a false problem using bad information for the sole purpose of benefiting for profit investment companies and advisors.

As always lunch on me for first to ID the location of the photo.

Made My Day

I just mailed letters to each of the six members of the Oklahoma State Pension Commission in advance of their meeting on Wednesday.  Here are the members:

Ken Miller Chairman State Treasurer
Louis F. Trost Vice Chairman Governor Appointee
Gary A. Jones Commissioner State Auditor and Inspector
Preston L. Doerflinger Commissioner Director, Office of Management and Enterprise Services, Secretary of Finance, Administration and Information Technology
Doug Lawrence Commissioner Governor Appointee
Jason Smalley Appointee Senate Appointee

This Commission is charged with monitoring the performance of Oklahoma’s pension plans and should be front and center in expressing concern about legislation, like Representative McDaniel’s bills HB 1162 and HB 1172 that could significantly damage the fiscal soundness of the existing Oklahoma Teachers Retirement System plan.  Here is my letter to them:

 

Ken Miller, Chairman

Oklahoma State Pension Commission

 

I request that the Oklahoma State Pension Commission recommend to the Oklahoma Legislature that an actuarial analysis be performed concerning the potential financial impact on the current Oklahoma Teachers Retirement System defined benefit plan by House Bills 1172 and 1162 under consideration during the current legislative session.  HB 1172 will create an “optional” defined contribution plan for new teachers only beginning with the 2018 fiscal year.  This new defined contribution plan lowers the contribution required of new teachers, from 7% to 4.5%, and provides a significantly greater “match” by employers, 6% compared to the current “employer cost” of 3.5% for the defined benefit plan.  At the same time HB 1162 diminishes the retirement benefits for new teachers electing the defined benefit plan.  The effect of these changes together will likely result in a rapid decline in the number of active members in the existing defined benefit plan which is a radical departure from the assumptions upon which its actuarial reports have been based.

This de facto “closure” of the defined benefit plan will deprive it of future revenue that is needed to amortize its over $7 billion unfunded actuarial accrued liability, or UAAL.  Specifically, of the current 9.5% match school district employers are required to pay to OTRS, at least 6% goes to reduce the plan’s UAAL which is a state obligation.  Under HB 1172 that payment, for members of the newly created defined contribution plan under its “remit the difference” requirement, is reduced to 3.5% at most and can be as low as 2.5%.  This clearly will diminish future payments by employers to amortize the UAAL of the existing plan.  Whether or not this reduction in future payments poses significant risk to the financial health of the existing plan can only be determined by a proper actuarial analysis.

You may encounter two arguments against my request.  One is that, if this legislation does effectively close the existing defined benefit plan, the effect will be similar as with the closure of the OPERS defined benefit plan where the actuary found the “remit the difference” revenue going forward was sufficient.  This argument is simply an “apples to oranges” comparison because the OPERS “remit the difference” payments are not significantly diminished and the OPERS plan is significantly better funded, less relative UAAL to amortize, than is OTRS. 

The other argument is that the Legislature’s actuary, pursuant to the Oklahoma Pension Legislation Actuarial Analysis Act, OPLAAA, may determine that HB 1172 does not have a “fiscal impact” so no further actuarial analysis is needed.  While such a determination can be made as “fiscal impact” is defined by OPLAAA, it is not correct as fiscal impact is ordinarily understood.  Under OPLAAA a “fiscal impact” only results from legislation that increases retirement benefits for a retirement system’s members.  Yet clearly legislation that strips away future funding needed to amortize a system’s UAAL also has a fiscal impact as those words are ordinarily understood and important to the state’s financial future. 

OPLAAA will not protect state taxpayers from reckless legislation that will increase the UAAL of the current OTRS plan by reducing its future revenue.  That can only be accomplished by thoughtful policy makers who take the steps necessary to inform legislators of the financial impact of their decisions.  Again I request that the Oklahoma Pension Commission recommend to the Oklahoma Legislature that an actuarial analysis be performed concerning the potential financial impact on the current Oklahoma Teachers Retirement System defined benefit plan by House Bills 1172 and 1162 under consideration during the current legislative session. 

 

We’ll see what comes of it in substance, but one insubstantial result was when I emailed a PDF of the letter to Ruthie Chicoine, who so ably provides staff support to the Commissioners, and alerted her that hard copies were in the mail, I “replied all” to her email notice to interested persons, about 30 in number, who are on her list for notice of Commission meetings.  Immediately, while still at the post office, I saw a reply to her from “Randy” saying “Who is Gary Watts?”.  Of course I hoped it was Representative Randy McDaniel, but instead turns out to be Randy Ellis, whose email address is rellis@oklahoman.com, so I assume is a reporter with the Oklahoman.  So just for fun if any reader of this post wants to reply to Mr. Ellis and tell him who I am just copy me and I’ll buy lunch for the first to do so and also for the best answer—humor counts for sure.

As always lunch also on me for the first to ID the location of the photo above.  I picked the Pegasus statue because I hope our OTRS retirement does not go down in flames this legislative session.

P. S.  Oops; mixed up mythological winged creatures starting with a “P”–bet I got the math right though.

 

If It Ain’t Broke, Don’t Break It

That’s the title of a very informative policy paper commissioned by the Oklahoma Policy Institute and posted to their website during the 2014 legislative session when legislators, against the advice of the policy paper, ultimately acted to essentially close, and ultimately end, the defined benefit pension plan, administered by the Oklahoma Public Employees Retirement System (OPERS) for Oklahoma’s state employees.   The authors are Stephen Herzenberg of the Keystone Research Center and Ross Eisenbrey of the Economic Policy Institute, both seemingly reputable think tanks with real thinkers employed.  The Oklahoma Policy Institute (www.okpolicy.org) is based here in Tulsa and is also the real deal with real thinkers.  The vehicle for closing the OPERS retirement plan was House Bill 2630 of the 2014 session.

As I outlined in my recent posts, “Fouling Our Nest….Egg” and “What’s Up Doc?”, what was done in 2014 to state employees with the HB 2630 “stick” is now proposed by Representative McDaniel to be done to Oklahoma’s teachers and other education employees with a big juicy “carrot” contained in House Bills 1162 and 1172 during the 2017 session.  In those posts I show that according to the most recent OTRS actuarial report for every $7 a teacher pays into the current OTRS defined benefit (DB) system the employer pays in about $3.50 and the employer and state pay another $13.50 to pay off the unfunded liability of the state to the OTRS DB plan putting it on track to be fully funded in about 20 years.  The proposed legislation would establish a new defined contribution (DC) plan for all new teachers beginning with the 2018-2019 school year.  The new plan would require teachers to contribute only $4.50, in comparison, yet employers would pay $6.00 as a match into the plan.  This means that, roughly, a new teacher can get the same potential retirement value ($10.50) by only contributing 65% of what a veteran teacher is required to pay.  Additionally, and most important, the extra $2.50 contributed by the employer is diverted from the amount being paid to fully fund the current DB plan, worsening its financial condition in a way no one has yet attempted to determine.

Rational newly hired teachers in 2018 and thereafter will elect to join the richer DC plan to be created by HB 1172.  As a result, large sums of funding, previously counted on to pay off the state’s unfunded liability for the OTRS DB plan, will now be diverted to the new DC plan.  This will clearly worsen the financial stability of the existing DB plan but no one yet has called for an actuarial analysis to determine what the impact of this proposed legislation will be.  If the bills were increasing the benefits to current or future retirees under the current OTRS DB plan, the Oklahoma Pension Legislation Actuarial Analysis Act (OPLAAA) would mandate an actuarial study be done and a two-year legislative process.  But McDaniel’s proposed legislation does not increase benefits for current or future retirees, rather it strips away funding from the DB plan that supports their current and future retirement income.  OPLAAA works effectively to prevent an increase in the unfunded liability caused by raising benefits, but it does not prevent an increase in the unfunded liability caused by diverting away needed funding.

If the legislature does not seek an actuarial analysis of the impact of these bills on the current OTRS retirement system, then the Oklahoma State Pension Commission should at its February 22nd meeting.  Its members include state treasurer Ken Miller, state auditor Gary Jones, and appointees of the governor, senate and house leadership.  Here are some of the statutory “duties” listed for the Commission on its website www.okpension.ok.gov:

“The Oklahoma State Pension Commission was formed to provide guidance to public officials, legislators and administrators in developing public retirement objectives and principles, identifying problems and areas of abuse, projecting costs of existing systems and modifications to those systems, and recommending pension reform programs…the Commission makes recommendations on administrative and legislative changes which are necessary to improve the performance of the retirement systems.”  

Another public body with a clear duty to understand the impact of this legislation is the Board of Trustees of OTRS.  They meet the following day on February 23rd.  Here’s hoping one of these boards takes action to fully understand the impact of HBs 1162 and 1172, working in tandem, on the financial stability of the current DB plan.

Now back to “If Ain’t Broke, Don’t Break It“.  For anyone with authority in Oklahoma to impact our public employee pension systems or with an interest in those systems this paper is a must read.  I can’t make their argument any better or shorter, but I do want to emphasize two important takeaways:  a large, pooled investment fund is more cost effective and will yield higher returns than individually managed funds; and the purpose of public retirement systems is and should be retirement income security, not wealth accumulation.

The OTRS DB plan has about $14 billion in assets.  When investing, size matters.  A fund of that size can command the lowest advisory, management and transactional costs available.  As a perpetual fund with an infinite life expectancy its investment decisions are not hamstrung by a short investment horizon—translated, its managers can seek investments with the greatest yield regardless of maturity, whereas an individual must invest for stability, not yield, as their life expectancy shortens.  Even an advantage as small as 1 per cent over a twenty-year period amounts to at least a $3 billion savings to Oklahoma taxpayers.  Here are some calculations that demonstrate this:  OTRS 1% Matters.  The policy paper explains other advantages of a collective approach and concludes:

Two recent National Institute on Retirement Security studies gauge the combined impact of all of these DC plan inefficiencies. These two studies conclude that defined contribution retirement plans cost 45% to 85% more in employee plus taxpayer contributions to deliver the same level of retirement security. An Economic Policy Institute/Retirement USA report independently came to a similar conclusion.

Part of the policy discussion that needs to occur is whether the goal of the Oklahoma Teachers Retirement System should be retirement income security or wealth accumulation.  If the goal is retirement income security, meaning we don’t want retired schoolteachers going on food stamps or begging at street corners in their 70s, then the reward to the member for participating is a guaranteed lifetime income, what is called an annuity.  If the goal is wealth accumulation, then the reward to the member is a lump sum payment upon retirement that may or may not provide retirement income security but that can be left to their heirs if they don’t use it all while alive.  By far the cheaper, more cost effective way to provide retirement income security is a guaranteed lifetime income commitment, i.e. a lifetime annuity.

When I taught Personal Finance at Tulsa Community College I would explain how an annuity works by showing how it is the opposite of term life insurance.  Term life insurance is income protection against dying too young.  When I was younger, had dependent children and many years left to work I faithfully paid for term life insurance every year, probably not enough coverage but at least something.  The bad news is I wasted every dollar I spent on those premiums because those policies never paid my family a dime.  Of course the good news is that they didn’t pay because I’m still living.  My premiums, primarily, went to those families whose breadwinners did die.  By paying the premiums my family was part of a collective pool that in a very cost effective way provided the lump sum benefit paid to those unlucky families to help offset their reduced future income.  I was willing to do so because there was a possibility my family could have been unlucky.

By contrast, a lifetime annuity is funded with an up-front lump sum amount that pays out an income for life to the beneficiary/retiree.  That money is pooled with many other beneficiary/retirees, collectively invested, and then, after factoring in everyone’s life expectancies, paid out in monthly pension payments to each as long as they live.  Some die earlier than their life expectancy; some die later, but all are provided a retirement income for the rest of their lives.  Those who die early are, in effect, subsidizing those who die later in much the same way as my life insurance premiums subsidized the unlucky families.  Overall it costs less to provide every beneficiary/retiree with a lifetime income, and not a dime more or less, than it would, collectively, if each had to save enough lump sum to be absolutely sure they would not outlive the funds available.  A pure lifetime annuity leaves no funds to be inherited, but again is the most cost effective way to assure a lifetime income for every beneficiary/retiree.

When the policy paper enumerates and further explains the advantages of defined benefit public pension systems, it is primarily about the greater returns received and lower costs incurred by a large collective investment fund and about the ability to annuitize lifetime income payments in the most cost effective way.  There are an endless variety of ways to tweak retirement options such as by providing for beneficiaries and lump sum pay out options, but at the core a smart public pension plan, one that delivers the greatest bang for the taxpayer’s buck, will incorporate the collective investment pool and the ability to annuitize lifetime income.

As always lunch on me for the first to identify the photo location.