Oklahoma Gov. Stitt’s Profile in Fiscal Courage

SACRAMENTO — Oklahoma Gov. J. Kevin Stitt is taking expected political heat for his courageous decision last week to veto Senate Bill 102, which would have boosted pensions for the state’s police officers to the “3 percent at 50” retirement formula that’s similar to what most California public-safety officials receive. Police unions and their allies claim Stitt doesn’t “back the blue” and successfully convinced lawmakers to take the unusual step of overriding the veto. The Senate passed an override earlier in the week, and the House followed suit late Wednesday.

Stitt received brickbats, even from fellow Republicans who should know better than to run up debt and create pressure for new taxes. Attorney General Gentner Drummond issued this beside-the-point statement: “I will always stand with the men and women who risk their lives to protect our families. I hope legislators move swiftly to override the Governor’s veto so our peace officers can know they still have reliable allies in the state Capitol.”

Despite the override, Stitt really deserves a “profiles in courage” award for putting Oklahoma’s future finances first. He could have taken the easy course and significantly increased pensions at a time when the state’s fiscal house is in good order and the ensuing problems wouldn’t be felt for some time. Backers of the legislation make all sorts of the usual promises. They note that Oklahoma’s pension plans are almost fully funded (96 percent) and that increases in benefits will pay for themselves through investment returns.

They claim that increasing pensions is necessary to improve employee retention at a time when it’s harder to recruit new officers. Yet surveys suggest that pension benefits are not a top concern for young recruits. Overly generous pensions add to the retention problem by encouraging public employees to retire early. Why keep working when you receive nearly your full salary in your 50s?

Based on my experience covering California’s pension crisis since the 1990s, I conclude that the other arguments for the bill are bunk also. In fact, the Oklahoma fracas is eerily reminiscent of the debate that Californians had in 1999, when the Legislature overwhelmingly and on a bipartisan basis passed Senate Bill 400, which adopted the “3 percent at 50” formula for California Highway Patrol officers.

Not surprisingly, the legislation was widely backed by unions across the state because local police agencies mostly bumped up their police and fire pension formulas to keep pace with the new CHP formulas, which were as much as a 50 percent increase over the past ones. As the formulas work, retired officers receive a guaranteed 3 percent of their final years’ pay times the number of years worked. So going from 2 percent at (age) 50 to 3 percent at 50 meant going from retiring with 60 percent of pay to doing so with 90 percent.

After California implemented the law, non-public-safety unions demanded a requisite pension hike — and SB 400 ended up triggering a one-way ratchet of pension increases throughout state and municipal governments. So something done to “back the blue” triggered a massive boost in benefits for government employees across the board. That ratchet has become unstoppable. As usual, I recommend that readers visit the site Transparent California to see the literally unbelievable pay and pension packages public-safety officials now earn in our high-tax, deficit-soaked state.

Per California’s legislative analysis, supporters argued that “[t]he increase in liability for these new benefits can be funded by the excess retirement assets that have been generated through investment income and changes in actuarial assumptions resulting in no immediate increase in costs to the employer.” The legislation was sponsored by the California Public Employee’s Retirement System (CalPERS), which touted a summary boasting it wouldn’t raise taxes a “dime.”

The demand for the pension giveaway was driven by the financially optimistic situation of California’s pension systems at the time — and also by optimistic stock-market returns. The size of a defined-benefit system’s unfunded liability is based on predictions about returns on investment. Those investments were doing well, so unions and union-allied lawmakers figured there’d be no immediate downside to placating this powerful interest group.

For a sense of the times, reporter Ed Mendel in 2019 noted that “[t]he annual payment to CalPERS for state worker pensions next fiscal year is expected to be $7 billion, a jump from $6.4 billion this year — and a quantum leap from $160 million when a pension increase, SB 400, was approved 20 years ago.” But back in 1999, “CalPERS was in its golden years… Investment earnings had averaged 13.5 percent for a decade, soaring in the two prior years to 20 percent. Funding for a half dozen state and school plans ranged from 100 to 139 percent.”

Apparently, California’s SB 400 supporters never figured on a stock-market downturn. Now CalPERS pensions are funded only at 72 percent. And while the pension hikes had only a relatively modest impact on the state budget (given the massive overall size of it), it created a crisis at the local level, where police and fire pay consume the bulk of municipal budgets. These increases didn’t directly increase taxes, but they set the stage for many local tax hikes and service cuts known as “crowd out.” Pension debt also helped push a couple of California cities into bankruptcy.

The Oklahoma Center for Public Affairs notes that SB 102 “was another attempt to chip away at past reforms that have helped put Oklahoma public pension systems in a fiscally responsible position.” Policy research fellow Curtis Shelton explained that the bill would have increased pension liabilities by $271 million, with $90 million of that unfunded. Those are small numbers by California standards but a big problem in Oklahoma — and with the override, it’s going to get bigger.

As Stitt said in a statement his office sent to me:

I’m never going to put our state in a bad financial position. And that’s why I vetoed Senate Bill 102. The bill would have required members and municipalities to contribute more to the pension system, but those contributions wouldn’t have been enough to cover the increased benefits this bill mandated — the math just doesn’t add up — and we won’t put the state’s pensions at risk. We have to remain vigilant to protect future generations of Oklahomans — it’s not an easy decision, but the right one for our state.

Unfortunately, the state’s lawmakers seemed more interested in placating an interest group than in doing the right thing. Oklahoma’s SB 102 didn’t go as far as California’s SB 400, but I only wish California had a governor then who was looking to the state’s long-term fiscal health. At least Stitt tried. Any lawmaker who supported the override is telegraphing a commitment to short-term interest-group politics rather than to Oklahoma’s fiscal future.