“Lean times have returned,” said Oklahoma Treasurer Ken Miller.

DALLAS – After scoring double-digit returns in the post-recession energy boom, Oklahoma's pension fund investments are among the nation's worst performers, with some turning negative in the last fiscal year, according to state Treasurer Ken Miller.

"Compared to their peers, Oklahoma's pensions generally underperformed with five of the seven systems reporting investment performance in the bottom half of all systems," Miller wrote in a report issued Thursday. "On average, the state's pensions ranked in the 81st percentile, with returns weaker than all but 19% of all public pensions."

Four of the state's seven systems made positive returns, while three lost ground in the year ending June 30, 2016.

The Oklahoma Public Employees Retirement System (OPERS) and the Firefighters, Judges, and Wildlife systems made modest gains, ranging from 1.1% to 0.3%.

The Oklahoma Teachers Retirement System (OTRS), Police, and Law Enforcement pension funds had negative returns ranging from 2.2% to 0.2%, Miller said.

"This year's returns stand in stark contrast to earnings of just a few years ago," Miller said. "In fiscal year 2014, the average Oklahoma pension return was 19.9%, and during FY-11, the average was 21.2% with OTRS leading the nation with 23.5% in investment gains."

Moody's Investors Service considers Oklahoma's pension liabilities "significant and slightly above average" among the states. Based on 2014 data, the state had an adjusted net pension liability of $14 billion, which, at 79% of revenues, was 18th-largest versus a 50-state average of 75%. Moody's has a negative outlook on the state's Aa2 rating based on shrinking revenues during an energy market contraction.

"The state has made significant headway in addressing unfunded pension liabilities," Moody's analyst Julius Vizner wrote.

Pension reforms in 2011 prohibited the granting of unfunded cost-of-living-adjustments, reducing the as-reported unfunded liability by 37%. Lawmakers established a defined contribution plan for new employees as of Nov. 1.

Some of Oklahoma's unfunded ratios are enviable when compared to the average nationwide. At the end of fiscal year 2015, OPERS was 93.6% funded while the Judges' system was 110.9% funded, according to Miller.

In August, the OPERS board voted to reduce the assumed rate of investment returns to 7.25% from the 7.5% it had used for more than 30 years.

Using a lower assumed rate of return on investments will result in lower funded status for the systems, Miller said. The lower the assumed rate of return, the higher the unfunded liability of a pension system.

"The board's action could be the first of multiple steps to ratchet down its assumed rate of return due to lower expected investment returns, especially in fixed-income investments," Miller said. "The reduction in assumed rate also applies to the Judges and Justices Retirement System for the state's judiciary."

While no action has yet been proposed, Oklahoma Teachers is also looking into changing its assumed rate, which at 8% is the highest among the state's seven systems.

The OPERS actuary reported that, had the new 7.25% assumed rate of return been in effect at the end of fiscal year 2015, the funded status would have been about 200 basis points lower, at 91.6% instead of 93.6%.

Oklahoma is not alone in lowering its assumptions on investment returns. Of the 127 pension plans measured by the National Association of State Retirement Administrators, more than half have reduced their investment return assumptions since 2008, according to a February report. The average return assumption is 7.62%.

The Wilshire Trust Universe Comparison Service reported that U.S. public pension plans generated a median return of 1.1% during fiscal year 2016, down from a median of 3.4% the previous year.

"After shrinking considerably during the Great Recession, investment returns grew at double-digit rates during the recovery," Miller said. "But the gains were unsustainable and lean times have returned."

Among those lowering their expectations is the nation's largest public pension system, the California Public Employees' Retirement System, or CalPERS. CalPERS approved a policy in November that will slowly, over the course of years, lower its assumed rate of return to 6.5% from 7.5%.

The lowered investment returns could require governments to dedicate more money to pension contributions, according to a report Monday from Standard & Poor's Global Ratings.

"Continued trends of slow revenue growth, growing liabilities, and higher future pension contribution costs could amplify an already constrained budget environment for many states," said S&P credit analyst Sussan Corson.

In Oklahoma's neighbor Kansas, investment assumptions played a large role in the legislature's decision to authorize $1 billion of pension bonds in 2015.

Proceeds from the bonds, which cost the state a composite rate of 4.688%, are expected to return 8% from investments. Thus, Kansas could reduce the unfunded portion of the Kansas Public Employees Retirement System with earnings that would exceed debt service on the bonds.

Pension officials point out that one or two bad years of investment returns does not significantly alter the historical average. When Kansas sold its pension bonds a year ago, the rate of return over 25 years was averaging 8.5%, even after steep drops during two years of the recent recession.

However, $500 million of Kansas pension bonds issued in 2004 have managed only a 6.86% annualized rate of return, well below the 8% threshold. Still, with a yield of 5.39%, the bonds have generated $156 million of positive revenue for the KPERS fund.

As a result of market gains, the state pension funding gap nationwide dropped in 2014, according to a recent Pew Charitable Trusts report. That marked the first decline in reported pension debt since 2000.

"Lower investment returns in 2015, however, indicate that pension debt will increase when valuations for that year are complete," the Pew report noted. "The volatility in investment returns between 2014 and 2015 demonstrates that states cannot rely on higher-than-expected returns to eliminate unfunded liabilities."

In a ranking of pension funds based on net amortization, Pew counted Oklahoma among the 10 strongest states.

"Oklahoma's performance reflects a 2011 change to cost of living adjustments," the report said. "After that policy change, the state's current contribution policy was adequate to pay down the remaining pension debt."

To strengthen the Oklahoma pension system, Miller proposes reducing the number of funds to two from seven.

"I continue to believe that Oklahoma's current pension governance with its seven independent boards and administrations is inefficient, costly and unnecessary," Miller said. "Our pensioners have to foot the bill for $100 million in administrative bureaucracy before one dollar is spent on actual benefits."

To improve governance, Miller also proposes making the state treasurer a pension board member.

"Whether the boards are consolidated or not, the state treasurer should serve on them," said Miller, a professional economist. "The treasurer is directly accountable to the people and constitutionally assigned to manage state investments. It makes zero sense for the treasurer to be excluded from the state's largest investments."

To bypass accusations of a "power grab," Miller proposed adding the state Treasurer to the pension boards after his term ends.

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