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June 2012
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PREMATURE 2013 pension 'victory' dashed by reality


We recently came across a blast from the not-so-distant past. It was an "Issue Brief" from the Pew Charitable Trusts dated September 27, 2013.

The report is headlined "Kentucky's Successful Public Pension Reform." Just beneath is a subhead saying, "The bipartisan effort in 2013 resulted in (a) fair and effective retirement system for employees and taxpayers alike."

This is hardly ancient history. We're talking less than four years ago. But it illustrates just how steep the spiral becomes when a state lets its pension funding get away from it.

The Pew organization in 2013 was already describing Kentucky's public pension program as "one of the worst-funded retirement systems in the country." The report said the unfunded liability in the teachers' fund alone was $13.9 billion in 2012, which Pew noted was "more than the tax revenue the state collected that year." The Kentucky Employee Retirement System fund, which covers most other state employees, was another $8.2 billion in the hole.

All told Pew estimated the pension shortfall at the end of 2012 at $26.2 billion, or 50 percent of what was needed to be fully funded. The teachers' plan was 54 percent funded at that time and the employee fund was 27 percent funded.

But last November the Associated Press reported the pension shortfall has ballooned to $32.6 billion, a 24 percent increase in just three years. (We recently came across a draft report from the Kentucky Chamber of Commerce that suggests the shortfall has reached $36 billion). Funding for the KERS was down to 16 percent by last November.

In 2013 Pew said Kentucky's reform "included a commitment to pay down existing debt and policies to keep future costs from growing unmanageably." It said additional contributions of $131 million a year would be adequate to close the pension gap. Fast forward to the present, when $1 billion injected over the current biennium may not be enough to stop the bleeding.

In addition to the General Assembly's contribution "commitment", the 2013 reform required that future cost of living adjustments for pensioners be paid for before they were granted. It also created a new retirement program for people hired beginning January 1, 2014. The new hires were enrolled in a "cash balance plan", which requires employer and employee contributions.

What went wrong? Politics mostly.

The General Assembly failed to follow through on its commitment to make the actuarially necessary contributions. Cost of living adjustments were "paid for" by way of gerrymandered budgets. The state's projection of pension fund investment returns proved to be fantasy. And the politically appointed trustees on the board overseeing the pensions did a lousy job of managing the money.

That's water under the bridge at this point. What the Pew study really illustrates is how quickly a pension shortfall deepens when it is ignored. It is not a linear progression. It is more like a power function. Millions that could have solved the problem years ago became billions with astonishing speed.

Gov. Matt Bevin deserves credit for finally making lawmakers acknowledge the magnitude of the pension problem. Unfortunately even with the additional $1 billion approved for the current biennium, there's still difficult work to do.

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