A quick look at the figures behind the Commonwealth’s pension shortfall.
Mary Ann Gerth/Courier-Journal/USA TODAY Network/Wochit
FRANKFORT, Ky. — A much-anticipated report will be released Monday afternoon that may be the foundation of changes that Gov. Matt Bevin and the General Assembly will make to Kentucky’s public pension plans.
It is the third and final report of PFM Consulting Group, a firm retained by state government to study Kentucky’s pension plans, and it is expected to offer recommendations for addressing the crisis.
Kentucky’s pension crisis: You’re on the hook, and this is what you need to know
The report will be presented to the Public Pension Oversight Board — a panel comprised of state legislators, state budget officials and citizens — at its meeting in the Capitol Annex at 1 p.m.
Bevin, meanwhile, is hosting a live question and answer session on his Facebook page at 8 p.m. Monday.
“The underfunding of our pension systems is the most pressing economic issue facing Kentucky,” Bevin said in an email send to state employees Friday notifying them of his question and answer session. “A failing pension system provides no retirement security to current state employees or teachers. Frankly, it also creates tremendous financial uncertainty for current retirees.”
Related: Bevin tells government workers he’ll do his utmost to save pension system
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The governor also said in his email, “We are morally and legally obligated to deliver, to the best of our ability, the pension promise made to Kentucky’s state employees.”
Kentucky’s eight public pension plans combined are about $40 billion short of having the money to pay future obligations, according to official reports. The governor says the problem is actually much worse, and he puts the pension debt at greater than $64 billion.
What to know about the pension crisis
To help all of us understand the crisis, we’ve interviewed more than 20 people who are part of the debate. (State Budget Director John Chilton, the top Bevin administration official dealing with pensions, did not respond to several requests for an interview.)
The questions are complex and the answers aren’t always simple, but here’s what we can tell you:
How big is Kentucky’s pension problem?
Big. It can be fairly called a crisis.
The latest official reports put Kentucky’s pension debt at $33 billion, plus $6 billion for retiree health plans. That means Kentucky is at least $39 billion short of what it needs to pay off pension and health care obligations for retirees over the next 30 years.
That number will go up to at least $43 billion because of new, more conservative assumptions adopted for Kentucky Retirement Systems plans this year.
The Bevin administration says the debt is actually much worse. Its new website puts the debt figure at more than $64 billion for pensions plus the $6 billion for the retiree health plans.
I don’t have a government pension. Why should I care?
Your taxes help fund pensions. And as pension costs soar, those dollars are being drained from paying for state and local government priorities like public schools and police.
Budget Director John Chilton has reported that pension funding in the state budget ballooned to $1.5 billion this year from $624 million in 2008. And he says a proper approach will require a huge increase starting next year.
Sen. Chris McDaniel, the Taylor Mill Republican who chairs the Senate budget committee, said during a meeting of the Public Pension Oversight Board this summer: “These are the choices we’re going to have: Raise taxes, and it’s going to be about a 10 percent tax increase for all Kentuckians; or cut all other areas of government about 12 percent.” That includes everything, he said, including education for your kids.
Wow, so will taxes be raised to pay off this problem?
Probably not anytime soon. While the governor said this year that he wanted to tackle tax reform at the same time as pension reform, in recent months he has separated the two and been emphatic on the tax question: “I do not intend to raise taxes to pay for the sins of the past, the mistakes that have been made. And the disregard for the pension system is not going to be remedied by sticking it to today’s taxpayers,” Bevin told WHAS Radio’s Terry Meiners on Aug. 8.
But the pressure for more money will be significant, and there’s a chance that tax reform could be considered in next year’s regular legislative session, when the 2018-20 budget must be passed.
I am a member of a Kentucky public pension system. Could my benefits be cut?
Benefits of current retirees appear safe. And it seems sure that some new benefit structure intended to save money will be approved for future employees.
Much harder to answer is whether the future benefits to be accrued by active teachers and government workers will be reduced.
Here’s what Bevin said in a video he posted this month: “For those that are retired, we want to make sure those checks keep coming and the promises are kept. For those of you that are working toward retirement, we want the promises to be able to be made and delivered upon for you when you retire. … For those that would be future employees for the state, we want a system that is sustainable. … We have to make sure that all these three things can be done in a way that can actually be paid for because otherwise they’re false promises. So you have my commitment as the governor of Kentucky that we are going to honor our obligations to the absolute extent of our ability.”
What is the “inviolable contract,” and does it mean my benefits are safe?
Pension recipients and employees say they are protected by an “inviolable contract” – language within state law that guarantees they get the benefits promised when they were hired.
But others — the fiscally conservative Bluegrass Institute, for instance — have different opinions of exactly what is protected by the inviolable contract. And then there are a few important parts of current benefits for teachers that all sides agree are not protected, such as a benefit that lets teachers accumulate unused sick days over their careers to enhance their benefits.
This question will be a lot easier to answer after the Bevin administration consultant (PFM Consulting Group) issues a report on Monday with options on how the pension crisis can be addressed.
Is Kentucky’s pension problem the worst of any state?
Kentucky is clearly among the worst.
Last September, Standard & Poor’s ranked Kentucky’s pension funds as the worst-funded of any state, with just 37.4 percent of the money it needs to pay obligations to retirees. Moody’s has ranked Kentucky as having the third-highest pension debt when measured against a state’s capacity to pay it off.
One of Kentucky’s pension plans — the one that funds pensions of most state government retirees — is the worst-funded public pension plan in America with less than 16 percent of the money it needs to pay obligations.
How many plans does Kentucky have?
Eight, and all of them are underfunded.
Kentucky Retirement Systems oversees five plans for state and local government employees and the non-teaching staffs of schools. That includes the one for state employees in non-hazardous jobs, the worst-funded plan and the primary reason for the crisis.
Teachers’ Retirement Systems is a large plan that is totally independent of the Kentucky Retirement Systems with different benefits and rules.
And there is a small system that administers plans for legislators and judges — and those plans are not nearly as underfunded as the others.
How many people are in these Kentucky pension systems?
Kentucky Retirement Systems has 364,710 members (102,725 retired and drawing benefits; 135,517 active employees now working and earning benefits and not yet drawing benefits; 126,468 inactive members who have earned some benefits but not yet drawing benefits.)
Teachers Retirement Systems has 132,651 (51,563 retired and drawing benefits, 71,848 active teachers earning benefits and not yet drawing them; 9,240 inactive members who have earned some benefits but not drawing them.)
Employees of Jefferson County Public Schools and Louisville Metro government are covered within the state plans. University of Louisville employees have a separate plan and are not within these state plans.
Where do the plans get their money?
From contributions made by employees themselves, contributions from the employers (state and local governments, school districts, etc.) and income from investments by the plans.
Are Kentucky’s pension benefits too generous?
The benefits in Kentucky Retirement System plans compare “highly favorably” to those offered by Kentucky’s 12 largest private employers, according to PFM Consulting Group, a consultant retained by the Bevin administration to look at the pension problem.
PFM noted that private-sector employers have largely shifted to 401(k)-style retirement plans and rarely offer retiree health care benefits.
PFM reports teachers also get a “comparatively generous overall benefit.” The consultant reported that teachers can retire at any age with 27 years of service or at age 55 with 10 years of service. “As a result, according to actuarial reports, the average age at retirement of a TRS member is 55 – below the age when teachers in many other states are even eligible for full benefits,” PFM reported.
Kentucky public employees and retirees say that they make, or made, much lower salaries than their private-sector counterparts and their total compensation of wages plus benefits is lower overall. The promised benefits, many say, are why they took a lower paying job. They note they’ve given up some benefits in reform efforts of the last decade. And they warn a reduction in benefits to current workers and teachers will trigger an exodus that will drive up pension costs and hurt the quality of public services.
How much do people receive on their pensions anyway?
Some Kentucky public retirees earn six-figure retirement benefits, but they make up a small percentage of all retirees. (Kentucky Retirement Systems says it has 141 retirees making at least $100,000, but that is 0.14 percent of its retirees. Teachers’ Retirement System says it has 387 retirees with annual benefits of $100,000 or higher, which is 0.8 percent of its retirees.)
The latest annual report of Kentucky Retirement Systems says that two-thirds of its retired members receive $20,000 or less in annual benefit payments and the average annual benefit is $16,161.
The average benefit for a Teachers Retirement System member is $36,244.
Do these folks get Social Security too?
Most state and local government workers get Social Security benefits. But teachers do not. Teachers contribute more into their retirement plan, which is designed to produce a larger benefit to compensate for the fact they do not get Social Security.
How is a typical Kentucky pension benefit calculated?
A typical benefit in what is known as a “defined benefit” pension plan offered by Kentucky and most states is determined by multiplying: the number of years an employee worked, times a percentage “benefit factor,” times an average salary of the employee’s highest years of pay.
Kentucky Retirement Systems provided this typical example: a retiree worked 21 years, times a 2 percent (0.02) benefit factor, times a $40,000 average salary for the highest five years of pay, equals an annual benefit of $16,800.
The benefit factor and number of years used for the average salary vary by plan and when the employee was hired.
How did we get into such a big mess?
For the past 20 years or so, the state did not put in nearly enough money.
For most plans over that time, governors did not propose, and the legislature did not appropriate, as much into the plans as was needed. These governors and legislatures were frequently struggling to fund schools and other needs amid recession economies.
Also, in the 1990s when the pension plans were fully funded, the General Assembly approved benefit increases without funding them — including an expensive cost of living benefit increase for Kentucky Retirement System members in place between 1996 and 2012.
Of course the Great Recession caused big losses in investment income. But PFM Group says that investment returns for most Kentucky pension funds were even worse than overall market returns during the recession. PFM attributed part of this to Kentucky Retirement Systems’ investments in hedge funds — a move that PFM said the current KRS board is withdrawing from.
PFM mostly blames the approach used to fund the systems, one used by most public pension plans across the country, which based the government’s contributions to the plans on a percentage of a growing payroll. It says that’s like a homeowner basing mortgage payments on a percentage of future income he expects, or hopes, will grow.
Will the money run out soon?
Bevin has been warning that there is a real possibility that money for the worst-funded plan could run out within just a few years. And given the unpredictability of the investment markets and the low amount of assets in the worst-funded state plans, the consultants say that is a scenario that must be considered.
But the consultants also have projected that that worst-funded fund will run dry in 2022 only if the legislature reverts to its underfunding practices — which is not likely.
Why do local governments want to get out of the Kentucky Retirement Systems?
Because they believe the interests of cities and counties are not well-served by having their pension plans governed by the same board that also oversees state employees’ plans, which are much worse funded.
The local government leaders note that — unlike the state — cities and counties have made full annual contributions required by actuaries to their plans and as a result are much better funded than the plans for state employees.
Why not reduce risk and long-term costs by moving everybody into a 401(k) plan?
It is not simple, but it’s an option that some groups, like the Kentucky Chamber of Commerce, support for future government employees — but not for teachers.
One difficulty is that making this change for state government workers hired before Jan. 1, 2014, would be considered an attack on the inviolable contract. Teachers Retirement System administrators say such a move would cost a lot more for teachers because the state would need to begin making big Social Security contributions.
Another complication is that even if workers are moved into a 401(k), the state still has to pay off the massive debt.
Hey, the stock market is up. Doesn’t that help?
Yes, but it’s just one year. KRS plans showed returns of about 13 percent for the year ended June 30, and Teachers Retirement system returns were more than 15 percent. But the retirement systems — well aware of the unforeseen recessions of 2001-02 and 2008-10 — try to invest for solid returns in the longer run.
When will the special session be held to consider changes in Kentucky’s pension plans?
The governor, who has exclusive authority to call special legislative sessions, has not set the date. Many legislators and stakeholders are expecting the session will be in October.
Reporter Tom Loftus can be reached at 502-875-5136 or email@example.com.
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