We know that Kentucky has to do something about its public pension shortfalls.
The current shortfall is caused by “unfunded liabilities—or the difference between the state’s pension plans’ assets and what the plans are obligated to pay out to retirees. Unfunded liabilities of the state’s public pension plans (excluding the teachers’ retirement system) for pension costs alone were a little more than $12.5 billion in 2011, with the Kentucky Employees Retirement System (KERS) responsible for most of the cost.
The KERS non-hazardous plan is the state’s largest pension plan with a membership of more than 340,000 state and municipal employees, and growing. It is also the plan that, as I mentioned, is most in need of funding. The plan was only 33 percent funded in 2011, making it responsible for a 59 percent share of last year’s $12.5 billion pension shortfall.
By fiscal year 2015, pension experts say Kentucky taxpayers can expect to set aside around $900 million to cover pension costs in the non-hazardous and hazardous plans for both KERS and CERS, the County Employee Retirement System for local government agencies in the state. And, if legal precedence in other states is any indicator, cutting pensions will not allowed since states are more or less contractually obligated to pay current employee and retiree pensions through a binding agreement called an “inviolable contract.”
So, long story short, lawmakers have to either find a way to pay more for employee pensions, or find a way to have employees pay more for their own pensions. And that’s where the current interim Task Force on Kentucky Public Pensions factors into the equation.
The task force is now considering draft recommendations made by two outside consulting groups, the PEW Center on the States and the Laura and John Arnold Foundation. The groups unveiled their recommendations before the task force last week. Another meeting on the draft recommendations will be held in late Nov., with a final vote on the recommendations taken by the committee before Dec. 7.
The draft recommendations presented last week offer five major routes of reform to get the KERS and other pension plans on track. Those include: Changing the contribution schedule; Suspending the cost of living adjustment (COLA) for all employees; Issuing bonds to reduce the unfunded liabilities by making required employer contributions immediately, rather than over time; Changing employee contribution policies, and; Taxing retirement benefits. Let’s look at each route briefly:
Changing the contribution schedule. The consultants stressed that the optimal choice as far as contributions is concerned is for the state to make its full pension contributions within the next four to six years, with full contribution by 2013 most optimal.
Cost of living adjustment suspension. As for COLAs, the consultants say they are not affordable and should be removed from law until the pensions are 100 percent fully funded.
Issuing bonds. Bonding has its benefits (allowing the state to refinance its pension debt, for one), but the consultants are saying that the state is better off making contributions and avoiding borrowing if the pension plan isn’t expected to earn returns greater than the state’s borrowing costs. Some data suggests that bonding could save Kentucky money, say the consultants.
Changing employee contribution policies. The proposal that, so far, appears to reduce total employer contributions to the state retirement systems through 2044 is an across-the-board additional 2 percent employee contribution (one percent for pensions, one percent for insurance). But there are other options proposed.
Taxing retirement benefits. Taxing retirement benefits (keep in mind that Kentucky now has a tax exclusion for retirement benefits) is another possibility floated by the consultants, though not one that is expected to be particularly popular.
Additional reform options suggested by the consultants include, but aren’t limited to: Implementing a two year waiting period for reemployment with agencies covered by the state retirement systems after retirement; Requiring employers to pay the actuarial cost for annual salary increases greater than 10 percent during an employee’s last five years of work; Eliminating the opportunity for state legislators who served in the 2005 session or elected afterward to earn retirement credit through both the Kentucky Retirement Systems (KERS, CERS or State Police Retirement System) and the Legislators’ Retirement Fund if employed either before or after their legislative service in a job that falls under one of the KRS retirement systems, and finding ways, legislatively, to increase local representation on the Kentucky Retirement Systems board.
The consultants suggested three reform “packages” for the task force to consider after explaining the five major reform routes, and I will go into more detail about those next week. Until then, enjoy your autumn.