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Kentucky's Pension System Can't 'Invest Its Way Out' Of Crisis, Analysts Say

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Analysts on Monday presented state legislators with a grim portrait of Kentucky’s main public pension system.

Kentucky Retirement Systems is facing a $9 billion shortfall—slightly less than the state's annual budget—and the projected return on investments for the system  have been adjusted to 4 percent for the fiscal year, down from 7.5 percent.

The situation doesn't offer the state many potential solutions, said Sen. Joe Bowen, a Republican from Owensboro.

“There’s obviously only two ways we can do that: employ a bunch more people or require our current employees to pay more,” Bowen said during a public pension oversight committee, which he co-chairs.

The pension system, which has $11.5 billion in liabilities, has 22 percent of the money it needs to pay current and future pension recipients. That funding ratio will increase to 32 percent over the next 20 years according to R.V. Kuhn Inc., a consulting firm.

“This study shows that the Plan faces substantial financial challenges over the next 20 years,” the consultants said in a report.

“By this we mean persistent funding shortfalls, elevated contribution levels, unsustainable payout ratios, and, in the worst-case scenario, the potential for complete depletion of the asset base.”

R.V. Kuhn consultant Ryan Sullivan said the state will not be able to “invest its way out” of the pension crisis.

“The unfunded liability will actually increase for the first couple of years until salaries can grow fast enough to where this payment grows larger and actually starts to pay down this unfunded liability,” Sullivan said.

Based on current salaries and employment numbers, the consulting firm expects the state’s funding ratio to decrease to 15 percent over the next years, according to R.V. Kuhn. In order to remain financially solvent, the state’s annual contribution will have to increase from $560 million in 2015 to $1.4 billion in 2034.

In 2013, lawmakers passed pension reforms which moved new state workers onto 401(k)-style plans, required the state to make recommended contributions to the system in full, and tweaked the tax code to generate more money for the system.

Rep. Brent Yonts, a Democrat from Greenville, says everyone felt “fine and dandy” after the reforms.

Yonts pointed out that the reforms were based on stabilizing the pension system within 30 years and the new analysis was based on a 20-year outlook.

“So the world’s not going to end unless the economy totally bottoms out,” Yonts said.

“All these projections also include not having another 2008, not having another war.”

The state has hired Segal Consulting to conduct an actuarial audit of the Kentucky Retirement Systems. A report, to be presented in late August, will cost about $100,000.