Kentucky’s next governor will inherit a financial problem too precarious to ignore — a desperately underfunded pension system. His task will be to come up with a plan to furnish hundreds of millions of dollars in increased contributions to the system serving state employees.
The teacher pension system, which has about 141,000 members, needs $520 million more in the 2016-17 budget cycle, system officials say. The state's other retirement system, which covers about 120,000 state employees, needs at least $60 million more.
The amount the state will need to contribute to the systems is expected to increase in coming years, and also looming on the state’s horizon is its obligation to pay an increasing share of its expanded Medicaid expenses, starting with $74 million in 2017 and increasing to $363 million by 2021.
The state estimates it will have a $219 million budget surplus this budget cycle, which ends June 30, which could help pay down the new expenses. But that money will be immediately gobbled up by the increased contributions.
Neither of the major party candidates for governor support plans to issue bonds to shore up the pension funds. Issuing a $3.3 billion bond was the favorite solution of state Democrats last year, but a bill authorizing the bond past the state House but was blocked by the Senate.
Democratic candidate Jack Conway and independent Drew Curtis have said they would support a constitutional amendment to open up to seven casinos in the state. Some of the tax revenue generated by the casinos would be dedicate to the pension systems, under that plan.
Republican Matt Bevin’s plan focuses on reducing the state’s liability to future pension holders by moving new hires onto 401K defined-contribution plans.
Ted Siedle served as an independent counsel for the Kentucky Retirement Systems and in 2012 conducted an investigation of placement agent abuses in the pension system. He said any plan to fix the retirement systems should begin with an investigation to determine if there’s been mismanagement of the funds.
“If you keep pouring water into a leaking bucket, the bucket’s never going to be filled,” Siedle said.
Instead of looking into the management of the funds, Candidates’ plans have focused on fixing the funding mechanism for the retirement plans.
Curtis and Bevin have called for reviews of the management of the systems, with Curtis issuing the strongest statement on the subject during a Kentucky Sports Radio debate last month:
“The first day I would be in office I would drop a big fat audit on the Kentucky Retirement System,” Curtis said.
Matt Bevin
Republican candidate Matt Bevin’s pension plan calls for putting new state employees on a 401K-style defined contribution plan and having current state employees make increased pension contributions.
The plan is aimed at decreasing the systems’ liability to future pension-holders by moving their retirement savings into quasi-independent accounts.
Siedle said Bevin’s plan “throws pension-holders under the bus” by exposing their retirement funds to the volatility of the stock market.
“The Baby Boom generation has painfully learned that the great 401K experiment didn’t work; 401K’s do not provide the level of retirement security promised,” Siedle said.
Jim Carroll, a retired Kentucky Parks Department spokesman who helps run a Kentucky Government Retirees page on Facebook, says moving new hires outside the system will deny the fund much-needed cash.
“That’s one way you would increase the costs for Kentucky Retirement Systems, because when you wall off the defined-benefit plan, you’re depriving the plan of contributions from new members. So that’s exactly the wrong thing to do for a plan that is hemorrhaging and faces the risk of insolvency,” Carroll said.
Bevin wants to give existing employees the option to transfer to the 401K plan.
Following reforms enacted by the legislature in 2013, new hires who go into the KRS system are switched into a “hybrid” cash balance plan that guarantees a 4 percent rate of return on money they put into their account.
Jack Conway
Democratic candidate Jack Conway says he would support legislation that would expand casino gambling in Kentucky.
A proposal put forth by Democratic House Speaker Greg Stumbo would allow as many as seven casinos to open up in Kentucky. Stumbo’s pitch is to dedicate 40 percent of the revenue for public elementary and secondary education, 30 percent for higher education, 20 percent for the pension systems and 10 percent for the racing industry.
Conway also says he’s committed to making the full actuarially required contribution to the system.
Carroll said: “From a stakeholder standpoint, we’re interested in examining any kind of revenue source that will provide us with a bit of money that will help us claw back the underfunding."
Siedle said that casinos haven’t proven to be reliable solution for other states looking to shore up pensions, education funding and other needs. He added that any new revenue would be squandered without structural fixes to the system.
“Unless you fix the leaky bucket, putting more money in it from gambling isn’t going to do any good,” Siedle said.
Other than that, Conway says fixes made to KRS in 2013 — including the hybrid cash balance plan and legal requirement to pay the full actuarially required contribution — need time to be realized and he’s awaiting recommendations from a task force for the teacher pension fund.
Drew Curtis
Independent candidate Drew Curtis’ wants to take out a bond and use the money as a “line of credit” as kind of safety net for the pension systems.
If investments in the pension funds fall short of a 4 percent rate of return, Curtis’ plan calls for tapping the line of credit to make up for the losses.
Carroll called Curtis’ plan “an intriguing idea,” though he worried that the bond issue wouldn’t be able to pass the legislature.
“Perhaps the idea is to marry the two options —one is a line of credit or bond and the other is a revenue stream of some kind that could help make a payment for the bond. So you could remove the risk that you can’t make those bond payments,” Carroll said.
Siedle said borrowing money to shore up the pension system doesn’t get to the root of the problem — reducing the state’s unfunded liabilities.
“Whether you borrow the money or raise the taxes, it’s the same thing. The money’s got to come from the taxpayer,” Siedle said.