Consultants Recommend Major Changes For Kentucky’s Ailing Pension Systems
A consulting firm hired by the state has recommended weakening pension benefits for current and retired state workers as a way to steer Kentucky’s retirement systems away from insolvency.
The proposed changes suggested by PFM Consulting Group include shifting future state employees from defined benefit retirement plans to 401(k)-style plans and raising the retirement age to 65 for most state workers.
The firm also said the state should get rid of cost-of-living raises given to state pensioners over the last 20 years and no longer allow employees to use accrued sick days and comp-time to enhance their pension benefits.
State Budget Director John Chilton said Monday that without changes to the pension system, the state will have to find an additional $700 million per year to dedicate to the retirement funds.
“There are only three things you can do: One is to cut spending, the other is to increase taxes, and the other is to adjust the liability for pension benefits — decreasing the unfunded amount by adjusting benefits,” Chilton said.
Gov. Matt Bevin has promised to call lawmakers back to Frankfort later this year to hammer out changes to the pension systems, which has an estimated shortfall ranging from $35 billion to $70 billion — one of the worst funding-levels for a public pension system in the nation.
Earlier this year, Bevin pushed for lawmakers to overhaul the state's tax code to capture more revenue, but the effort faded amid concerns from Republican lawmakers over raising taxes.
There are about 500,000 current and former employees who have a stake in Kentucky’s pension systems, ranging from state employees to teachers and police officers.
Bevin has pushed for moving future employees onto 401(k)-style retirement programs, decreasing the benefits the state has to pay out for those workers.
More controversial would be tweaking benefits of people already working in or retired from state employment. State law forbids the “reduction or impairment by alteration, amendment, or repeal” of benefits for employees.
Mike Nadol, a consultant with PFM, said that altering current benefits would help the state begin saving immediately.
"The problem with stopping digging and doing no more is you are still in the hole," Nadol said.
Jim Carroll, the organizer of advocacy group Kentucky Government Retirees, says the changes proposed by the consulting group would violate the state’s contractual promise to honor pension benefits.
“It seems very clear to us that we have a contract that’s supposed to mean something and we will oppose this politically and if necessary, we’ll lawyer up,” Carroll said.
After the presentation, Bevin released a statement, saying the report “confirms the need for urgency as we resolve Kentucky’s pension crisis.”
“Change is necessary,” Bevin said. “Time is not our ally — we must act now to get our financial house in order. There is no other viable option.”