Herald-Leader Editorial

Facing realities of pension crises; state, city need revenue, transparency

December 13, 2012 

This may be the year when even the geekiest policy wonks get their fill of charts and graphs, thanks to the pension crises at the state level and for Lexington's police and fire workers.

Even leaving the politics aside, the math of these issues is daunting: the numbers are huge, the time spans are long, the factors many.

Here are a few of our takeaways:

• COLAs are forever. A COLA — cost of living adjustment — is that single-digit annual add-on aimed at keeping retirement benefits in line with the cost of living. But they add up. This was demonstrated vividly in one chart prepared for the Lexington pension task force.

It compared the COLAs from 1983 to 2012 with the Consumer Price Index compiled by the Bureau of Labor Statistics for the same three decades. The cumulative growth of the COLAs was 162.4 percent compared to 133.3 percent for the CPI, meaning benefits rose 29 percentage points more than the cost of living during that period.

If you assume that a pension fund's investments will rise with the economy, as represented by the CPI, then the money should be there to pay for a comparable COLA. But when those little increases exceed the CPI year after year, the COLAs can wind up digging a very deep hole over the long term.

• Traditional defined benefit retirement plans reward you for staying put, whether you should or not.

David Draine, the consultant to the state task force from the Pew Center for the States, pointed out that the system is back loaded — meaning the greatest benefits are earned in the last few years — and a fair number of public employees never get any pension benefits because they move on after a few years.

It's true that, as its proponents assert, this system rewards honest, hard-working career employees who could leave to make more money but choose to stay and conduct the business of government.

But there are also other less appealing possibilities. A young person with a long view could go into a public-sector job to get trained, gain a few years of experience and then jump into the private sector; or that person might stay until retirement benefits are maximized, regardless of how well the job opportunities matches their abilities and ambitions.

If we taxpayers think like employers, neither of those pictures looks too pretty.

The state task force adopted Pew's recommendation to change to what they call a hybrid plan. In it, as now, both the employee and the employer pay into a pension fund. But instead of guaranteeing a certain benefit at some distant point in the future, the fund guarantees a minimum return of 4 percent a year. If investments soar, that can increase but it will never fall below 4 percent.

At retirement, employees can take their account in a lump sum or use it to buy an annuity to guarantee future retirement. That pay-as-you-go aspect means neither the employer nor the employee will be surprised by shortfalls in later years.

• No matter what happens, both the state and the city of Lexington need additional revenue to meet the obligations to current retirees and employees. We've said this before but it bears repeating: There is no miracle brew of investment returns, bonds and cuts elsewhere in the budgets that will make the numbers work.

• A corollary to the last point is improving transparency. Citizens paying taxes to solve these problems have the right to know what they're paying for. They have the right to know who is double-dipping, and which former legislators have taken advantage of spiking to pad their retirements.

• The systems should also have Web pages that make it easy for the public and beneficiaries to review the fund's financial status and its investments, know how much money is spent on administration, the principle officers, their qualifications and compensation, as well as members of the oversight boards, their qualifications and who appointed or elected them to their positions.

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