Agree on bipartisan, funded pension reform

Task force consultants: situation too dire to ignore

March 5, 2013 

Kentucky's public employees — past, present and future — deserve a secure retirement. Yet Kentucky has one of the worst-funded retirement plans in the country with a total unfunded liability in the state's main retirement system of nearly $14 billion — more than the amount of taxes the state collected in 2012.

If the commonwealth does not adopt comprehensive reforms that fix the retirement system once and for all, every retiree, worker and taxpayer will be burdened with rising costs and unpaid promises for years to come.

The General Assembly had a chance to reach consensus on a path to reform, but the House and the Senate have not been able to come together. This is unfortunate because last year the General Assembly created a bipartisan task force that spent six months reviewing the pension system and then offered a comprehensive reform proposal that dealt with the tough choices head-on.

Our organizations served as unpaid advisors, analyzing the current financial condition of several of the state's public pension programs, providing estimates for future pension costs and modeling reform options brought to the task force by local stakeholders.

The results of the analysis are stark. The current pension system is on an unsustainable course. All told, the plans studied by the task force owe public workers close to $25 billion for benefits they have earned, but state and local governments have set aside only $11 billion to pay for that obligation.

After carefully examining the challenges the pension system faces, the task force recommended a comprehensive set of solutions that would save Kentucky an estimated $10 billion over 20 years. The task force's recommendations had three primary components.

First, the task force said the state should pay its full contribution right away, instead of continuing to put it off. Recently, the House passed legislation that would increase state lottery revenue and put it in a Pension Sustainability Trust Fund to ensure it is used to pay the pension bill. This is one of a number of funding ideas circulating in the state.

But regardless of where the money comes from, establishing a responsible payment schedule for the debt and sticking to it is critical for both the state's future fiscal health and for the retirement security of the work force.

Second, the task force recommended that the legislature provide cost-of-living increases only when it also can provide the money to pay for them. The Senate and the House included this reform in the bills they passed.

Third, and most important, the task force recognized that those two changes alone would not be enough to protect workers and taxpayers from the rising costs and ballooning pension debt. As the saying goes, "when you find yourself in a hole, stop digging." So the task force recommended a hybrid cash balance plan, which combines the defined benefit of a traditional pension plan with the flexibility of an individual retirement account. Workers would retire with a guaranteed monthly benefit.

By making costs more predictable and manageable, this new plan has fewer risks for employers and taxpayers — a change critical to achieving long-term sustainability for the retirement system. Legislation to create a hybrid cash balance plan passed the Senate, with a strong bipartisan majority, but unfortunately it was removed from the House bill.

The hybrid cash balance plan is expected to produce a better benefit than the current plan for more than two-thirds of new public employees.

It allows workers to earn retirement wealth more evenly across their careers and enables them to take their entire account balance with them if they change jobs after vesting.

In contrast, retirement benefits under the current pension plan are back-loaded for most employees, where retirement wealth is earned only after 20 or more years of state service. According to the retirement system's own assumptions, typical employees only have a 29 percent chance of getting a retirement benefit worth more than what they paid in.

In the final days of the legislative session, lawmakers in both chambers should come together and agree on bipartisan, comprehensive reform that ensures the debt to public workers is paid in full, requires future cost-of-living increases to be fully paid for, and includes the task force plan that places new employees on a more secure path to retirement.

David Draine is senior researcher of the States' Public Sector Retirement Systems Project of The Pew Charitable Trusts; Josh McGee is vice president of public accountability for The Laura and John Arnold Foundation.

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