Major reforms needed to repair Kentucky's broken pension system

Steps include repealing legislature's 'greed bill'

April 15, 2013 

Logan Morford is vice president for transparency at the Lexington-based Bluegrass Institute for Public Policy Solutions, a free-market think tank.

  • At issue: March 27 Herald-Leader article "Plan to fund state pension program wins approval"

If Kentucky's public pension system was a private-sector business, it would have been forced to close its doors many years ago.

Unfortunately, the pension system doesn't exist in the private sector. Rather, it exists in the realm of government where inefficiencies and mismanagement can be papered over with a guaranteed flow of taxpayer dollars.

While the system continues to enroll more and more new state workers, it struggles to keep pace with the obligations it has already made. In effect, it has become akin to a Ponzi scheme: plush with cheap promises of future retirement benefits and the constant need to pay off past promises with dwindling taxpayer funds.

Simply put, this trend is not sustainable.

How did we get here, and who is responsible? Poor decision making by the General Assembly is largely to blame.

One of the most egregious blows to the health of the public pension system came when lawmakers passed HB 299 in 2005. This law was nothing more than a cash-grab by Kentucky's "public servants" by way of supersizing their already generous retirement benefits.

Doesn't it seem fundamentally wrong that part-time (emphasis on part-time) "public servant" legislators voted to enhance their own pensions by manipulating a broken system?

With HB 299, politicians voted to allow their salaries from non-legislative state jobs to be factored into calculating their legislative pension rates, a practice known as reciprocity. They also lowered the number of years — from 30 to 27 —required to serve before collecting a pension and reduced the salary multiplying factor from the five-highest years' salary to the three peak-earning years.

In the aftermath of this lawmaker greed, we find the pension system in the worst shape ever; those affected most negatively are state workers. It is incumbent upon state legislators to take meaningful action and correct what they have done so that full-time state workers who earned — and were promised — their retirement are not left out in the cold.

Here are some significant actions that the General Assembly must take if it wants to put the public pension system back on solid footing:

 Make the system transparent. Determining how bad the problem truly is proves difficult without a system that makes information readily available. Besides, Kentuckians should be alarmed that they do not have the ability to assess how their money is being spent. Access to that information is always the first step toward accountability.

 Move all current and future employees to a defined-contribution plan rather than a defined benefit option. The current defined-benefit plan places the vast majority of risk on the taxpayer. Rather than taxpayers shouldering the entire risk, a defined-contribution plan would act more like a professionally managed 401(k), limiting the risk of loss.

 Roll back HB 299. This measure came to be known as the "greed bill" because it displayed nothing more than a lack of respect for taxpayer funds by enriching the pensions of state legislators.

These changes would cause a needed and significant culture shift within the current state-administered pension system.

All we got on the last day of this year's legislative session was a bill rushed through the Kentucky General Assembly that served only as a smokescreen for the billion-dollar problem. Frankly, it's going to take far more than that to fix the $33.7 billion unfunded liability the state has incurred due to the irresponsible practices of lawmakers in the past.

Kentucky's taxpayers will continue to be on the hook for billions of dollars if the General Assembly cannot muster the political courage to make significant changes in the near future.


At issue: March 27 Herald-Leader article "Plan to fund state pension program wins approval"

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