State on path to a bailout

With pension crisis unsolved, pain for all unavoidable

May 6, 2013 

Christopher B. Tobe of Anchorage was a trustee of the Kentucky Retirement Systems 2008-2012.

  • At issue: April 14 Herald-Leader editorial, "Unintended impact of pension fix; deal overburdens nonprofits, some agencies providing state services"

In a desperate attempt to hide their bipartisan collusion in raiding pensions, the legislature and governor have put out a disastrous bill, Senate Bill 2, that not only tries to cover up their past indiscretions but harms local governments and non-profits as well.

In the normal Frankfort culture of cover up and corruption, they may be able to get away with it. But in this case, the mathematics of a huge structural deficit have already started to expose this scheme as Seven Counties files for federal bankruptcy protection.

No matter how much you punish future faceless employees, make them work to 95, give them pitiful 401(k)s it does absolutely nothing for the current pension and retiree health liability. This liability cannot be wished away because the vast majority of it, 90 percent or so, has already been earned by retirees and long-term employees.

Kentucky has an underlying structural budget problem, not strictly a pension funding problem. Both pension and retiree health plans have an actuarially required contribution (ARC) that needs to be paid every year for a plan to function correctly. If you pay the full ARC every year, it is designed to bring your plan back to full funding in 30 years.

Our legislators and governors around 10 years ago started shorting the combined retirement and health plans by a few hundred million a year. By 2012, the structural budget deficit has grown to over a $866 million shortfall a year, with half in pensions and the other half in retiree health.

The crisis was caused by too much bipartisanship and too little transparency. Ryan Alessi on CN2 traced the start to a back room budget deal designed by then-budget director Jim Ramsey for Gov. Paul Patton in 2002, which has been continued under both Gov. Ernie Fletcher and Beshear. These deals delayed tax increases and spending cuts by shortchanging the pensions and retiree health plans starting at under $100 million but working up to now nearly $1 billion a year.

This is just a back door to circumvent the Kentucky constitution's balanced budget requirement and borrow money. When this well ran dry they issued $700 million in pension obligation bonds in 2010 to plug a hole in the Kentucky teacher's fund.

The small amount of real solutions in SB 2 involves a tentative $100 million a year revenue source that Jason Bailey at the Kentucy Center for Economic Policy says is probably closer to $30 million a year. But when you have budgeted to shortchange the pensions $900 million a year, reducing it to even $800 million a year is not a solution, it just slows the digging.

House Bill 1 in 2008 did not fix the pension problem; in fact it locked in its destruction by allowing the budget to dig the hole deeper for years. It tricked the public into thinking they were filling the hole, by just slowly reducing the rate they were digging each year and calling it "a big improvement."

SB 2, the 2013 pension bill, tries to pull the same trick. The only substantial recommendation: to pay $300 million more than HB 1, is still just a gimmick, since they only come up with, at most, $100 million in revenue with the other $200 million involving unfunded mandates on other parts of state and local government, e.g. cost shifting.

Nearly half of state government is not funded by the General Fund but by fees or, in the case of transportation, a specific gas tax. Transportation will probably have to cut $50 million from its budget to make its payments. The Labor cabinet will have to lay off or increase workers compensation fees. Fish and Wildlife will have to lay off workers or drastically increase fees and licensees. Every other license-based agency will have to lay off or increase fees dramatically.

Unless the other mental health agencies follow Seven Counties to federal bankruptcy court and Kentucky River in state court, hundreds of social workers will be out of jobs. County attorneys and health departments will probably have to lay off staff. All the regional universities will have millions added to their budget costs, increasing their layoffs.

People ask me for solutions, and I tell them there are none and they have a hard time with it until I ask the following questions: Can our political system in Kentucky simultaneously in 2014 or 2015 both give the largest tax increase in history and the largest education cut in history to fill a $1 billion budget gap?

My answer, after attending a public pension legal seminar at Ohio State last month, was that there is no legal way not to. States, unlike cities, cannot declare bankruptcy. Earned pension benefits have high legal standing and the state would have to default on every municipal bond, and sell off the state parks before it could default on a penny of earned benefits.

What options does this leave? I see only one: a bailout of some type. If the auto industry and Wall Street can be bailed out by the federal government, why not Kentucky?


At issue: April 14 Herald-Leader editorial, "Unintended impact of pension fix; deal overburdens nonprofits, some agencies providing state services"

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