FRANKFORT — Kentucky faces a rising wave of state government retirees drawing from its beleaguered public pension funds even as fewer workers remain on the job to contribute to those funds.
With financial pressure building, some lawmakers say the state might have promised retirees — some still in their 40s — a more generous deal than it now can afford to deliver.
To trim the state payroll under the last two governors, the legislature offered lucrative incentives to encourage early retirements. As an unintended consequence, within five years there could be more state retirees collecting lifetime pensions and health insurance than state workers, pension officials said.
In the last five years, the monthly sum the Kentucky Retirement Systems spends on retiree benefits exploded by 72 percent, from $68 million in 2004 to $118 million in 2009.
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"That creates a much greater demand on our cash flow," said Mike Burnside, executive director of the KRS, which covers 330,000 state and county employees and retirees.
"It makes us very dependent on employer contributions (from the governments), which have not been what they're supposed to be, and it puts us at the mercy of our investments' performance in the market, where we do not have a lot of control," Burnside said.
The funds were worth $16 billion in 2007 before the stock market collapsed, and then lost nearly one-third of their value. They partially have rebounded to $13.8 billion. The unfunded liability of the funds — money they eventually will owe that they don't have — stands at $16.6 billion.
On Thursday, the legislature's Program Review and Investigations Committee will hear testimony about the results of changes that lawmakers made during a 2008 special session called to help stabilize the funds.
Among other things, lawmakers then pledged to pay more into the funds. They scraped together an extra $66 million this year alone, despite reductions to other state spending, although they're still not contributing even half of what studies say is needed to keep the funds solvent in the future.
Lawmakers also required employees who joined the state payroll after 2008 to work longer before retirement and contribute more toward their pensions.
But that hasn't solved the problems. Given the recession and continued painful cuts across the state budget, one key lawmaker says it might be time to reduce retirement benefits for current employees and retirees, despite the "inviolable contract" setting the terms for those benefits.
Colorado and Minnesota are trying that approach this year, prompting lawsuits by angry retirees who say their public pensions are sacrosanct. If the states win in court, other states could be emboldened to follow.
"We're definitely watching what happens in those other states," said Sen. Damon Thayer, R-Georgetown, chairman of the Senate State and Local Government Committee.
Thayer said the state is struggling to support workers who can retire as young as their late 40s and collect a guaranteed pension, with cost-of-living increases and free health insurance for the rest of their lives, sometimes passing the package along to their spouses after they die.
For this fiscal year, the legislature allocated $245 million for the state retirement funds, up from $178 million the previous year, according to the state budget office. Next year it's scheduled to jump to $285 million. That's nearly as much as Kentucky spends on its statewide judicial system.
"This isn't sustainable in the long run," Thayer said. "We've got a tremendous imbalance between those who enjoy the benefits of public employment and those who pay for it through their taxes."
"In the private sector, people have to work much longer than they do in the public sector before they can even think about retirement," he said. "In the last few years, private sector employees have had to deal with layoffs, wage cuts, with the disappearance of defined-benefits pensions in favor of 401(k)s, with big increases in the cost of their health insurance."
Just four years ago, there were 51,027 state workers contributing toward the pension fund and 34,120 retirees drawing benefits from it. By 2009, the number of workers slipped to 50,394 while the number of retirees leapt 19 percent to 40,531.
(In a separate fund for Kentucky State Police workers, there already are 239 more retirees getting pensions than active troopers on duty. County governments, served by a third fund, had 93,481 workers and 45,564 retirees.)
At the same time, benefits got a little richer for workers who left under the "incentive windows" the legislature created in recent years to encourage retirement and reduce the payroll. One such incentive let workers base their pensions on their best three years of salaries rather than their best five years.
These incentives cause headaches at the Kentucky Retirement Systems because they send droves of workers for the exit years earlier than expected, Burnside said. That produces more people taking money from the funds, fewer people giving money and less money to invest for gains, he said.
"We would be happy if they didn't do that again," Burnside said.
Most state employees hired before 2008 can retire after 27 years and collect a pension based on an average of their best-paid years of service. For instance, a worker who earned $50,000 a year would draw an annual pension of $27,000 for the rest of her life, plus cost of living increases. Workers who perform "hazardous duty," such as police officers, can retire after 20 years.
In the private sector, only about one in five workers still have a "defined-benefits" pension that guarantees payments for life, according to the U.S. Bureau of Labor Statistics.
The Kentucky Chamber of Commerce has used its Frankfort lobbying clout in recent years to call for a less generous public retirement package, in part because the costs help to starve other priorities, such as education.
"Clearly the state has tremendous financial problems now and we need to find ways to address this situation," said Dave Adkisson, chamber president.
Adkisson challenges the notion that government employees deserve better retirement benefits as compensation for salaries that are smaller than the private sector's. Based on the most recent data, Adkisson said, the average Kentucky state employee gets $40,900 a year, compared to $34,950 a year for the average private employee in Kentucky.
On the opposing side, state workers said they chose career paths based on the guaranteed benefits. For the state to renege decades later would be unethical, they said.
Jim Roberts of Frankfort had worked for the state Transportation Cabinet for 27 years when he retired in 2002 to draw his pension. He went back to work for the Legislative Research Commission for five years and retired again under one of the incentive windows, drawing a second pension.
He's now 57 and has no plans to return to the workforce.
"I'm comfortable. I haven't missed any meals," Roberts said.
Roberts said he understands the fiscal pressure the state faces, but for years, governors and lawmakers promised retirement benefits and chose to not put aside the money necessary to pay for them. It's not the employees' fault if there are looming solvency problems, he said.
"The General Assembly shouldn't be considering reducing our benefits as an option," Roberts said. "But from a retiree point of view, the General Assembly also knows there's nothing we can really do to stop them. They're only limited by their conscience here."
Rep. Kelly Flood, D-Lexington, is co-chairwoman of the legislative panel that will hear testimony about the pension funds on Thursday.
"We're prepared to hear bad news," Flood said. "But I don't want to send the message that Kentucky state employees who serve the public are the problem. I don't want to see them demonized. They've devoted their lives to public service, and we should not penalize them now for choosing this career path even if it means we need to raise the necessary revenues to make up the difference."