Kentucky’s unfunded public pension liability has grown from $30.5 billion to $32.6 billion, a debt that threatens to undermine every other service the state provides, an oversight panel was told Monday.
The financial outlook continued to weaken in Fiscal Year 2016 for the Kentucky Retirement Systems and Kentucky Teachers’ Retirement System, from which 487,000 people combined either draw pensions or expect to in the future.
Kentucky’s pension problem resulted from two decades of inadequate contributions from the state, a shortfall the legislature has only addressed in the last few years; weak investment returns; and unrealistic assumptions about how many public employees there would be (fewer than predicted), how much they would earn (less than predicted) and how long they would live (longer than predicted).
“If you think of it as a bathtub, the water is going down,” KRS interim executive director David Eager told the Public Pension Oversight Board during Monday’s hearing. “We are where we are, and we’re going to work to get our way out of it.”
The primary KRS pension fund for state government employees has only 16 percent of the assets it’s expected to need to cover promised benefits, down from 17 percent in 2015. The chief KRS fund for local government employees has 59 percent of the assets it’s expected to need, down from 60 percent. The KRS fund for Kentucky State Police has 30 percent of the assets it’s expected to need, down from 33 percent.
For KTRS, which covers K-12 school teachers, regional university faculty and state Department of Education employees, the 2016 funded level was 54 percent, down from 55 percent.
A rare bright spot: Public pensions for most of Kentucky’s part-time legislators, kept in a separate system, are 79 percent funded, the same as last year.
“Keep on keepin’ on,” the oversight panel chairman, state Sen. Joe Bowen, R-Owensboro, told officials from the legislative pension fund.
The situation is about to improve somewhat for teachers. Last winter, the General Assembly agreed to put an additional $973 million into KTRS over fiscal years 2017 and 2018, which is roughly twice what the state is paying into the fund annually for its employer contribution. That extra sum will partly offset KTRS’ losses, which totaled $1.2 billion last year, said its general counsel, Beau Barnes.
Cash flow was so difficult at the $17 billion KTRS in 2016 that it was forced to sell $650 million in assets to keep benefits checks flowing, which meant losing money on some investments during market slumps, Barnes said.
“That’s a permanent loss for us, when we sell a stock that’s under-valued,” Barnes told the oversight panel.
KRS’ state employee pension fund, which has collapsed from 85 percent funded to 16 percent over the last dozen years, should turn around now that Gov. Matt Bevin and the legislature have committed themselves to fully funding its annual required contributions, plus kicking in whatever extra money can be located, Eager said. Hundreds of millions of dollars that were supposed to go into pensions were diverted and spent elsewhere under governors Paul Patton, Ernie Fletcher and Steve Beshear.
However, the numbers could get worse for KRS before they get better.
When it plans for the future, KRS assumes the state employee pension fund will earn a 6.75 percent return on its investments. In reality, the 10-year return has been 5 percent, so there is some thought of lowering the assumed rate of return to a more realistic 5.75 percent, Eager said. While that would give the state a clearer look at its pension liabilities, it also would lower the funded level overnight from 16 percent to 14 percent and require the state to pay in even more money every year.
“Part of what we’re trying to balance is, what is realistic and what can we afford to do?” Eager said.
Bowen, the oversight panel chairman, said lawmakers are looking forward to getting the independent audits being conducted at the public pension systems as Bevin ordered. The audits are due by Dec. 31 so lawmakers can act on recommendations during the 2017 session.