Kentucky’s public pension debt just got a few billion dollars bigger.
On Thursday, the Kentucky Retirement Systems board of trustees approved more pessimistic assumptions about the investment returns for state pension funds and the growth of state government payroll. The board debated but delayed voting on a similarly stark set of assumptions for local governments and their pensions.
Under the new numbers presented to the board, KRS’ official unfunded pension liability of $18.1 billion will increase by somewhere between $3.6 billion and $4.5 billion, KRS executive director David Eager said.
“It’s going to be painful,” Eager said. “The contribution rates (for the state) are going to go up considerably.”
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Following Thursday’s board vote, the primary state pension fund operated by KRS — known as the Kentucky Employees Retirement System (Non-Hazardous) — has only 13.81 percent of the money it is expected to need in coming years, down from 15.97 percent. That fund covers 122,146 active state workers and retirees.
Likewise, the funding level for the system covering 2,565 active and retired Kentucky State Police troopers and their families dropped from 30 percent to 26 percent.
Given the stark numbers, state government’s contributions to the pension systems starting in 2018 will have to be “significantly higher, on an order of magnitude,” said board chairman John Farris. Where the state was supposed to contribute 41 percent of each employee’s salary cost toward the pension system, that now will be 66 percent.
“The most important function of our board is to give correct numbers to the legislature,” Farris said. “If we don't do that, if we continue to rely on aggressively optimistic assumptions, then we will continue to fall behind.”
KRS, already considered one of the country’s worst-funded state retirement systems, is responsible for providing pensions to about 365,000 past and present employees of state and local governments. Last year, it paid $1.9 billion in pension benefits, up from $1.8 billion in 2015.
The KRS board agreed in February to reconsider the assumptions it uses to decide how much money will be necessary to keep pension benefits flowing in coming decades.
KRS had assumed that it would earn from 6.75 percent to 7.5 percent on money it invested; it assumed that public payroll would grow by 4 percent a year; and it assumed an inflation rate of 3.25 percent. All of those numbers look unrealistic, Farris told his fellow board members in February, shortly after Gov. Matt Bevin appointed him.
The KRS board hired Milliman, a Seattle-based actuarial consultant, to come up with a less rosy but more realistic set of assumptions.
Under the numbers approved Thursday, KRS now assumes a 5.25 percent investment return for the pension funds for most state workers and Kentucky State Police; 0 percent payroll growth; and an inflation rate of 2.3 percent.
When Farris asked the board to adopt a reduced set of assumptions for local government pension funds in the County Employees Retirement System, which are in a relatively stronger position financially, there was protest from the trustees elected by public employees and retirees.
Betty Pendergrass, elected by local government employees and retirees, said she would prefer to see the assumed investment return for CERS lowered from 7.5 percent to 7.25 percent, rather than 6.25 percent, as Farris proposed. Assuming too low an investment return puts an unreasonable burden on local governments to contribute more money than they need to, Pendergrass said.
Elected trustees also said they wanted a 2 percent payroll growth assumption for CERS instead of the 0 percent that Farris proposed. Data presented by Milliman on Thursday showed the member growth rate for the chief fund for local government workers at negative 1.11 percent over the last five years and the member growth rate for the chief fund for state workers at negative 4.12 percent.
In reply, Farris, a Lexington economist, said he manages Centre College’s endowment. Although that endowment is well-managed and doesn’t face the political pressures the state pension agency does, it recently lowered its assumed rate of return from 7 percent to 5 percent, given current market realities, he said.
“We (at KRS) have been aggressive in our assumptions for many years — aggressively wrong,” Farris said. “And we wonder why we’re underfunded.”
Unable to reach an agreement, the board delayed a decision for CERS’ assumptions until a future meeting.
Bevin frequently calls Kentucky’s unfunded pension liabilities “a crisis” that will demand more money from state government. Although no plans have been set, there is speculation that Bevin will call a special legislative session later this year to address the state’s tax code and its pension systems.
In recent years, the state has committed to spending billions of dollars more on its beleaguered pension systems as partial compensation for roughly 20 years of inadequate funding under the previous three governors. That has meant less money is available for education, social services, infrastructure and other state priorities.
“Governor Bevin has made it clear from the beginning that we must honor our commitment to Kentucky’s public retirees and strengthen our financial foundation for future generations,” Bevin spokeswoman Amanda Stamper said in a prepared statement Thursday. “Thank you to Chairman John Farris and the KRS board for providing an honest and realistic view into our crippling pension crisis.”
As the outlook has darkened for KRS, local governments have tried to break away from the agency, unsuccessfully so far, and some nonprofit agencies that joined in better times have applied to leave.
Apart from KRS, the state’s other major pension agency, Teachers’ Retirement System Kentucky, covers about 123,000 K-12 school teachers, regional university faculty and state Department of Education employees. KTRS faces a $14.5 billion unfunded liability.