‘No more pretending.’ Kentucky issues dire warning on pensions to local governments

Kentucky’s local governments may have to contribute up to 60 percent more money next year to provide pensions for their employees, State Budget Director John Chilton warned city and county leaders in an email Thursday.

Unless lawmakers make “structural changes” to the state’s public retirement systems this fall during a special legislative session, scores of local governments will have to make payments into the County Employees Retirement System that equal between 29 percent and 51 percent of their total payroll, depending on the type of employee involved, Chilton wrote.

For the Lexington-Fayette Urban County Government, pension payments to CERS, currently $19.6 million, would jump by $10.3 million. The Fayette County Board of Education’s payment, currently $10.3 million, would leap by $5.2 million. Some of Eastern Kentucky’s coal-mining counties, already struggling to pay their bills amid a collapsing tax base, would need to find an extra half-million dollars or more.

“Clearly, a 50 percent employer match increase for school districts would be untenable,” Fayette County schools superintendent Manny Caulk said Thursday. “We have confidence in the collective leadership of the commonwealth to come together and find a long-term solution that will not divert critical resources from students at a time when we are working hard to close both the achievement and opportunity gaps.”

Betty Pendergrass, a local government finance consultant who represents CERS on the Kentucky Retirement Systems Board of Trustees, said it’s important to remember the higher pension rates are “not a one-time cost, it’s something that we’re going to have to pay every year going forward.” KRS oversees CERS and other retirement systems for state government employees and state police.

“The first thing you cut in this situation is capital projects,” Pendergrass said. “If you were going to build a ball field in one of your parks or you were going to buy a new firetruck to replace outdated equipment, you delay that for a while so you can find some money for your pension payment. The next thing you do is delay any hiring. You leave empty places on your payroll. And you won’t be giving out any raises. But I’ll tell you, since the 2008 recession, most governments don’t have much wiggle room on their payroll. Most of them never have staffed up again. There’s not much left to cut there.”

The full list of public employers being told to dig deeper runs for 30 pages and includes city halls, county fiscal courts, sheriff’s departments, county clerks, county attorneys, school boards (for non-teaching jobs only; teachers are enrolled in a separate pension system), libraries, fire departments, sanitation districts, utility systems, ambulance services, community action agencies, housing authorities, ambulance services and area development districts.

“It’s going to be tough, especially for those coal counties that already have taken so many hits with the decline in mining and the loss of coal-severance dollars,” said Shellie Hampton, government relations director for the Kentucky Association of Counties. “But even in other counties, everyone has been trying to operate as efficiently as possible and not raise taxes.”

Overall, Chilton wrote Thursday, Kentucky’s local governments would have to scrape together an extra $345.5 million in the fiscal year that starts July 1, 2018.

“To address budgetary implications to the commonwealth and to all employers, priorities must be set and choices must be made,” Chilton wrote. “Unfortunately, the choices are not happy choices — make structural changes to the pension plans and/or reduce other spending.”

The increases are driven primarily by revised financial assumptions that the KRS Board of Trustees adopted earlier this year. The board had previously assumed a 7.5 percent rate of return on investments, but that was lowered to 6.25 percent based on what KRS was actually seeing in its investment portfolio. The board also assumed a payroll growth rate of 4 percent, but it cut that to 2 percent to reflect stagnant government salaries and declining numbers of public workers.

Based on the new assumptions, the unfunded pension and insurance liabilities of CERS — which covers 229,205 people — rose from $7.4 billion to $9.5 billion.

Chilton said Gov. Matt Bevin and state lawmakers believe it is important to embrace the revised financial assumptions.

“No more pretending that everything is just fine,” he wrote. “Everyone needs to understand the severity of the situation. To do otherwise will lead to solutions that fall short of solving the problem.”

Bevin is expected to call a special legislative session later this year for lawmakers to consider changes to KRS and to the Teachers’ Retirement System of Kentucky, which together face tens of billions of dollars in unfunded liabilities.

The PFM Group, pension consultants hired by Bevin, released a list of recommendations last week that included an end to defined-benefits pensions for state workers and school teachers in favor of less generous defined-contributions accounts; a raise in the retirement age to 65 for most workers; and the “clawback” of a previously awarded cost-of-living adjustment to some retirees that could reduce their future benefits by 25 percent.

In its report, The PFM Group observed that local governments have dutifully made their full recommended contributions every year to CERS, unlike the state government, which most years since 2001 has failed to make its full recommended contributions for state employees enrolled in the Kentucky Employees Retirement System. As a result, as of June 2016, the primary KERS fund had a funding level of only 14 percent, while the primary CERS fund stood at a healthier 59 percent.

Given this long history of compliance, and to avoid “sudden and volatile changes” in contribution rates, lawmakers should consider imposing a cap of no more than 5 percent to 10 percent on annual pension cost increases for local governments, the consultants wrote. That would seem to contradict what Chilton is now proposing, Pendergrass said Thursday.

“Even PFM says the local governments should be allowed to phase in significant increases,” Pendergrass said. “I wonder which is fair.”

There is a rising movement among Kentucky’s local governments to break away from KRS and establish their own independent pension system. CERS holds 63 percent of KRS’ members and 73 percent of its assets, and it’s far better funded than the systems for state employees and state police, said Bryanna Carroll of the Kentucky League of Cities. But the state firmly controls the KRS board through gubernatorial appointees and legislative action, Carroll said.

This story was originally published September 7, 2017 at 2:45 PM with the headline "‘No more pretending.’ Kentucky issues dire warning on pensions to local governments."