Gov. Matt Bevin hasn’t yet publicly shared his plan for overhauling Kentucky’s financially ailing pension systems, but an email that his administration sent lawmakers recently provides a clearer picture of what he hopes to accomplish in a promised special legislative session this fall.
The email, sent Sept. 21 by Bevin’s legislative director, Bryan Sunderland, to all 138 members of the General Assembly, seeks to reassure lawmakers that switching public workers from a defined-benefit pension to a 401(k)-style investment plan won’t create huge transitional costs.
That recommendation was among several sweeping changes recommended by PFM, a consultant hired by the Bevin administration. Consultants also recommended slashing the benefit checks of current retirees and raising the retirement age for most public workers to 65.
“We continue to hear about the efforts being made by opponents of pension reform to create confusion about the PFM recommendation to transition from defined-benefit pension plans to defined-contribution plans,” Sunderland wrote. “A common misconception these outside groups offer is that transitioning from a DB plan to a DC plan results in a transition cost and therefore the recommendation should not be considered. This argument demonstrates a fundamental misunderstanding of how defined benefit plans are supposed to work and completely ignores the fact that the underfunded amount is owed regardless of whether a DB plan is being wound down or not.”
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Lawmakers were quick to distance themselves from the PFM report, which angered many teachers, police officers and government employees. Those groups have said they oppose moving to a 401(k)-style investment plan, which limits the government’s future liabilities by promising workers a contribution to their investment accounts instead of monthly benefit checks for life.
Closing the state’s traditional pension plans to new workers would cost the state more, they argue, because the contributions of current workers could no longer help pay for the benefits of current retirees.
In the email, Sunderland said Kentucky’s pension plans were never supposed to be using the contributions of current employees to help pay the benefits of current retirees. As the state cuts jobs and as the number of retirees increases, any plan that relies on current and future workers to fund existing retirees is unsustainable, he said.
“To assume that current and future employees are required to pay for today’s retirees is wrong — it perpetuates a system that cannot be sustained and completely ignores the reality of demographic changes we are experiencing in America,” he wrote.
Jason Bailey, executive director of the liberal-leaning Kentucky Center for Economic Policy, said Sunderland’s argument misses the mark.
In a response posted on his website, Bailey said closing the state’s traditional pension plans to new workers would lead to lower investment returns for retirees, and that would inevitably require more government funding.
A pension plan brings in better returns when it has workers of all ages, allowing it to maintain a portfolio aimed at long-term gains, Bailey argued. If a pension plan has only older members, it must invest more conservatively, he said.
Bailey cited several states that considered switching to a 401(k)-style plan but decided against it. Only three states — Alaska, Michigan and Oklahoma — have required such plans for government employees.
The email also emphasized Bevin’s desire to alter how governments make their pension payments. In the past, state and local governments have paid a percentage of employee salaries. In the future, Bevin and PFM recommend paying a set amount so that “declining payroll will not create additional underfunding,” Sunderland wrote. “We will be able to accurately determine the liability and fund it at a level that will fully fund the promises made.”
Select lawmakers have been meeting behind closed doors for weeks, drafting legislation to fix Kentucky’s pension systems, which have an estimated unfunded liability of more than $30 billion. Without change, the state will need to find an estimated $5.4 billion to finance the pension systems for state workers and school teachers in the next two-year state budget.
In an interview Monday with Freedom Works, a conservative news outlet in Washington, D.C., Bevin emphasized his desire to transition future employees into a 401(k)-style plan, saying that structural changes are necessary to save the pension system.
“You cannot have a system going forward that is a defined-benefit system for people not yet in the system. You just can’t do that, because there’s not enough workers,” he said.