The controversial pension plan rushed through the Kentucky legislature Thursday night would do at least one thing Republican lawmakers vowed to stop this year: It would kick the can down the road.
“We are finally going to stop kicking the can down the road and get to full funding in these systems,” state Sen. Joe Bowen, R-Owensboro, said in February as he argued for his pension overhaul efforts.
However, under Senate Bill 151, lawmakers give the state and local governments six additional years to pay off their estimated $27 billion pension shortfall at Kentucky Retirement Systems.
And that breathing room — making payments on the unfunded pension liabilities through the year 2049 instead of 2043, which is the current plan — would come at a cost, according to an actuarial analysis of Senate Bill 1, which had identical language on changes to state employee pensions. (As of Friday, there was no actuarial analysis publicly available for SB 151’s proposed changes to teacher pensions.)
Jason Bailey, executive director of the Kentucky Center for Economic Policy in Berea, estimated the additional expense at $5 billion over the next 35 years. That would be $3.3 billion for the state pension systems and $1.7 billion for the local pension system, Bailey said.
Spreading contributions over a longer period of time requires larger sums at the end, he said.
“It’s just like you’re going to the bank and saying, ‘I want a six-year extension on my mortgage because I need more time to pay.’ The bank might give it to you, but if they do, it’s going to cost you,” Bailey said.
“I don’t necessarily think it’s the worst thing, because it will give some relief in the short term to our governments that are facing increased pension contribution costs in their next budgets,” Bailey added. “But it does sort of give the lie to this idea that our plans are in such a state of crisis that we absolutely have to throw everything at them right now. This shows that we can be flexible with ourselves when we want to be.”
A spokesman for Senate Republican leadership said Friday the bill reflects lawmakers’ commitment to eliminate the state’s more than $40 billion unfunded pension liability, which includes the debt at the Teachers’ Retirement System of Kentucky.
“There was a modification in the Senate committee substitute to SB 1 which changed, or ‘reset,’ the 30-year amortization period over which the new funding formula will eliminate the unfunded liability,” Senate GOP spokesman John Cox said. “Resetting this period does not reduce the General Assembly’s commitment to fully funding Kentucky’s public pension systems. It simply acknowledges the sustained fiscal discipline required to appropriate the billions of tax dollars required to fully implement the level dollar formula needed to save our public pension systems.”
Presently, Kentucky expects to pay about $1 billion to $1.1 billion annually into the largest state employee pension plan through 2039, when the pension plan is forecast to be 76 percent funded and the state’s contributions quickly would shrink to tens of millions a year. (That pension plan is now only 13 percent funded.)
Under the Senate bill, however, it would be acceptable for the pension plan’s funding to take longer to improve, so the state’s payments would start at $1 billion in 2018 and 2019 —about $100 million less than currently projected — and then stay at just under $1 billion a year through 2048.
The trend is similar for cities, counties and school boards with employees enrolled at the largest local government pension plan.
They currently expect to contribute a gradually escalating sum, starting at a combined $546 million this year and reaching $730 million in 2042, at which point their pension plan would be fully funded. The Senate bill gives local governments a more stable payment of about $550 million a year but keeps it at that level for six more years, through 2048, when it otherwise would have dropped to tens of millions annually.