FRANKFORT — Leaders of the largest pension system for state workers learned Wednesday morning that it has only 21 percent of the money it's expected to need for future payouts, down from 23 percent in 2013 and continuing a steady decline during the past decade.
Hours later, officials with another pension plan, the Kentucky Teachers' Retirement System, or KTRS, urged state lawmakers to consider issuing a 30-year bond of $1.9 billion or $3.3 billion to boost its sagging pension fund, which has 51 percent of the assets it's expected to need for future payouts.
"That's a big bond," Beau Barnes, KTRS deputy executive general counsel, told the Interim Joint Committee on State Government in a hearing room packed with retired teachers. "Of course, we have a very big financial challenge on our hands that's just getting worse. It's not going to go away on its own."
Lawmakers rejected a similar request from KTRS during last winter's legislative session, arguing that the state budget could not afford the hundreds of millions of dollars in additional debt service such a bond would require. Some compared the idea to a worker making 401(k) retirement account contributions using his credit card.
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This time, KTRS officials modified their pitch, warning that the state already owes this pension liability to teachers through their inviolable contracts, and it's a debt that has damaged the state's credit rating. With interest rates near record lows, KTRS could invest money from bonds on the stock market and elsewhere, and fatten the teachers' pension fund, they said. It's like refinancing a mortgage at a cheaper interest rate, they said.
"We are asked, 'Aren't we just creating new debt?'" Barnes told the lawmakers. "The way we look at it, we already have a debt here. We're not really creating a new debt. We're just refinancing it in a smarter way at lower interest rates."
House Speaker Greg Stumbo, D-Prestonsburg, said he was one of the lawmakers skeptical about a teachers' pension bond during the last legislative session. But having considered it some more and having watched interest rates stay near record lows, Stumbo said his mind was open this time.
"If the rates are favorable, as they are right now, then this plan has great merit," he said. "I am convinced this is a fundamentally sound proposal, and if we don't act soon, we may lose this window of opportunity."
After the hearing, Barnes said KTRS officials were actively lobbying House and Senate members, including Senate President Robert Stivers, R-Manchester, to win their support during the 2015 session that begins in January. The legislature agreed in 2010 to issue three bonds for nearly $900 million to strengthen the KTRS fund that pays for retired teachers' health care benefits.
KTRS is recommending the new bond could be paid for by redirecting hundreds of millions of dollars from two sources, Barnes said: savings from the money budgeted to pay off the 2010 bond, which will begin to decline next year, and assorted other retiree assistance the state pays for, such as cost of living adjustments, sick leave and medical insurance subsidies.
More than 141,000 people are enrolled in the $18.5 billion KTRS, including nearly 50,000 retired teachers and survivors who currently are receiving pension and health care benefits. On average, teachers retire in their mid-50s, Barnes said, and they are not eligible to participate in the Social Security system, making the pension their sole source of retirement income.
Across town Wednesday, an audit committee at the Kentucky Retirement Systems, or KRS — which provides pensions and health care for state and local government retirees — got its first look at its 2014 unfunded liability numbers.
The retirement systems for county employees and state police appear to be stabilizing somewhat, based on preliminary numbers, officials said. But the $2 billion Kentucky Employees Retirement System, or KERS — which includes 118,325 people in non-hazardous jobs — has only 21 percent of the money it's expected to need for future payouts.
This was the first fiscal year under a pension reform plan in which the legislature paid the full annual required contribution — known as the ARC — into KERS, but it likely will take several more years of full ARC payments before funding levels rise, said Bill Thielen, KRS executive director. Despite an investment return of about 15 percent, the KERS pension fund lost $182 million for the year.
"If you don't have the assets to invest, you don't gain as much," Thielen said.