FRANKFORT — Vicki Cunigan is a tiny part of the $9.1 billion state pension shortfall the Kentucky legislature ignored this winter.
Until she retired in 2004 at age 50, Cunigan was an examiner at the Kentucky Department of Revenue, collecting delinquent taxes from businesses. As a state retiree, Cunigan gets a pension — currently about $40,000 a year — for life.
Or for now, anyway.
Cunigan is paid from a fund called the Kentucky Employees Retirement System (Non-Hazardous). It has only 21 percent of the money it will need for future expenses — compared to 80 percent for the average state retirement plan in this country — and its funding is expected to drop as low as 15 percent in coming months. Starved for revenue, it's cashing out investments to keep payments flowing to retirees like Cunigan.
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"I'm angry and frustrated," Cunigan, 60, said in a recent interview. "If something doesn't change to improve the funding, or if we get another recession, then I don't see how we can keep the retirement system going, especially for the younger workers."
Nothing will improve the funding this year for the Kentucky Retirement Systems, which cover 348,123 active, inactive and retired employees of state and local government. (Cunigan's pension fund is one of five under the KRS umbrella.) The 2015 General Assembly, set to end Tuesday, has taken no action to commit additional money to KRS, despite the recommendations of a pension oversight board and state retiree groups.
"Once they get into the next budget, next year, we realize the need for more pension funds is going to be in competition with a lot of other state services. That's why we wanted to get it sorted out now, and before this gets to a truly catastrophic level," said Paul Guffey, president of Kentucky Public Retirees.
Lawmakers have debated this year whether to help the state's other public pension fund, the Kentucky Teachers' Retirement System, which covers more than 141,000 educators. Depending on how one crunches the numbers, KTRS either has 53 percent or 45 percent of the money it will need for future expenses. Either way, it's about $14 billion short. That alarms Kentucky teachers, who are not enrolled in Social Security.
The Democratic-led House approved a bill to authorize $3.3 billion in "pension bonds" for teachers. The state would borrow a huge sum at relatively low interest rates, funnel the money to KTRS and hope that agency could make a profit by investing it on Wall Street and elsewhere.
The Republican-led Senate criticized that plan as too risky and replaced it with a proposed task force that would study the "problem" of teacher pensions. Some lawmakers want an overhaul of the system before borrowing money to prop it up, saying its benefits are too generous.
A conference committee is trying to reach a compromise on the bill before the session ends Tuesday.
"This is an unsustainable system," said Rep. Brian Linder, R-Dry Ridge, during a House floor debate on teacher pensions last month. "The taxpayers who will be on the hook to bail out our unsustainable pension plans deserve better."
Looking for security
Lifetime pensions after 27 years of service were part of the employment package in 1977 when the state of Kentucky hired Cunigan, then a 23-year-old divorcee supporting her 18-month-old daughter. State workers could even buy five years of "air time" and retire earlier.
A Frankfort native, Cunigan's parents also worked for the state, her father in computer programming and her mother in social services. When Cunigan later remarried, it would be to yet another state employee, a concrete inspector for the Transportation Cabinet.
Everyone knew that state jobs led to a safe, comfortable retirement, Cunigan said. Today, Franklin County alone is home to 6,630 state retirees who collect $180 million a year in pension benefits.
"I was told up front that I would pay around 8 percent of my salary, and the state would pay its share, and when I retired, I would have a pension," she said. "It was a big incentive for me because I thought, 'Here I am raising a daughter by myself, and I'm gonna one day want to retire and have some security.'"
The state pension system was sustainable for many years. In 2001, it actually had 125 percent of the money it was expected to need for future expenses.
The next year, though, Gov. Paul Patton and the General Assembly faced a lean state budget. They chose to divert about $30 million from the state's annual recommended contribution to the pension system and spend it elsewhere.
With every paycheck withholding, Cunigan contributed her agreed-upon share — about $4,800 a year — to sustain the pension system. The state no longer did.
"We don't believe this will jeopardize in any way pension benefits," state budget director James Ramsey told the Herald-Leader in 2002 when it asked about the diverted $30 million.
Cheating on pension contributions proved a hard habit to break.
Over the next dozen years, hundreds of millions of dollars were diverted and spent elsewhere under governors Patton, Ernie Fletcher and Steve Beshear. The state pension system became Frankfort's piggy bank. Politically, it was easier than raising taxes or cutting projects, some of which — like the Robert Stivers Appalachian Rural Wellness Initiative Center in Barbourville and the James E. Bruce Convention Center in Hopkinsville — carried the names of powerful state lawmakers.
Simultaneously, to trim the public payroll, state employees were offered fattened retirement benefits to induce them to quit early. Cunigan herself retired in 2004 at the start of the Fletcher administration. Yet the state failed to set aside the funds to pay for the generous benefits promised to this wave of early retirees, who would collect more money, for more years, than KRS had anticipated.
By the time the stock market collapsed in 2008, the fund that supports Cunigan already was drained to 52 percent of what it needed for future expenses. All of the country's public pension systems suffered for a few years until investments could recover from the collapse. Most bounced back. Kentucky's never did.
KRS officials say they don't have sufficient assets to make the large, long-term investments that yield enough to offset payouts. Last year, despite an investment return of about 15 percent, the fund that pays Cunigan's pension declined in value by $182 million.
"Pension funding is simply a story of fiscal discipline," Alicia Munnell, director of the Center for Retirement Research at Boston College, wrote in her recent book, State and Local Pensions: What Now?
On average, the states managed to pay 91 percent of the recommended contribution into their pension systems from 2001 to 2013, so the average system is funded at a respectable 82 percent of what it needs for future expenses, Munnell said. That's not true for states like Kentucky, she said, where leaders showed no fiscal discipline and the public "should be hysterical."
"Before the two financial crises of the past decade, most plans were in reasonably good shape. And in the wake of the crisis, plan finances have begun to stabilize," Munnell wrote in her book. "Sponsors of seriously underfunded plans, such as those in Illinois, Kentucky, Louisiana, New Jersey and Pennsylvania, have behaved badly."
'You feel uneasy'
During this winter's debate over teacher pensions, the General Assembly pointed with pride to how it has managed the state pension system.
In 2013, lawmakers approved a pension reform plan that switched newly hired state workers to a less generous 401(k)-style "hybrid" plan and tweaked the tax code to generate an extra $100 million for the state pension system. Most significantly, it committed the state to making the full recommended pension contributions every year, a pledge that lawmakers so far have kept.
Lawmakers already had required state employees hired after September 2008 to work at least until age 57. Retirement lasts longer than it once did. When the legislature established the state pension system in 1956, average life expectancy in this country was 66 for men and 72 for women. Now it's 76 and 81, respectively.
Senate Republican leaders say the legislature should try something similar with the teacher pension system, where the state has rejected pleas for full and adequate contributions since the 2008 recession. Teachers might be required to work longer before they can retire and pay more out of their salaries toward their pension costs, senators say.
As for the continued decline of the state pension system, Senate President Robert Stivers blames "a series of things — bad markets, bad performance, investment wasn't quite as good as it should have been" — not the legislature. But Stivers said he's optimistic about the future.
"You won't see it this year, you won't see it next year, but you get five, six, seven, eight years out, you'll start to see that unfunded liability be diminished," Stivers, R-Manchester, said in January. "We have made a commitment to make sure those systems are sound."
State retirees are far less confident.
Jim Carroll, co-founder of a Facebook group called Kentucky Government Retirees, said KRS officials have advised pensioners to "set aside emergency savings to prepare for the remote possibility that pension payments will be disrupted because of a lack of pension assets."
Over the winter, KRS talked with its consultants about the possibility of keeping itself solvent through a $5 billion pension bond from the state.
"At this point, yes, we probably need more money for the KERS Non-Hazardous plan than just the full (annual required contribution) the legislature has committed to," KRS executive director Bill Thielen said last week. "Where they come up with the money is up to them. But we have a significant negative cash-flow problem in that fund that needs to be addressed."
Meanwhile, some nonprofit agencies and local governments are fighting to cut ties with the beleaguered state pension system. Last May, U.S. Bankruptcy Judge Joan Lloyd ruled that a Louisville mental-health nonprofit, Seven Counties Services, could exit KRS. In her order, Lloyd blamed the legislature for creating an unsustainable mess by failing to make adequate contributions for so many years.
Linda Funk of Elizabethtown, a retired social worker for the state Cabinet for Health and Family Services, said she's "not all that sure" she will get to keep her pension, currently about $36,000 a year.
"We're at a time in our lives where we already feel vulnerable financially, and we want to feel secure," Funk said. "But when you keep hearing about our pension system, and you see headlines about bankruptcies elsewhere in places like Detroit, where public pension obligations are excused, it does make you feel uneasy."
As for Vicki Cunigan, the second-generation state retiree in Frankfort, she's relieved that her daughter, a certified public accountant, took a corporate job at Louisville-based Papa John's Pizza.
"It's a different situation in state government now in terms of the benefits and security," Cunigan said. "If you're a young person interested in getting a higher salary with a good retirement, I think you can do better for yourself on the outside, in the private sector."