Gov. Matt Bevin’s plans to railroad massive changes to Kentucky’s public pension systems through a five-day special session appear to have been derailed by his party’s sexual harassment scandal.
On Thursday, cold, hard numbers dealt another blow to this ill-made plan. The first serious analysis of the proposal’s financial impact showed that, for the Teachers Retirement System, Bevin’s “reforms” would cost an extra $4.4 billion over the next 20 years.
The consulting firm Cavanaugh McDonald figured that Bevin’s proposed changes to TRS would leave it at 71.3 percent funded in 2038, a deficit of $11 billion. But, the firm calculated that if the state retains the current system and makes its required contributions each year, TRS would be 80.6 percent funded in 2038, with a deficit of $9.6 billion.
And that’s for just the Teachers Retirement System. The official scoring, or actuarial analysis, of the proposed changes on the much larger Kentucky Retirement Systems has not been released.
So, what we have now is a plan that will leave almost all teachers poorer in retirement and cost taxpayers more money. Why, oh, why does anyone think this is a good idea?
Many don’t, as thousands have shown up to express in forums held all over the state. Wednesday night over 500 people attended a meeting in Paducah with three legislators. “The audience was palpably opposed to the proposed measure,” according to a report on WKMS, Murray State’s public radio station.
The only Republican at the forum, Sen. Danny Carroll, supported Bevin’s approach in theory, but said, with no actuarial scoring at that point, he hadn’t committed to voting for it. “For me that’s been very frustrating to have a plan that’s been issued without any statistics to back up anything that’s been proposed,” Carroll said. No word on Carroll’s position since the actuaries said Bevin’s plan would cost more money.
Actually, no one should have been surprised by this scoring. Pension plans benefit from the ability to diversify investments because of their huge size and the liquidity they achieve from current employees paying into the plan — meaning they don’t have to constantly sell investments to pay retirees and so can invest for the longer term.
When new employees are shunted out of the pension fund and into individual plans, as Bevin proposes, that liquidity dries up, so the funds must invest more conservatively to assure they will always have cash on hand to pay benefits.
The state will be on the hook for decades to those now in the retirement system, a burden that would increase as investment returns fell. The state would also be obligated to match employee contributions into individual retirement accounts.
And this doesn’t even take into account that virtually no one, except very wealthy people who use 401(k)s to shelter income they don’t need during the working years, retires with enough in that type of account to enjoy a secure retirement. Among the millions of private sector employees who have been shunted out of pensions into 401(k) plans, the average family savings in the plan is $95,776, hardly enough to stay afloat through years of retirement.
That’s why three states that have made changes similar to those Bevin’s proposing have switched back, including neighboring West Virginia. David Haney, executive director of West Virginia’s education association, warned legislators not to repeat his state’s mistakes in these pages last month.
Shifting new employees into 401(k)-style plans, “will only saddle your state with more debt and cause hard-working public employees to lose their retirement security,” he wrote.
It’s a sobering warning, one Kentuckians across the state are sounding, that was reinforced by the actuarial report. Legislators will put their political futures and, worse, the state’s economic stability at risk if they don’t heed it.