Kentucky’s public pension crisis has become a political football in the fight for control of the House, as Democrats and Republicans play pin the blame on each other.
No matter which party prevails on Nov. 8, lawmakers and Gov. Matt Bevin will face a hard reality: Huge money infusions, repeated annually, are the only way to make up for years of underfunding and save the state employee pension fund, now the nation’s worst funded, and other state pension funds that are in only slightly better shape.
Governors and legislators — of both parties — shortchanged pensions because it was easier to borrow from future and current retirees than to raise taxes or make budget cuts.
Bevin, to his credit, prioritized pensions in his first budget, despite having to make unpopular cuts. But the sources of much of the money Bevin and lawmakers pumped into pensions are non-recurring, most notably a $500 million surplus in the state employees’ health plan.
The governor doesn’t have to propose another budget until 2018; by then Kentucky should decide how to increase tax revenue, not just to avoid pension insolvency but also to pay for education, infrastructure and other needs.
The first place to look is the maze of loopholes in Kentucky’s tax code. By the end of this budget cycle, tax exemptions or “tax expenditures” as they are called are projected to exceed general fund revenue by $1.8 billion. As a candidate, Bevin expressed a desire to patch the tax code’s many holes; as governor, he has no choice. Another place to look: the 2012 Blue Ribbon Commission on Tax Reform.
It’s also true that the Kentucky Retirement Systems staff and board have made questionable decisions about managing assets, most recently, as the Herald-Leader’s John Cheves reported, by increasing the investment in an underperforming opaque hedge fund designed for Kentucky that invests in other opaque hedge funds.
One of Bevin’s KRS board appointees, David Eager, made the motion at a May committee meeting to increase the target allocation for the Prisma Capital Partners’ Daniel Boone portfolio from 3.3 percent to 5 percent of KRS assets.
Over the last three years, the Prisma fund has returned 1 percent while the Dow rose 15 percent.
Eager on Sept. 1 became the interim director of KRS and wants to be considered for the permanent post. Another Bevin appointee, William S. Cook, retired from Prisma’s management in March 2015. He will abstain from action related to the firm in which he still has holdings.
Despite the controversy and lawsuits sparked by Bevin’s June 17 executive order increasing his sway over the pension board, people are wondering how much change his appointees will bring. Bevin also ordered that KRS’s contracted investment advisers adhere to the CFA Institute’s professional conduct code, also a requirement in the Republican Senate’s pension legislation that died this year in the House. Prisma is not among the firms that committed to abide by that code.
Democratic House Speaker Greg Stumbo last week tried to make political hay of the Prisma investment, while Republicans accused Stumbo of using a pension briefing as a pretense for paying Democrats for a day of legislative work when his real goal was to get them to a caucus and fundraiser.
Political posturing aside, Kentucky’s pension funds could not possibly invest their way out of the death spiral brought on by years of underfunding.
There’s no shortage of blame. What’s needed is the backbone to push through tax reform.