I understand a discussion about pensions is about as welcome as Lyme disease. But, while much has been written about who is to blame for Kentucky’s pension crisis, very little has been written about why those of us who don’t have pensions should care.
Here is why we should care: because if this is not fixed, Kentucky will slide back rather than be able to invest for our economic future.
Enjoy the state parks? You might have to take the kids to Opryland instead. Appreciate the opportunities public schools and public universities offer? Well, get ready to sell more wrapping paper and explain to your student that history didn’t end in 2002, despite when the textbook was published.
A quick review of the problem: $36 billion is the total of the pension systems’ unfunded liability, meaning that’s the amount we’re short to pay present and future promised benefits for retirees and employees in the systems. That number varies depending on who is doing the calculation and what assumptions they use, but I’ll stick with $36 billion for our purposes here.
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The governor has said he will call a special session this fall to address this pension problem. Here is a secret: At best, whatever changes they make to the retirement plans will only stop the hole — the $36 billion — from getting deeper. It won’t fill the hole.
The hole won’t get addressed until the 2018 regular session when the legislature will write the budget. That’s when they will have to figure out how to fund that $36 billion. The preliminary estimate of how much additional state money is needed is $600 million — each and every year for a very long time.
Here are the legislature’s three broad options:
1. Do nothing, always an option in Frankfort, and hope changes made in the special session will not only stop the hole from getting deeper but will eventually help fill the hole, too.
This option is not only irresponsible but it has consequences, such as a lower credit rating that will increase borrowing costs for things like schools and infrastructure. Doing nothing will not only not solve the problem, it will make things worse.
2. Cut roughly $600 million from the state budget and redirect that money to pay pensions. Sen. Chris McDaniel, chair of the Senate budget committee, was recently quoted as saying all areas of government would have to be cut 12 percent, including K-12 education, to fill the hole. A 12 percent cut to K-12 is equivalent to roughly $350 per child in every school district in the state. Not a viable option.
3. Comprehensive tax reform. Adding one penny to the state sales tax will raise approximately $570 million each year. If the base on which sales tax is charged expands, it would raise more. In addition, about $10 billion in tax credits and exemptions are applied to a variety of activities — some have outlived their usefulness and should be eliminated. Some, such as the exemption of sales tax on groceries, count for a big chunk of that $10 billion and won’t be eliminated. Others, however, need to go away.
Having spent more than 20 years around the General Assembly I’m not politically naïve — I know this is hard. And I welcome a tax increase with roughly the same enthusiasm as a bad haircut. But I am willing to bite the bullet so that we as a state can finally again invest in our future.
Kentucky is a special place with amazing people — a place that needs to continue to educate people at all levels as well as create and attract more jobs. Let’s cut the chain on this anvil that we’ve collectively been carrying around for the last two decades so we can focus on investing in our future rather than our past.
Stephen R. Byars is vice president of Moneywatch Advisors in Lexington; he blogs at lexingtonfinancialplanner.blog/.