The Kentucky Public Pensions Task Force recently completed its work and issued its recommendations. As a stakeholder, I view the task force's recommendations as a lost opportunity.
The task force proposes to accelerate the current phase-in of the actuarially required contribution for the Kentucky Employee Retirement System and State Police Retirement System to 100 percent beginning in fiscal year 2014-15. This is absolutely the right thing to do. The KERS non-hazardous fund is threatened with insolvency.
We are keenly disappointed, however, that the task force failed to propose a funding source. It is unfortunate that the pension task force worked independently of the Governor's Blue Ribbon Commission on Tax Reform. Obviously, the two bodies should have worked hand in hand to address the pension funding crisis. As it stands now, the task force is simply saying to the legislature: "We need to fully fund the actuarially required contribution, and we have no idea where to find the $327 million a year to do so."
Other recommendations included repealing any provision for cost of living adjustments for retirees. The General Assembly was well intended when it provided a COLA; after all, inflation robs retirees of spending power over time. But the legislature failed to pre-fund this benefit, to the detriment of the retirement system. In today's crisis environment, nobody can reasonably argue to maintain the COLA. But we see no reason to actively remove the COLA provision from state law. Erecting a barrier by requiring new legislation to re-instate the COLA is unnecessary; the legislature could simply continue to choose to suspend payment as it has done so for the current biennium. When the pension fund is once again stable, the benefit could then be resumed.
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The task force proposes to pack the Kentucky Retirement Systems board with three more appointees representing management interests in local government, thus diluting the elected representation of the board. This recommendation is a solution in search of a problem. The premise is that local governments are underrepresented on the board. In fact, the governor by law must appoint one representative with local government experience, and two other elected board members must be participants in the County Employees Retirement System.
It is unsurprising that the task force recommended that the current defined-benefit plan be abandoned for new hires starting next year. Both of the task force's consultants, the Pew Center on the States and the Laura and John Arnold Foundation, are advocates for replacing defined benefit plans. Throughout the task force's deliberations, one important point was glossed over: most state defined-benefit plans are financially stable and sustainable. Only in states victimized by legislative malfeasance, such as Kentucky's, are defined-benefit plans in trouble. Had the General Assembly provided adequate contributions and pre-funded a COLA, our fund would be strong today. Instead, for more than a decade, the General Assembly ignored its financial duty and shortchanged the retirement systems to the tune of $2.5 billion. Moreover, by failing to fully fund the retirement system, the General Assembly deprived the KRS of an estimated $500 million in potential investment income. In brief, legislative neglect created a burden for taxpayers.
The task force proposes a hybrid cash balance plan in which the legislature guarantees only accrued benefits. This provision betrays the pension promise. The Kentucky Supreme Court ruling in Jones vs. Board of Trustees, which upheld the inviolable contract, made no distinction between past and future benefits. New hires should not be treated as second-class citizens subject to the whims of the legislature.
Throughout the task force deliberations, a crucial point was ignored — that our current plan provides a meaningful incentive to attract and retain a talented workforce, and contributes $3.5 billion to Kentucky's economy annually. When properly funded, it efficiently allocates precious taxpayer dollars.
We call upon the 2013 General Assembly to carefully consider the path forward, and, unlike the deliberations of the task force, give due consideration to strengthening and maintaining the current plan. Taxpayers will be ill served if the legislature throws the baby out with the bath water.