The Herald-Leader recently reported on the deepening crisis in Kentucky public pensions and the critical need for prompt action. We learned that the pension plan covering most state employees, known as the Kentucky Employees Retirement System non-hazardous fund, continues to decline in value. It now stands at a dangerous level in which available revenue covers only 23.2 percent of its obligations.
As a state retiree and taxpayer, I find no comfort in saying "I told you so."
A year ago, in an op-ed piece published in the Herald-Leader, I documented the continuing decline in the KERS non-hazardous fund. The General Assembly has consistently starved the pension system for cash by failing to allocate the full employer contribution. This fiscal mismanagement has taken place 14 out of the last 21 years.
Currently, the General Assembly is paying only 57 percent of the calculated contribution rate. Meanwhile, state employees year-in and year-out have made their full employee contributions.
Public retirees hoped that the 2013 General Assembly would create a dedicated source of revenue to accelerate the employer contribution and help return the KERS non-hazardous fund to financial stability. Our Facebook community, Kentucky Government Retirees, coordinated letter-writing and phone-call campaigns urging our lawmakers to step up and solve the crisis. Unfortunately, we were ignored.
The legislature spent weeks shepherding through so-called pension reform measures that have no impact on the unfunded pension liability. The centerpiece of this effort, Senate Bill 2, establishes a new defined-contribution plan that provides reduced benefits for new hires starting Jan. 1, packed the Kentucky Retirement Systems board with three special-interest appointees and created yet another advisory board in Frankfort.
None of these changes addressed the pension problem, which is simply underfunding. The legislature did pass a cobbled-together, last-minute House bill that creates roughly $100 million in new revenue a year. But there was no attempt to designate the new money specifically to the pension fund. The revenue goes into that huge pot of money called the General Fund. Yes, it is the intent of the legislature to use that money for the pension fund, but we may be forgiven for expressing cynicism about the General Assembly's money-management skills.
So, a year has passed, and the news gets grimmer for the KERS non-hazardous fund that covers nearly 42,000 active members and about 36,500 retirees. At the close of the fiscal year ending June 30, the KERS pension fund had $2.78 billion in total assets and paid out $900 million in benefits and expenses for the year.
You don't need to have an MBA to see that this is an unsustainable path. Indeed, the financial situation is so dire that the fund lost $191 million even though investments gained more than 11 percent.
Why should this matter to the average Herald-Leader reader? Because as the pension fund declines in value, it raises the alarming, if remote, prospect of a pension fund in which available revenue would be insufficient to pay current benefits. If such insolvency took place, Frankfort would have to find a way to pay those benefits, as a matter of contract law. Unlike the city of Detroit, the Commonwealth of Kentucky cannot declare bankruptcy and walk away from pension obligations.
Imagine the fiscal chaos if the administration and legislature were forced to find cash to pay monthly benefits due immediately.
This is not a likely scenario. It would take a huge market downturn. But it is certainly a dilemma that would have been unthinkable in past years, before the General Assembly began ignoring its obligations to the fund. And it is an indisputable fact that Kentucky has the dubious distinction of having among the nation's worst-funded state pension systems.
What is the path forward?
The General Assembly needs to step up and make the painful decision to make the full employer contribution. Senate Bill 2 strengthened the language on meeting this commitment. But, then, it has always been stipulated that the legislature pay the full contribution, and the legislature repeatedly ignored the language.
Make no mistake, it's going to take some heavy lifting. This year, the General Assembly contributed just $459 million to the KERS non-hazardous fund. For the next fiscal year, it's going to take $680 million to meet the full contribution rate. But anything less will expose the fund to the unacceptable risk of insolvency.
It's time for the General Assembly to fulfill its promise.