For most state workers, their pension is one of their largest assets. Along with a home, it is likely to be the greatest source of income for middle-class families in retirement.
The proper division and allocation of these assets for divorcing couples occupies much of our time as professionals.
The chronic underfunding of Kentucky Employee Retirement Systems and Kentucky Teacher Retirement Systems not only throws future retirement income into uncertainty, but it wreaks havoc for divorcing couples who need to divide their assets. State workers need immediate solutions to this problem, because they are already paying a price for this uncertainty.
Suppose state employee Bob and his wife Mary decide their marriage is over. They need to decide who gets the house, who gets the savings account, who gets the car, and who gets the pension. If Mary wants to keep the house, Bob may keep the car and the pension — if they know the present value of Bob's future pension benefits.
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If that's uncertain, how can they decide what's fair?
Essentially, one of the things Bob earned over his years with the state was a promise from the state to pay a certain amount of benefits upon his retirement. The present value of that promise — when it's certain — can be calculated in today's dollars, and many divorces are resolved using this present value.
For a long time, determining the dollar amount was a simple matter of accounting — harder math than most of us use on a daily basis, but straightforward for any CPA. However, chronic underfunding has now rendered the value of those future benefits uncertain.
Courts in other states have ruled that the value of a pension must be reduced to account for contingencies such as the insolvency or illiquidity of the plan. In effect, the possibility that promised retirement benefits will not be fully paid reduces their present value. That possibility is determined by looking to the amount of money available to pay current and future retirees. For KERS and KTRS employees and retirees, the picture is bleak.
This wreaks havoc on divorce settlements. With the value of one of their primary assets uncertain, divorcing spouses would be highly ill advised to accept that asset in lieu of another. Until pension funding is adequate and stable, couples like Bob and Mary will spend a lot more time, effort and money to figure out what's fair.
This can have a domino effect on other issues at play in divorce and may lead to things like selling the home if neither of them can afford to buy out the other's interest with their more certain assets. All of this creates more financial stress on state workers already facing a difficult transition.
The bonding proposal before the General Assembly will not alleviate this problem for two reasons. First, $3 billion will not be enough. That is a sad and telling statement. And who is to say that it will pay off? KERS/KTRS investments have not always fared well. Even when they have, the funds have still lost overall value, and investment fees and expenses are shrouded in secrecy. It would be foolhardy to assume any set rate of return for them in the future.
The bottom line is that uncertainty has a real price. Pension underfunding is not the future's problem — it is our problem. The General Assembly should act to provide lasting, stable funding to the state's assorted pension plans. Until that happens, divorcing employees like Bob and Mary will pay a price for the uncertainty — precisely when they can least afford to do so.
Ross T. Ewing is a Lexington divorce and family attorney; Calvin D. Cranfill is a CPA specializing in asset valuation and litigation matters.