FRANKFORT — Kentucky's budget woes could have long-lasting effects on the roughly 445,000 Kentuckians who rely on state-run retirement programs, pension officials warned this month.
It's only been 18 months since lawmakers drafted a 17-year spending plan to shore up the Kentucky Retirement Systems, which provide benefits to 330,000 current and retired government employees, but it's not clear that lawmakers will make the first payment.
Preliminary projections suggest the state will have about $1.2 billion less to spend over the next two years. That grim outlook has key lawmakers and Gov. Steve Beshear waffling on their 2008 pension funding pledge, even as a $16.6 billion unfunded liability threatens to drain the retirement system of cash as soon as 2017.
Meanwhile, lawmakers have borrowed in recent years more than $562 million from the Kentucky Teachers Retirement System's pension fund to pay for health insurance for retired teachers.
If the state keeps borrowing from the pension fund to pay for health insurance, it could spell insolvency for the system that covers 115,000 retired teachers, pension officials say. But halting the borrowing could mean controversial cutbacks in benefits.
"It's really important that we fix this," said Sharron Oxendine, president of the Kentucky Education Association.
Even before the state's current cash problems, both retirement systems were struggling as poor stock market performance and chronic under-funding have chipped away at the systems' fiscal health.
The retirement program — the only social safety net for teachers, who don't get Social Security benefits — already faces a $13 billion unfunded liability, which means it has money to cover current retirees but could fall short in future decades.
The woes of both pension systems will likely vex lawmakers for much of the 2010 General Assembly, which runs from Jan. 5 to April 15.
"It's too soon to tell" what the legislature will do about the cost of retirement benefits for government workers, said Republican Sen. Damon Thayer of Georgetown, chairman of the Senate State and Local Government Committee.
"I think everything has to be on the table. It's obviously a very significant cost-driver," Thayer said last week.
Governor awaits forecasts
Over the next two years, the state's payments to the Kentucky Retirement Systems are scheduled to increase by $72 million — $24 million in 2011 and $48 million in 2012, according to the Legislative Research Commission.
However, spokeswoman Kerri Richardson said Beshear has not yet committed to calling for additional funding for the pension system in his budget proposal, which he will deliver to lawmakers in January.
"No decision can be made until we get a final report from the Consensus Forecasting Group, but it's clear from the state of the national and local economy that difficult choices lie ahead," Richardson said.
The Consensus Forecasting Group — the state's think tank of economists — will finalize its budget projections for the next two years on Monday.
Democratic Rep. Mike Cherry of Princeton, chairman of the House committee that oversees state pensions, said it's critical that the state fulfill its obligation to the pension system. But he also isn't sure where to find the money.
"It couldn't have come at a worse time economically," Cherry said. "We exacerbate the problem if we don't do it. I am of the opinion that we will find a way to do it."
Kentucky Retirement Systems officials warn that delaying the state's payments would only increase money woes in future years, since the funds would have less time to grow in the stock market before being spent on retirement benefits.
"It's critical that they meet this (obligation) in the first year and the second year of the biennium," said Mike Burnside, executive director of the Kentucky Retirement Systems.
Teachers seek a solution
Officials with the Kentucky Teachers' Retirement System also are demanding action from the legislature.
Since 2004, the state has diverted $562 million from the teacher's pension fund — which funds retirement benefits — to its health care fund to pay for retiree insurance benefits.
The state has agreed to repay what it has borrowed at 7.5 percent interest. So far, it has repaid about $41 million of the $562 million, said Beau Barnes, an executive with the Kentucky Teachers' Retirement System.
If the state keeps borrowing money at the current rate, the pension system will be out of cash by 2029, Barnes said.
"We can't go to pay-as-you-go for the pension fund," Barnes said. "It needs immediate action; the longer you wait, the harder it gets to solve."
Currently, retired teachers pay nothing for their health insurance.
Working teachers pay about 10 percent of their salaries into the retirement fund, but less than 1 percent of that contribution goes into the health fund. Those hired after 2008 pay 1.75 percent of their contribution into the health fund.
The state also pays for a portion of the health fund, but those contributions have not kept pace with rising insurance costs, Barnes said.
Stakeholders have been meeting for some time to discuss the system's health insurance quandary, but some potential solutions — requiring everyone to pay more or cutting benefits — are controversial.
The Kentucky Teachers' Retirement System is remaining neutral during the talks, although it hopes draft legislation will be finished this month. "We're advocating for a solution but not taking a position," Barnes said.
Teachers and retired teachers say they're willing to consider change.
"We would support any option that would result in the borrowing being stopped," said Dr. David Waggoner, executive director of the Kentucky Retired Teachers' Association.