FRANKFORT — Kentucky's state pension fund could run out of money in 2019 if contributions remain inadequate and market investments sag, under a worst-case scenario presented to lawmakers Thursday.
More likely, by 2018, the fund will pay out nearly half of its assets every year for retiree benefits, making it difficult to get the high returns it needs from large, long-term investments, pension officials said. The fund currently earns far smaller returns — 3.59 percent over the last decade — than its goal of 7.75 percent a year.
"You might be surprised at how expensive this is going to get," Jim Voytko, president of R.V. Kuhns & Associates Inc., told the legislature's Program Review and Investigations Committee.
R.V. Kuhns advises the Kentucky Retirement Systems, which covers 330,000 state and county employees and retirees.
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"I'm already surprised," replied Rep. Rick Rand, D-Bedford, a committee member.
Over the last two decades, the General Assembly sweetened retirement benefits for state workers, many of whom could leave after 27 years with a lifetime pension and free health insurance. But it failed to put enough money in the pension fund to honor its obligations.
Kentucky, like many states, now faces a growing wave of government retirees and no consensus on how to pay them without wrecking other state programs.
The pension funds were worth $16 billion in 2007 before the stock market collapsed, and then lost nearly one-third of their value. They have rebounded to $13.8 billion, but their unfunded liability stands at $16.6 billion.
Lawmakers discussed whether cutting retirement benefits to existing state workers and retirees should be an option, although Kentucky law forbids such cuts and one group — the Kentucky Association of State Employees — pledged Thursday to sue if benefits are reduced.
"It's impossible to manage a retirement fund over a long period of time and not really make the benefits side of it a part of the equation," said Rand, who also is House budget chairman. "It's a huge part, it's the biggest part of the equation. For us to bury our heads in the sand and say that's a factor we can't change or can't discuss, I think that's what's gotten us to this place we're at."
But Rep. Derrick Graham, D-Frankfort, who represents many state workers and retirees, said the legislature is to blame for the solvency problem, not the state workforce.
"We went 17 years without funding the retirement system properly," Graham said. "The investment side of it can be questioned, obviously, but we need to step up to the plate and admit our mistake."
Several lawmakers said they had assumed the legislature fixed the solvency problem, at least in part, during a 2008 special session.
In changes made that year, lawmakers agreed to pay more into the funds, including $245 million in the current budget. However, they still are not contributing even half of what is needed to keep the funds solvent.
For the next decade, the fund will pay more in retiree benefits than it gets in state contributions, Voytko said.
Lawmakers also required employees who joined the state payroll after 2008 to work longer before retirement and contribute more toward their pensions. But the state won't see savings from that for a generation, Voytko said.