Every populist politician needs a problem he can exaggerate into a crisis. Then he needs an idea — no matter how simplistic or misguided — to sell as a solution to that crisis so frightened voters will rally around him.
With President Donald Trump, the phony crisis is immigration, which has been declining for years but still scares the bejesus out of many white conservatives. Trump’s simplistic, misguided solution is a wall on the Mexico border, which no credible research has found would solve the problem or be worth the huge cost.
With Gov. Matt Bevin, it is unfunded public pension liabilities, which he hysterically claims have put Kentucky on the brink of financial collapse. He insists this crisis can’t be solved without switching virtually all state employees from traditional defined-benefit pension plans to riskier 401k-style defined-contribution plans.
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Fitch refuted Bevin’s claim last month that failure to pass a quick pension overhaul would result in downgrades to Kentucky’s credit ratings, increasing state borrowing costs. The agency said pension overhaul legislation like what Republicans passed last spring — in such an underhanded way that a unanimous state Supreme Court declared it unconstitutional — and considered during the special session fiasco last month would not affect the state’s credit rating.
Fitch said that is because such an overhaul would produce only “modest savings” — about 1 percent of the $40 billion unfunded liability, by Republican lawmakers’ own estimates — and spark more litigation from employees and retirees.
Moody’s Investor Services, another credit rating agency, last month took a dimmer view of the Supreme Court decision, calling it “credit negative” for the state. But Moody’s didn’t cut Kentucky’s credit rating, and it agreed that the Republicans’ proposed pension overhaul would produce only “modest savings” long-term.
“Pension benefit changes could be helpful in easing fiscal pressure over a very long time frame, but are likely to have only a modest effect on the commonwealth’s pension burden in the near term,” Fitch said. “Fitch’s primary focus remains whether Kentucky can continue recent progress towards structural budget balance, including maintaining full pension funding.”
In other words, Fitch thinks Kentucky leaders need to focus on two things: properly funding the pension system and fixing a broken tax system, which doesn’t produce enough revenue to meet the state’s needs.
The first item is one thing Bevin has done right: insist that the General Assembly fully fund the state’s actuarially required contributions to pension funds. Kentucky’s pension plans were fully funded until about 20 years ago, when previous governors and legislators, both Democrats and Republicans, started shortchanging contributions and spending that money on other needs. They knew the tax system was broken, but they were afraid to fix it by raising anyone’s taxes.
The pension system has other problems, too, including poorly trained oversight boards and unnecessary secrecy. Those problems led to bad decisions, risky investments and Wall Street agents pocketing huge fees.
Fitch’s statement makes it clear that Kentucky’s biggest issue is fixing the tax system so it produces enough revenue. The agency noted that the 2019-2020 biennial budget includes cuts to many state agencies (which have endured cut after cut for more than a decade) and about $500 million in one-time fund transfers that will be hard to continue in the future, especially in an economic downturn.
“Kentucky’s ability to manage rising spending demands while reducing reliance on one-time items will continue to drive Fitch’s assessment of the commonwealth’s financial resilience as the next, inevitable, recession draws closer,” the statement said.
Bevin is no more likely to give up on taking secure pensions away from public employees than Trump is to give up on his border wall. That is because both ideas are more about politics than problem-solving.
Both Trump and Bevin need to satisfy their political bases. For Bevin, that base is business executives who took traditional pensions away from their workers years ago to save their companies money, and right-wing donors like those in the Koch network whom Bevin hopes will fund his political aspirations.
Fitch’s statement, like many similar warnings over the past two decades, is a clear call for tax reform — real tax reform that will generate more revenue, now and in the future, to properly fund government, including pension obligations. Is anyone in the state Capitol willing to listen?