Politics & Government

This one fact explains why Kentucky’s pension system is unsustainable

It’s impossible to know exactly who, where or when, but one day in 2016, a Kentucky state employee packed up her desk, said goodbye to her colleagues and retired.

Once she hit the exit, the number of retirees drawing a pension from the Kentucky Employees Retirement System (Non-Hazardous), the struggling $2.6 billion fund that serves most of state government, officially topped the number of active workers paying into it.

The 60-year-old fund has been mathematically upside down from that day forward.

Social Security, by comparison, has a roughly 3-to-1 ratio of workers supporting retirees, but KERS’ ratio is less than 1 to 1. Its numbers are expected to worsen as state government continues to cut its work force and aging baby boomers keep heading into retirement. The average age of a worker in KERS is 45, up from 43 just a few years ago. And they retire at age 57 on average to draw a lifetime pension.

“You just can’t depend on this model anymore,” said state Sen. Joe Bowen, R-Owensboro.

Bowen is working with Gov. Matt Bevin and other GOP lawmakers on proposed changes to Kentucky’s public pension systems, which face tens of billions of dollars in unfunded liabilities due to inadequate contributions and unrealistic financial assumptions by state government over much of the past two decades.

Bowen said Wednesday that an outline of their pension proposals could be unveiled within the next week, with a special legislative session to enact those changes possible later this year.

“The model of a defined-benefits plan doesn’t work for us anymore because we can’t raise enough money from this work force to pay for everyone who is going into retirement,” Bowen said. “This is why moving to 401(k) accounts, moving to defined-contribution plans, and then committing to paying down the existing liabilities … that’s really the only option we have.”

A decade ago, in fiscal 2007, there were 47,913 active workers enrolled in KERS (non-hazardous) and 33,849 retirees. Then came the 2008 economic recession and rounds of state budget cuts under Govs. Steve Beshear and Bevin. By fiscal 2017, which ended June 30, the number of active workers had fallen by 23 percent to 36,725. Meanwhile, the ranks of retirees had jumped by 21 percent to 40,813.

This is a painful trend for a retirement system fed by state employee paycheck deductions and employer contributions. (Its other source of revenue, investment income, traditionally has fallen short of expectations.) For members of KERS (non-hazardous), over the previous five years, annual payroll shrank by more than $200 million while annual retirement benefits surged by $113 million.

“It creates a cash-flow problem,” said David Eager, interim executive director of Kentucky Retirement Systems, which manages KERS (non-hazardous) and other state and local government pension funds. “The benefit payments are going to continue to go up. The contributions are going to continue to go down. That’s just the math of it.”

KERS (non-hazardous) has just 14 percent of the money it’s expected to need to meet its future liabilities. The fund pays nearly $1 billion a year in retirement benefits, with an average annual benefit of $21,246.

Overall, there are 122,146 people enrolled in KERS (non-hazardous), including 43,929 “inactive” members who are no longer in state jobs but who have not yet retired. The majority of KERS participants are state government employees, but some also work for the regional state universities as non-educators or for certain “quasi-public” nonprofits with state connections, such as state-funded mental health agencies.

John Cheves: 859-231-3266, @BGPolitics