The unfunded pension liability of Kentucky’s state and local governments grew by more than $5 billion last year, adding urgency to the pension crisis that threatens to derail every other public service.
As of June 30, Kentucky Retirement Systems had $26.75 billion more in future pension liabilities than it held in anticipated assets. That was up from $21.17 billion on the same day in 2016, according to data presented Monday to the KRS Board of Trustees.
The KRS board gets an annual update on the health of its five pension funds so it knows how much money to request from the state legislature and city and county governments. Nearly 365,000 people are enrolled in KRS, including active and retired public employees.
Next year, Kentucky’s state government and its employees will have to put $1.16 billion into the state’s primary pension fund, called the Kentucky Employees Retirement System (Non-Hazardous), according to consultants from the actuary firm GRS, based in Southfield, Mich.
“This clearly demonstrates that we need to raise more revenue,” said Larry Totten, president of the advocacy group Kentucky Public Retirees.
“We have so many important obligations as a state,” Totten said. “If there is a continued lack of revenue, then who gets shorted? Is it pensions? Is it Kentucky State Police, where their patrol cars are breaking down? Is it social services, where they don’t have enough child-protective workers? How many public agencies are going to come forward and tell us, ‘We can’t accomplish our mission anymore?’”
His group is among several opposing Gov. Matt Bevin’s plan to overhaul the state’s pension systems before the end of the year. Instead, they advocate financing the state’s pension obligations by closing tax loopholes that cost the state billions each year.
KERS (Non-Hazardous) was only 13.6 percent funded on June 30, making it one of the worst-funded public pensions in the country. With only $2 billion in assets and nearly $1 billion in benefits payments, it’s close to becoming a pay-as-you-go system, which means it depends on a shrinking number of active workers to support a growing number of retirees, the consultants said. Nearly 133,000 people are enrolled in this fund.
“They just continue to get worse,” KRS board chairman John Farris said after the meeting. “It’s going to be just a challenge.”
At least KRS had a good year with investments, Farris said. The consultants said KRS enjoyed investment returns between 12 percent and 13 percent, depending on the fund. But the state can count on spending $1 billion a year or more on KRS, from a General Fund that isn’t much larger than $10 billion, Farris said.
Much of the increase in unfunded liabilities at KRS is due to a decision by the KRS board earlier this year to adopt more conservative assumed rates of payroll growth, investment return and inflation. Recent history showed that the numbers previously used by KRS to predict how much money it would need from employers — such as 4 percent payroll growth — could be wildly off the mark.
“When you use real numbers — more accurate numbers — numbers that should have been used for the last 10 years in terms of payroll growth and project those out 26 years — when you apply real numbers to the system and not fantasyland numbers, yeah, the numbers are gonna go up,” Farris said.
The other pension funds within KRS are in better shape than KERS (Non-Hazardous), but all fall short of the 80 percent funding level that is recommended by pension experts as the minimum necessary to be considered healthy.
KERS (Hazardous) was funded at 54.1 percent, down from 59.7 percent in 2016. The County Employees Retirement System (Non-Hazardous) was funded at 52.8 percent, down from 59 percent in 2016. CERS (Hazardous) was funded at 44.8 percent, down from 57.7 percent in 2016. And the State Police Retirement System was funded at 27 percent, down from 30.3 percent in 2016.
To fund the retirement system, budget forecasts call for state government to pay the equivalent of 84 percent of each non-hazardous employee’s salary as a pension and retiree health care contribution. Local governments would have to pay 28 percent for non-hazardous employees and 50 percent for hazardous employees.
Apart from KRS, the state’s other major pension agency, Teachers’ Retirement System Kentucky, covers about 123,000 school teachers, regional university faculty and state Department of Education employees. KTRS faced a $14.5 billion unfunded liability last year.
Bevin’s plan to overhaul the state’s pension systems would shift most future state workers and teachers into 401(k)-style investment plans, but that proposal has bogged down in the Republican-led House in recent weeks.
Meanwhile, retirements are up 16 percent so far this year among state and local workers, pension officials were told Monday.