Stivers: Pension boards, not legislature, responsible for debts
Kentucky’s public employees are living longer after they retire, which is good news generally, but it also will add hundreds of millions of dollars to the already staggering pension costs faced by state and local governments, regional universities, health departments and other public agencies enrolled in Kentucky Retirement Systems.
On Monday, the state’s Public Pension Oversight Board was told that KRS has not been accounting for lengthening lifespans, as many other state pension agencies do. Instead, it has kept flat projected lifespans of 84 years for men on average, if they reach 65, and 87 for women.
But last week, the KRS Board of Trustees adopted a more realistic set of mortality rate assumptions that added two years to the life expectancy of retirees who reach age 65 in 2020, and two more by the year 2045, assuming that the men eventually will be reaching age 88 on average and the women age 91.
“People are gonna live longer,” said David Eager, KRS executive director. “A retiree lives longer today than we were expecting they would. And a 45 year old is going to live longer than a 65 year old. That’s never been factored in, but we’re factoring it in for the first time.”
All those extra pension checks tomorrow mean more money must be contributed today, GRS Retirement Consulting adviser Danny White told the oversight board Monday.
The new assumptions bump the $15.6 million liability of the state’s primary pension fund up to $16.3 billion, White said. For the primary local government pension fund, liability will jump from $13.1 billion to $13.7 billion.
As a result, White said, employer contribution rates are expected to rise next year from 85 percent of payroll to 89 percent for the state government and from 27 percent to 31 percent for employers enrolled in the primary local government pension fund.
Lawmakers will struggle next winter to find the extra money in the state budget to meet the higher contribution rate, said state Sen. Jimmy Higdon, R-Lebanon, co-chairman of the oversight board. Kentucky already is on track to spend 20 percent of its General Fund on pension obligations to state workers and school teachers, which is “incredible when you think about it,” Higdon said.
However, it’s essential that state leaders have accurate demographic information about retirees, such as mortality rates, so they can know how much money will be necessary in coming years, Higdon said.
The new data “looks bad on paper because it increases our unfunded liability. That’s a bad thing,” Higdon said. “But the good thing is, it forces us to make increased payments to pay for the fact that people are living longer. If you looked at our past, we’ve done a poor job in the past of properly doing assumptions and properly funding our pension system.”
“This is a step in the right direction,” Higdon added. “Had we been doing this 20 years ago, we’d probably have unfunded liabilities, but they wouldn’t be at the magnitude that they are right now.”
The last time KRS adjusted its actuarial assumptions, in 2017, it added billions of dollars to its liabilities by adopting less optimistic numbers for what it expected to see in the future on investment returns, payroll growth and inflation rates.
Some local governments have protested that the changes forced their pension contributions to surge overnight. But KRS trustees have defended the move, arguing that the pension agency was relying on outdated and inaccurate assumptions, such as 4 percent payroll growth that, more realistically, should be a negative number, given the shrinkage in the number of public employees. Instead, the KRS board dropped payroll growth to 0 in its assumptions.
Higdon said lawmakers are still waiting to hear from Gov. Matt Bevin about a special session to pass a bill to give relief from rising pension costs to regional universities and other public agencies, such as health departments and mental health nonprofits. Bevin vetoed a bill earlier this month that was meant to provide such pension relief, citing a number of flaws he saw in it.
In his veto message, Bevin said he wanted a special session by June 30, the end of the current fiscal year. Starting July 1, a temporary one-year cap that is shielding some of the public employers from the full weight of the pension costs will expire.
“We’ll wait for his lead,” Higdon said. “To my knowledge, the only talks going on would be with the governor and his people. I don’t know of anybody in the General Assembly who’s been in contact or talked to about the special session.”