Politics & Government

Kentucky's cost might increase under proposed pension overhaul

Senate President David Williams, R-Burkesville, makes a point while discussing a bill during the legislative session in Frankfort, Ky., Friday, Jan. 7, 2011.  (AP Photo/Ed Reinke)
Senate President David Williams, R-Burkesville, makes a point while discussing a bill during the legislative session in Frankfort, Ky., Friday, Jan. 7, 2011. (AP Photo/Ed Reinke) AP

Kentucky might have to pay more under changes to the state pension system proposed by Senate Republicans, according to an actuarial analysis released Wednesday.

Senate Bill 2 was approved by a Senate committee in January and awaits further action in the Senate next week when the 2011 legislative session resumes.

The bill, co-sponsored by Senate President David Williams, R-Burkesville, would close the current pension system to new state employees on June 30, 2012. Instead of getting a guaranteed pension from retirement to death, new employees would be offered the chance to join a defined-contributions plan, like a private-sector 401(k).

Employees not performing hazardous duty could contribute up to 5 percent of their pay, to be matched by the state. Hazardous-duty employees could contribute up to 8 percent, also to be matched by the state.

Assuming 95 percent of non-hazardous-duty employees join the plan and give an average of 3 percent of their pay, the state would kick in 2.85 percent of its payroll, according to the analysis prepared by Thomas Cavanaugh of Cavanaugh Macdonald Consulting for the Kentucky Retirement Systems. That's more than the 2.67 percent the state presently pays, Cavanaugh said.

For the far-smaller pool of hazardous-duty workers, the new system could be cheaper, with the state paying 2.85 percent instead of the current 4.30 percent, according to the analysis.

Overall, in 2010, the state paid $162 million into the pension funds as its employer contribution for 50,759 employees.

"As shown, there is a possibility that the bill would result in greater long-term costs for most employers," Cavanaugh said.

He added that ending guaranteed pensions could hurt future state retirees and, through them, the state economy. Under the new plan, as under most private-sector retirement plans, the burden for having enough retirement income would fall squarely on employees, who could run out of money.

"A change to a voluntary 401(k) plan will significantly reduce the retirement income security of employees," he wrote. "The ultimate impact on the commonwealth in terms of future increases in other social costs and reductions in economic activity generated by retiree spending is beyond the scope of this analysis."

Williams, who is seeking the GOP nomination for governor, agreed Wednesday that short-term pension costs might be greater under his bill. But he disputed some of the analysis' assumptions, such as the 7.75 percent investment returns the current pension system anticipates will boost its bottom line. The actual rates of return have tended to be less than that, Williams said.

The current pension system, with guaranteed payouts, has a huge unfunded liability, Williams said. His proposal would resolve that by making the state and its workers put aside money in advance and then limiting the fund's liability to that available sum, he said.

The analysis suggests his proposal could start to show savings for the state by the year 2028, he said.

"What you're doing is trying to get yourself into a situation where you're pre-funding these retirements," Williams said.

"That's what you buy with this plan, you buy certainty," he said. "What I'm trying to do is come up with a solid proposal that solves the problem and does not just continue the problem, saying, 'Well, I hope the system does all right, I hope the market goes up.'"

Kentucky's retirement funds face an unfunded liability in the many billions of dollars, sometimes forcing investment assets to be sold to cover the cost of checks going to retirees. State retirement officials warned for years that governors and legislatures failed to contribute enough to the funds.

On Friday, the Kentucky Retirement Systems' board of trustees will meet in Frankfort to discuss Williams' bill and the analysis. The board has not taken a position on the bill.

The Kentucky Association of State Employees opposes Williams' bill because it would make state workers even more vulnerable, said the group's president, David Smith.

"Our legislature has failed to make required contributions to the current pension system, so why should we believe it would make matching contributions under a 401(k) system?" Smith asked.

"When the stock market tanked a couple of years ago, I lost $23,000 from the 401(k) account I had from my last job," Smith said. "I still haven't recovered that money. That is not a reliable retirement system for our state merit workers."

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