FRANKFORT — The state pension fund is in worse shape than ever despite a reform attempt the General Assembly passed in 2008, the fund's advisers said Thursday.
The Kentucky Retirement Systems' pension fund that covers 115,000 state workers and retirees saw its funding level slump to 33 percent in 2011, down from 38 percent in 2010, creating an unfunded liability of $7.4 billion.
Counting pension and health insurance obligations together, that fund looks even bleaker: Its funding level fell to 27 percent in 2011 from 30 percent in 2010.
"It's really scary to hear this, of course," said Tom Moore, a state retiree from Paducah and president of Kentucky Public Retirees, which has about 3,600 members. "Every day I worked for state government, I paid my portion toward my retirement, and I was glad to."
Overall, the $13 billion KRS, which covers state and local government employees, faces a $17 billion unfunded liability, including pension and insurance obligations. An unfunded liability is the expected future payout for retirees for which no money is available. Despite its unfunded liability, KRS remains solvent and is in no danger of defaulting on its immediate obligations.
Nationally, banks, ratings agencies and others consider KRS one of the worst-funded public pension systems.
KRS investment returns disappointed in recent years, falling short of the expected 7.75 percent, pension officials said Thursday. But the KRS board of trustees, which heard an annual update from its actuarial advisers, said the chief problem is more than a decade of massive underfunding by the legislature.
KRS is forced to miss out on some high-yield investments because it doesn't have the necessary money to put away for long periods of time, trustee Randy Overstreet told his fellow board members. In order to keep pension checks and insurance payments going out, much of KRS' money is kept in cash, which now pays next to nothing, Overstreet said.
"The lack of funding has had a significant impact," Overstreet said.
Under the stepped-up pension payment plan that the legislature agreed to in 2008, as part of a reform package known as House Bill 1, lawmakers plan to pay only 53 percent of what is required next year to keep the fund solvent. Last year, it was 48 percent. Full payment won't come until the year 2024.
"HB 1 payments are like making the minimum payments on a credit card," said KRS trustee Christopher Tobe. "We will need to pay more than HB 1 to move KRS from being the worst-funded public pension plan in the country."
However, lawmakers warn that even sticking to the modest reform plan of 2008 will be painful in this winter's budget-writing session. State revenues still have not rebounded from the recession, and there are no more federal stimulus dollars, which helped Kentucky pay its bills for several years.
The legislature paid $308 million last year to KRS as the employer's contribution to the pension and insurance funds for state workers. This winter, under HB 1, it could have to add about $30 million to that sum.
"It was difficult to make the payment last time, but it was the first priority of the House and, I think, the entire General Assembly to do so," said state Rep. Carl Rollins, D-Midway, vice chairman of the House State Government Committee.
"I think we will try to keep our commitment no matter how difficult it is because it's one of those things that, if we don't do it, then it will just get worse," Rollins said. "This is our responsibility. We'll have to find the money somewhere, or we'll have to cut other programs."
The KRS board and its advisers said some politicians misunderstand the effectiveness of HB 1, wrongly assuming that it solved the pension problem.
"I'm sure there are people in the legislature who think they'll be 100 percent funded in 2025 based on what they've done," Thomas Cavanaugh of Cavanaugh Macdonald Consulting told the KRS board.
Actually, pension officials said, even under HB 1, the state pension fund may look about as empty in 2025 as it does today.
In comparison to the state worker fund, a pension fund that covers most local government employees is in better shape because cities and counties are required to make higher payments. That account saw its funding level fall to 63 percent in 2011 from 65 percent in 2010, for a current unfunded liability of $3.2 billion.
Typically, public pension experts recommend at least 80 percent funding for a fund to be secure.
Legislators have not been shortchanging their own state pension fund, which is managed apart from that of other state employees. For much of the last decade, the legislators' retirement plan was so well funded that it enjoyed a surplus.
The state paid more than $2.2 million into the legislators' plan over the past four years; the legislators paid $1.2 million. Only in 2009 did their plan start to see any unfunded liability, due in part to the fatter pension benefits that legislators approved for themselves four years earlier.