Politics & Government

Kentucky's public pension plans face insolvency without major reforms, task force is told

State Sen. Damon Thayer (R) spoke during a Tea Party rally in front of the Capitol in Frankfort, Ky., on Aug. 21, 2012. Photo by Pablo Alcala | Staff
State Sen. Damon Thayer (R) spoke during a Tea Party rally in front of the Capitol in Frankfort, Ky., on Aug. 21, 2012. Photo by Pablo Alcala | Staff Lexington Herald-Leader

FRANKFORT — Kentucky's public pension funds need billions of additional dollars to remain solvent, with taxpayers and government workers and retirees all likely to share the pain, lawmakers said Monday.

A legislative task force on public pensions heard a package of reform proposals from the Pew Center on the States and the Laura and John Arnold Foundation, with an eye on passing a pension bill in the 2013 legislative session.

Kentucky faces a $12.5 billion pension shortfall for state and local government workers enrolled in the Kentucky Retirement Systems, plus a separate, smaller system for judges and lawmakers, the experts said. That doesn't even include promised health benefits for those retirees or a third pension system for Kentucky school teachers, they said.

To close the gap, the experts said, state government can put more money than it planned into the system; require workers to contribute more of their pay; provide less generous retirement benefits for future workers; tax retirement income in Kentucky and devote that revenue to public pensions; and issue a $780 million state bond to raise cash.

There could be more immediate tweaks, such as ending cost-of-living-adjustments for retirees until the system is adequately funded and repealing a controversial law that lets lawmakers boost their legislative pensions by taking a full-time state job for three years, they said. The experts said that law has given lawmakers "outsized rewards."

"While the choices will be hard, ultimately this is a solvable problem," the Pew Center said in its written report to the task force. "But if Kentucky continues to delay, it could become an unmanageable crisis. This task force has the chance to make a real, lasting improvement in Kentucky's fiscal health and put the commonwealth on a credible path towards closing its funding gap."

Several lawmakers said they're reluctant to change retirement benefits for public workers or ask them to contribute more of their pay after several years of no raises and rising health insurance costs. Rep. Brent Yonts, D-Greenville, said state employees pressed for more concessions "could become violent."

"We don't want to hit the employees any harder than they've already been hit. If we do, we're going to lose our employees," Yonts said.

But Sen. Damon Thayer, co-chairman of the task force, said lawmakers must remember that taxpayers support state government. Many taxpayers are struggling with their own fiscal woes, such as pay cuts or job losses, he said, and it's unreasonable to ask them to keep digging deeper to finance pensions better than most of them will enjoy.

"The taxpayers who fund public pensions ... we have to be cognizant of their role in this equation," said Thayer, R-Georgetown.

In 2010, 84 percent of public sector workers were in a traditional pension plan that guaranteed lifetime payments, compared to only 20 percent of private sector workers, according to the U.S. Bureau of Labor Statistics. Private employers largely have switched to defined-contribution plans that put the burden on workers to save enough.

Rep. Brad Montell, R-Shelbyville, asked why the reform proposals Monday did not include a shift for future state workers into a defined-contribution plan. Instead, the experts recommended moving toward slightly less generous models that split the financial risks between workers and public employers.

For example, the Pew Center said, some governments around the country are trying a "stacked hybrid" model that mixes a smaller traditional pension with a defined-contribution account.

Rep. Mike Cherry, the task force's other co-chairman, said the General Assembly thought it had addressed the state pension shortfall with reforms in 2008. But those efforts proved inadequate, Cherry said.

Recognizing that it had failed to fully fund the pension system, the legislature agreed in 2008 to slowly increase its annual payments until 2025, when it finally would make the full required contribution.

The state could save hundreds of millions of dollars in the long run if it sped up that schedule and put more money into the pension system sooner, the experts said. But the state budget already is stretched tight, said Cherry, D-Princeton.

It would be "an appropriations nightmare to come up with 100 percent of the full requirement," Cherry said.

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