Politics & Government

Three agencies ask to leave struggling state pension system

Three large “quasi-public” agencies have asked to exit the Kentucky Retirement Systems, which is struggling with $16.6 billion in unfunded pension liabilities because of a long history of inadequate state funding.

The KRS Board of Trustees on Thursday approved withdrawal applications from Commonwealth Credit Union, based in Frankfort, and Kentucky Employers’ Mutual Insurance and the Council of State Governments, both headquartered in Lexington. The applications are the first under a new state law that allows for an orderly departure from KRS, but they might not be the last.

“This is hardly surprising. The handwriting is on the wall that this pension plan is bleeding red ink, and it is unsustainable,” said Jim Carroll, a member of an advocacy group called Kentucky Government Retirees.

Before they may leave, the agencies will have to pay KRS the expected cost of future pension and retiree insurance payments for their roughly 1,600 past and present employees. KRS officials put a “very rough estimate” of that sum at $75 million to $79 million combined for all three employers, but they said a final tab won’t be ready until fall.

Jon Stewart, president of Kentucky Employers’ Mutual Insurance, which provides workers’ compensation insurance, cited “the sheer cost” as his agency’s motivation to withdraw from KRS. The required employer contribution this year for the state pension fund to which KEMI belongs is 38.77 percent of payroll. Next year, fueled by KRS’ booming demand for cash, that figure will rise to 48.59 percent.

“I can remember when it was 5 percent,” Stewart said. “We had to pay something like $6.5 million in 2015 in pension costs. We’re an insurance company; it just doesn’t make any sense for us anymore. These are costs we’re having to pass along to our customers.”

Stewart said KEMI would replace the KRS pensions for its 215 employees with defined-contribution or defined-benefits plans, depending on the employees’ individual lengths of service. New hires will get a defined-contribution plan, commonly known as a 401(k), he said.

Karen Harbin, president of Commonwealth Credit Union, said her institution was “grateful for the benefits” KRS provided. But the credit union is growing its membership beyond the original base of state government employees, so it no longer will be eligible to participate in KRS, Harbin said.

“We know that there are tremendous opportunities ahead for Commonwealth Credit Union, and these changes will enable our continued growth,” Harbin said in a prepared statement.

Although KRS was created to provide retirement benefits for the employees of state and local governments, dozens of outside employers asked to be admitted over the years on the basis of their ties to government, including social-service nonprofits, mental-health agencies and publicly subsidized businesses.

However, KRS is in a downward spiral, considered one of the nation’s worst-funded public retirement systems. The primary state pension fund at KRS has just 17 percent of the assets it’s expected to need for future benefits, a number that’s expected to worsen. State elected leaders have not settled on a solution. So some of the outside employers that once wanted to join are changing their minds.

Seven Counties Services, a Louisville-based mental-health agency, filed for bankruptcy protection and stopped making contributions to KRS in 2014, saying it no longer could afford escalating pension costs. But KRS remains liable for benefits to Seven Counties’ retirees, a debt KRS estimates at more than $90 million. KRS is suing Seven Counties in U.S. District Court in an effort to collect.

To create a smoother withdrawal process for quasi-public agencies, the General Assembly passed a law in 2015 that requires them to formally apply and reach an agreement with KRS on what they owe for their employees’ share of future benefits.

The tricky part for KRS will be asking for enough money to guarantee that Kentucky taxpayers aren’t left on the hook for other people’s employees over the next 40 years, said Chris Tobe, a Louisville financial consultant who sat on the KRS board from 2008 to 2012.

KRS makes assumptions about the future when it estimates how much money it needs for the state pension fund, including an investment return of 6.75 percent and payroll growth of 4 percent. Both might be overly optimistic, especially the payroll growth, Tobe said. State government is steadily shrinking its workforce and has provided few, if any, raises in recent years, he said. Gov. Matt Bevin’s proposed two-year state budget calls for no pay raises and 9 percent spending cuts that could bring layoffs.

“It’s all about the numbers,” Tobe said. “If you get a good enough number, if it’s accurate, then this shouldn’t hurt KRS. But I’m very skeptical that we’re going to get enough money from these employers upfront. You can forget about 4 percent payroll growth. It’s more like 0 percent, if you’re being realistic.”

Bill Thielen, KRS executive director, said the “cessation date” for the three quasi-public agencies would be June 30. After that date, they no longer may enroll new employees in the retirement system. Based on the total number of past and present employees and their years of service, KRS’ actuarial advisers will calculate what is owed to cover future liabilities. Once the agencies pay it, they’re free to go.

It’s important to correctly determine what’s owed because KRS can’t come back later to ask for additional money if the benefits prove to cost more than the agencies paid, Thielen said.

“We could come out better or worse, depending,” he said.

John Cheves: 859-231-3266, @BGPolitics