Lawmakers balking at the idea of moving Kentucky’s public employees into individual retirement accounts have a solid reason for their reluctance: The change would cost taxpayers more, and the outcomes would be worse.
Bravo then to the House Republicans who are raising smart questions rather than bowing to pressure from the deep-pocketed donors and a D.C. lobbyist who waded into the pension debate last week with an ill-informed email.
Paying more for less is a bad deal anytime, but especially when it also would leave retirees poorer and make it harder for Kentucky to compete for teachers, firefighters, police and other public employees.
As this legislative session hits mid-point, we have to assume that no pension overhaul bill has been unveiled because it’s difficult, if not impossible, to make the numbers work on anything resembling what Gov. Matt Bevin and the authors of last week’s email say they want.
It’s telling that Bevin is fighting to keep the cost of the plan he touted last fall secret by bottling up an actuarial analysis.
The governor was unable to suppress an analysis of the effects on the Teachers Retirement System, however. It showed that shifting teachers from a defined benefits to a defined contribution plan would cost an extra $4.4 billion over the next 20 years. Among the costs are hefty transition expenses and a loss of liquidity from new employees entering the system. Without that liquidity, the fund would lose the ability to diversify its investments.
Consulting firm Cavanaugh McDonald figured that Bevin’s proposed changes would leave TRS 71.3 percent funded in 2038, a deficit of $11 billion. The firm calculated that if the state retains the current system and makes its required contributions each year, TRS would be 80.6 percent funded in 2038, with a deficit of $9.6 billion.
Even figures presented by PFM Group Consulting, which the state has paid $1.25 million to advise the administration, reveal the costs of changing to individual accounts would be higher than sticking with the current system. Now state and local employees (but not teachers) hired after 2013 go into a cash-balance plan that reduced employer risk by combining individual accounts and traditional pensions.
An analysis by the Kentucky Center for Economic Policy also explains that Bevin’s plan would raise costs because teachers, who do not receive Social Security, and their employers would have to start paying into Social Security. But, no sweat, said PFM, just push the new costs onto school districts. Fortunately, lawmakers understand that few districts could afford the new burden, especially since some already are in danger of bankruptcy.
No doubt an analysis completed in November for the Kentucky Retirement Systems also showed a high cost from switching to individual retirement accounts. A coalition of public employees and retirees sought release of that analysis under the Open Records Act. On Feb. 8, the attorney general’s office ruled that the analysis is in its final form and should be available to the public. No word yet on whether Bevin will go to court to keep the cost of his plan secret.
None of the smart questions being raised by lawmakers were addressed in the email they received last week calling for moving all future employees into a defined contribution system. Organized by the Pegasus Institute, a conservative think tank in Louisville, the missive had 19 signatures, including prominent Kentucky Republicans, business execs, former state Chamber of Commerce chairman Bill Lear and anti-tax lobbyist Grover Norquist.
The email blames the pension crisis on “inherent structural problems.” In fact, governors and lawmakers created the crisis by shortchanging the pension funds.
Rep. John “Bam” Carney, R-Campbellsvile, is right when he suggests the solution is to “stay with defined benefits and fully fund them.”