Unintended impact of pension fix

"Historic" was a word often applied to the changes in the state pension system that were enacted in the final moments of the legislative system last month.

History, though, is one of those things that just keeps coming at you.

In this case, it didn't take long before at least one huge flaw in the so-called reform came to light. One of the state's partner agencies in the pension system has filed for bankruptcy protection, saying that its share of the fix is unsustainably huge. Seven Counties Services, a non-profit community mental-health agency, says that in the new scheme of things its payments will amount to 40 percent of payroll by 2015.

You don't need an MBA to figure out that no business could run on that model. Further, given that Seven Counties relies on state payments for about 80 percent of its income, you also don't need an accounting degree to understand that some of the underlying logic in this solution may be flawed.

To back up a minute, it's important to understand how we got here. A key element of the legislation was changing the type of benefit future employees will have from a guaranteed pension payment to something more like the 401(k) savings plans popular in the private sector. But that didn't change the obligation to those already in the system, including Seven Counties' employees.

The pension systems known as the Kentucky Retirement Systems are funded by contributions made by employees through their paychecks and the money the employer — the state generally — puts in. That fund is then invested with the idea that it will grow enough so that when employees retire there will be money to pay the pensions they've earned.

For years the state has not paid in its full share as legislators have decided to use General Fund money for other purposes. So, there was already a problem when the recession hit and made it worse.

That dug a hole so deep that no one could ignore it. As part of the fix, employers' contributions to the system will cover two costs: one to meet current pension obligations and the other to make up for that deep hole.

The legislature made a group of changes to the tax code, including shifting $34 million from the Road Fund to the General Fund, that are supposed to yield $100 million annually to make up for the state's arrears as an employer.

But, as Seven Counties makes clear, that $100 million won't cover all the employer costs. Indeed, the total annual bill to fill the hole is at least double that, and the money has to come from somewhere.

The non-profit chose to seek bankruptcy protection, trying to escape the state system and establish its own pension, but not every employer can pursue that option.

Consider, for example, the highway department, which relies not on the General Fund but the Road Fund, which took a hit, for most of its money. In that case, the added payments will ultimately mean less money for Kentucky's roads. The same accounting applies for other state agencies, like fish and wildlife, that don't rely on General Fund monies.

The pension problem is so huge and so complex that we'd all like to praise the legislature, breathe a sigh of relief and trust that last month's effort solved it. But Seven Counties quickly made it clear that we can't outrun history — or debt — that easily.