Taxpayers may be forgiven if they believe that the funding crisis for the state's public pensions was resolved in 2013 with pension reform legislation. Lawmakers hailed passage of Senate Bill 2 and House Bill 440 as a breakthrough.
Unfortunately, the numbers tell a different story.
The pension plan covering most state employees, the Kentucky Employees Retirement System non-hazardous plan, continues to bleed red ink.
In October, I appeared before the legislature's Public Pension Oversight Board to review the sorry state of the plan. I pointed out that since 2008, the fund has lost half its value, falling from $5 billion in assets to only $2.5 billion at the end of the fiscal year, June 30.
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Since July 1, the fund has lost another $95 million. This leaves the plan with a bare minimum of assets to cover $915 million in annual payments and expenses.
What is even more alarming is the fact that the plan enjoyed outstanding investment returns over the past two fiscal years — far above its assumed rate of 7.75 percent — yet declined in value by nearly $400 million anyway. Positive market performance has become disconnected from asset growth. This is a horrific development in the fiscal management of a pension plan.
Kentucky is among a handful of states facing a funding crisis for exactly the same reason — years of employer underfunding. For 15 out of the last 22 years, governors and lawmakers failed to set aside sufficient money in biennial budgets to make the actuarially required contributions.
Meanwhile, we employees contributed our share every single paycheck.
As part of pension reform, the legislature began making the full employer contribution with the biennium that started July 1. Unfortunately, the hole has been dug so deep that the KERS non-hazardous plan is projected to continue to decline for the next several years.
It will be critical for future legislatures to continue to pay the full employer contribution, but it may not be enough. At stake is the fiscal health of a plan that covers 40,000 active employees and 37,000 retirees.
Can this vulnerable plan stay afloat during the next market downturn? The official estimate of Kentucky Retirement Systems and its actuary is that if the fund meets its actuarial assumptions, it will not run out of money to pay current benefits. But an actuary isn't in the business of predicting market fluctuations. Truly, anything might happen, including, at worst, insolvency or close to it.
On behalf of the retiree advocacy group Kentucky Government Retirees, I appeared before the oversight board to ask it to recommend to the 2015 General Assembly that the legislature provide a funding solution to avert the insolvency. I'm pleased that the board did exactly that.
All taxpayers need to hope insolvency never takes place. After all, as a matter of firmly established contract law, earned benefits shall be paid.
Let's be clear — there are no good solutions. Suggestions that the existing budget could be raided fly in the face of fiscal reality; a sizeable cushion for the fund will require many millions. The state budget has suffered cut after cut.
There's also nothing to be done to reduce costs by altering benefits. Substantial plan changes were made in 2008 and 2013, and cost-of-living adjustments for retirees have been eliminated.
That leads to two unappealing choices: tax revenue or borrowing, or some combination. As KRS stakeholders, we are fully aware how politically unpopular these choices are. However, if the KERS non-hazardous fund cash-flow crisis is left for 2016 or beyond, the fund will continue to decline in value and the solutions will become no more palatable.
And, if the worst happens and the plan drops to the verge of insolvency, any solution might have to be made under deadline pressure to underwrite benefit payments. Meanwhile, credit-rating agencies would make our state suffer for years of fiscal incompetence through ratings downgrades.
Our reluctant message to Frankfort decision makers: act now to fix the pension system. Don't let time become the enemy.