STUMP » Articles » Kentucky Update: They've Got Budget Blues, Too » 10 March 2016, 11:32

I last posted a Kentucky-centric piece in June 2015. Kentucky showed up both days when I “subbed” for Jack Dean recently, pointing out an article of quasi-public agencies in Kentucky wanting to escape the state pension plans, and pension funding threatening education funding in the state.

Seems about time to take a closer look at Kentucky, again.

OLDER ITEMS

I’ve actually had this post building in draft since last June. At the time, I accumulated a few key pieces that are still relevant.

Joe Sonka at LEO Weekly wrote “Abandon ship! Kentucky’s underfunded public pension system threatens to drown the commonwealth” in June 2014:

On March 26 of last year [2013], the most powerful elected officials in Frankfort were effusive in their backslapping and self-congratulations over their bipartisan feat. Kentucky’s General Assembly had just beat the deadline for their session to pass the much debated Senate Bill 2, a public pension reform bill that supposedly cured what ailed the deeply troubled Kentucky Retirement Systems (KRS), and champagne corks were popping.

“The reforms will make Kentucky’s pension system one of the healthiest in the country,” said Gov. Steve Beshear. “I think we have done a heck of a job for the people of this state because it gets a financial burden out of the way.”

….
In theory, those retirement plans are supposed to function by the employees kicking in payments from their paycheck, while the state or county as employer annually contributes a larger amount called the “actuarially recommended contribution” (ARC), which is the amount needed to keep the pension on sound financial footing. This pool of money is then invested by the pension system to increase their pool of assets, while also paying earned benefits out to retired workers. But for more than a decade, Kentucky’s state government has been treating this theory as more of a loose suggestion than a hard rule, choosing to not contribute the full ARC payment for several pension plans and diverting those funds to other budget priorities.

This lack of funding by the state has been most drastic for KTRS and KERS. The state stopped paying the full ARC for KTRS a decade ago, currently paying only 75 percent. KTRS now has a $14 billion unfunded liability and is only 50 percent funded, meaning its total assets are only half of the total liabilities it owes. The underfunding of KERS was even more dramatic, as the state only paid half of its ARC payments each year over the past decade, giving it a total unfunded liability of $8 billion. The KERS non-hazardous plan is now only 23 percent funded, making it the single worst-funded public pension plan in the entire country.

Though supporters of SB 2 and the accompanying House Bill 440 in 2013 claimed the legislation solved this pension crisis, in actuality, the new law barely addressed this issue of chronic underfunding. Instead, it gave a loose promise of a $100 million payment of the ARC for KERS in the following years, and took a large step toward a longtime conservative goal of transforming Kentucky’s pension system from a defined benefit plan into a defined contribution system, similar to 401k plans in the private sector. SB 2 created a hybrid cash balance plan for new hires under KRS, and many Democrats and labor leaders lambasted the new law as gutting workers’ benefits in exchange for vague promises of savings decades from now, while putting a band-aid on an open chest wound of underfunding.

Undercontributions leading to massive underfunding.

Imagine that.

The Kentucky Chamber of Commerce has its own take:

That’s odd. One of the graphs is a pie chart, the other is a bar graph (the pie chart choice is just a plain bad choice. And I hate when you’ve got a huge “other” portion. I don’t trust it.)

Also, the first pie chart does not indicate the date range for those sources. Even assuming both are using the same period for these percentages, that’s an awfully short period for a comparison… given the unfundedness developed over the life of the pension and not just in the past 5 years.

PUBLIC PLANS DATABASE NUMBERS

You know what data source I trust? The Public Plans Database. Let’s take a look at their numbers:

ERS:

Teachers:

So lookie there. They vastly underfunded ERS for a long time and it had a horrid funded ratio even before the financial crisis.

They behaved better with the teachers pension, so yes, I can see that underfunding would be less of a factor there… but it’s still a factor.

In any case, the Kentucky Chamber points to high investment fees as a big cause for investment underperformance. This is not totally unfounded, by the way. I don’t feel all that great when you find that public plans are fighting against transparency.

That said, one does not get down to 17% fundedness due to investment results alone….unless the investment allocations are extremely inappropriate.

To be fair, you can go to the Chamber’s pension-related website and judge for yourself. I agree with many of the recommendations they have in this report, seen on page 11. Many of the recommendations for regular audits, more transparency, lobbying/political contribution limits are just plain good governance. I’m not sure about the contingency plan idea — sounds like a pension obligation bond to me (DON’T DO IT!)

KENTUCKY’S GOVERNOR AND BUDGET WRANGLING

I wonder what Governer Beshear has to say about all this in 2016.

Oh wait. Beshear is no longer governor.

After Beshear came Matt Bevin, the second Republican elected to the position in almost 70 years (the last Republican governor was Ernie Fletcher from 2003 – 2007, and the last Republican before that was Simeon Willis from 1943 to 1947.)

Let’s see what current governor Bevin has to say:

A video posted to Facebook by Kentucky Gov. Matt Bevin has gone viral.

In the two minute video, posted to his official page, the Republican governor showcased empty house chambers around 11 Monday morning. He criticized legislators for being absent and having not yet passed the budget.

But traditionally, on Mondays, the House does not convene before 4 p.m., allowing lawmakers from the Commonwealth to make the trip to Frankfort. Democrats, for their part, call it a ‘childish’ stunt.

The video comes nearly six weeks after Bevin presented a $10 billion budget. In that video, the governor is seen putting his finger to his lips, saying he doesn’t want to interrupt ‘the hard work’ going on as he makes his way into House Chambers.
…..
Governor Bevin’s office declined to go into specifics about the video but issued a statement reading, “There are only 19 legislative days left in this budget session and House Republicans are still waiting for Speaker Stumbo’s budget. The governor is simply calling on Speaker Stumbo to quickly pass a budget that gets our fiscal house in order without adding more debt.”

The governor’s video is at this link (I’m having trouble embedding facebook vids.)

Here is a news piece on the video and budget wrangling:

I have been trying to get at a straight news article on the budget proposal, but I keep digging up a bunch of whines over proposed cuts.

This six-item list looks like a good overview:

1. Base funding for most state agencies, including universities, is cut by 9 percent. But several programs, including public school funding and Medicaid, are exempt from the cuts.

2. Kentucky’s ailing pension programs are the priority, getting increases of more than $800 million, with the potential for more, by the end of the two-year budget period.

3. Base public school funding is increased by $39 million over two years – enough to maintain per pupil spending at the current-year level.

4. There is no money for across-the-board raises for state workers or teachers. However, the budget does give raises to some categories of workers including state troopers, correctional officers and starting-level social workers.

5. Funding for the Kentucky Arts Council is not eliminated. But the council’s parent agency – the Tourism, Arts and Heritage Cabinet – will decide how to fund it in coping with its 9 percent budget cut.

6. The budget assumes no tax increases and no tax cuts over next two years.

But, again, these are numbers without context. How much is being contributed to the pensions now? Is $800 million a large increase? Or a drop in the bucket?

This longer article provides context:

Gov. Matt Bevin called for $650 million in “cuts across the board” in his first state budget proposal to the General Assembly on Tuesday, with the details, including possible layoffs of state employees, to be left to his cabinet secretaries.

Bevin said his $21 billion, two-year budget would dedicate $1.1 billion to the state’s ailing pension systems for state workers and schoolteachers, although it was not immediately clear from where that money would come, and even that large sum falls short of what the teachers’ system requested.

So yes, a $800 million increase would be a substantial boost.

Back to the article:

Kentucky must pour far more money into the pension systems to address years of funding shortfalls, Bevin said. The pension fund for most state workers is only 17 percent funded; the pension fund for teachers is 42 percent funded. Collectively, the state is $35 billion short of what it’s expected to need to pay promised benefits to future public retirees.

….
▪ Give $130.7 million more to the Kentucky Retirement Systems as the General Fund contribution for state workers and $591.5 million more to the Kentucky Teachers’ Retirement System as the contribution for schoolteachers. In addition, he said, if “certain conservative budgeting targets are met and the budget reserve trust fund is strengthened as a result,” $135.7 million more could be dedicated over the biennium to stabilize both systems.

Bevin acknowledged that sum falls short of the full budget request by KTRS, which asked for more than $1 billion over the next two years to meet its actuarial goals.

“KTRS alone, I’ll just tell you right now, we cannot in year one, even with everything we’ve talked about, cover everything that they want. We can’t. We don’t have a half a billion dollars to cover that,” Bevin told reporters.

So this is a nice start, but it’s far from the target they need to hit. Even though the teachers plan is 42% funded, it can lose that fundedness status.

In any case, this is just in the middle of everything — I’ll need to remember to update after the legislative session is over, and see if anything actually happened.

But I wouldn’t be surprised if there’s a stalemate in Kentucky, just as there is one in Illinois.

Compilation of Kentucky posts