STUMP » Articles » Kentucky Pension Blues: Let's Get This Fire Started » 25 September 2017, 06:25

Where Stu & MP spout off about everything.

Kentucky Pension Blues: Let's Get This Fire Started  

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25 September 2017, 06:25

Okay, let me step back from Illinois for a moment. There’s a bunch of public pension and finance fires going on right now, and I’m kicking this off with Kentucky.

As it’s pretty much in the worst place.

KENTUCKY PENSIONS IN A NUTSHELL

I’ve covered the awful condition of Kentucky pensions before, but here’s the very short version:

1. The main state pension is in an awful funded position, at 19% funded. Don’t take my word for it.

2. A few things fed into this awful funded position, but the main one is they never paid full contributions — much less than full contributions.

3. That said, the county pension plan that the state runs, and requires 100% contributions into, isn’t doing much better. Some tout their near-60% funded ratio as being something good… but it SUCKS if you’ve always made 100% contributions.

4. What’s up with that? Some bad valuation assumptions meaning those “full contributions” happen to be less than they should be, too.

A few of my posts on the Kentucky pensions:

I didn’t address the Teachers plan above, but it’s somewhat between the state and county plans. They’ve had a spotty contribution record, but better than the state ERS.

CRISIS COVERAGE

The governor of Kentucky set up a web page

Hmmm, KERS-NH running out of cash by 2022? Let me check my own projections:

Well, I have 2024 as the date, but I’ve got all the KERS in there, not just the “non-hazardous” (i.e. non-cops & fire fighters) and my data were older than what was used for the governor’s study.

But yes, at 19% funded, KERS does not have a long future ahead of it as currently constituted.

Other pieces on the pension crisis in Kentucky:

PROPOSED REFORMS

Well, an expensive actuarial study ended with a variety of proposed changes, as mentioned in many of my links above.

These are primarily non-starters.

The main reason is that the problem is already accrued benefits, including pension benefits currently being paid out to retirees.

As this piece explains: Consultant ideas on Ky. pensions violate law

Kentucky has the strongest public-pension contract protection of any state in the country. The legislature long ago created the “inviolable contract” for all the major plans, and the Kentucky and U.S. Constitutions prohibit any legislative impairment of contracts.

According to Kentucky statutes, employee benefits are “not subject to reduction or impairment by alteration, amendment or repeal.”

Kentucky, in contrast to every other state, has spelled out in statutes exactly what the pension contract consists of, leaving no room for judicial interpretation. Virtually all the significant recommendations for pension reform made by PFM, Gov. Matt Bevin’s consultant, require amending those inviolable contracts.

In fact, only a few of PFM’s recommendations specifically suggest rolling back provisions “not subject to the inviolable contract.”

What if the lawyers all reached the same conclusion we have about the inviolable contract, but didn’t want to acknowledge it?

He’s not the only person to point out that almost all of the consultant’s suggestions are not doable because it would require, at least, a change in the state constitution.

Here’s the deal — I’m about to go through a variety of proposals put forth to “fix” the problem.

None of them actually fix the problem: the pension benefits already promised and earned by current and past employees.

The 19% fundedness of the state plan is not for future retirees (and that 19% is a bit optimistic, mind you).

It’s for people currently getting pension benefits. It’s for people who aren’t yet retired but have 20 years’ worth of pensionable service. It’s for people with 5 years of service that they’ve earned.

Maybe you can stop them from accruing more (modest proposal: fire all the employees!), but the big debt hole is for that which was already earned. It doesn’t include future service, it doesn’t include new employees.

It’s for benefits that have already been legitimately earned.

Those benefits have got to be paid for.

And Kentucky can’t really afford to pay for those benefits, which that underpaying all those years indicated.

But let me give each of these major ideas their time. Even though they don’t do anything.

401(K)S

One of the big ideas being pushed is to change from a defined benefit pension to defined contribution.

Here are pieces on that:

I don’t want to dig through the arguments, but here is one main thing:

The 401(k) plan would be “more expensive” because you’re comparing it against an undervaluation of DB pensions.

I’m not going to even dig through the theory.

The county plan has been doing 100% contributions. This is what its funded ratio has done as a result:

So to get that 60% funded ratio for the past five years, what percentage of payroll have they been paying?

So between 13% and 16% of payroll. But even during these years of good market results, they’ve been stuck at 60% funded.

That indicates those “100% payments” are insufficient.

I would posit something quite a bit more than 16% of payroll would be needed to cover the DB pension costs. In short, you can’t compare the DB costs based on historical, other than to notice those were obviously too low.

Don’t even get me started on the state plan.

And, again, 401(k) plans will only help limit accruing more pension debt. It doesn’t do anything for the current pension debt.

SPLITTING OFF THE COUNTY PLAN FROM THE STATE PLAN

One long-standing issue is splitting off the county plan (remember: they always paid 100% of what was required… because the state told the counties what was required, and they paid it) from the state plan (never paying 100% of required contributions until recent years). This isn’t a new idea.

Here is some recent coverage of that idea, as well as increased costs for the local employers:

Splitting off the county plan from the state plan would probably be a good idea. But it doesn’t mean that CERS will be saved. They’re in a bad position, too. Just not as bad as the state pension.

If they can fully split off, they don’t have to worry about KERS parasitically having CERS pick up overhead and investment losses. I think, from a governance point of view, a formal split would be a good idea. Let the county plans deal with their problems separately.

But both the county and state plans will still have to change things, even once split.

Guys, 80% fundedness isn’t healthy and 60% fundedness is just plain crappy. There would still be tough times once the KERS anchor is removed.

CASINOS, POT, AND OTHER CRAZY IDEAS

Some people are grasping at straws for new revenue sources.

Coverage of that:

None of this reads as serious to me.

Similar to New Jersey’s “great idea” to tie lottery revenues to the pensions. No. These won’t fill the hole.

OTHER REACTIONS

So none of this is very productive. The governor has not yet called a special session for the legislature to deal with any of it.

Looking at all the pieces I’ve come across, I can see that nobody really wants to deal with this. A defined contribution plan doesn’t fix the legacy pension problem. The iffy-political-action-group doesn’t persuade people to go for an idea they don’t like to begin with.

Accusations of criminal activity, when pervasive undercontributions and too-optimistic valuation assumptions explain quite a bit, doesn’t really help. But let’s pretend the pensions got this ill-funded due to provable corruption.

Then what?

It might make people feel good to have the perpetrators in prison (or, if it’s the usual kind of pension malfeasance, one would find that the perpetrators were long dead). But it won’t call billions of dollars into being to fill the pension hole.

Ah, but Kentucky ain’t the only state in pension pain. It’s just in the worst position. More states will be coming this week…

Compilation of Kentucky posts


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