STUMP » Articles » Kentucky Pension Battle: Just Throw Out Everything » 14 November 2017, 07:51

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Kentucky Pension Battle: Just Throw Out Everything  

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14 November 2017, 07:51

No, I don’t mean the pensions. I mean the various plans.

I just saw this:


And, I swear, this is the sort of thing that made us delete and rewrite an entire section in a report yesterday at work. Yes, it was about the tax reform bills in the U.S. Congress, and I am unlikely to be blogging about it any more, as I will be writing about it for work. Nope, not giving y’all that stuff for free.

via GIPHY

I will link to various items, but I want to address some crap I’ve seen flying around first.

NO, KEEPING THE PONZI GOING DOESN’T MAKE IT CHEAPER

This is not something unique to Kentucky, but is an argument trotted out all the time — that if all new entrants are shunted over to some separate pension system (doesn’t matter if it’s a new DB plan, some hybrid, or a pure DC plan), the old plan magically gets more expensive.

Here is an example with respect to the Kentucky pension battle: Numbers doom Bevin’s pension plan:

Gov. Matt Bevin’s plans to railroad massive changes to Kentucky’s public pension systems through a five-day special session appear to have been derailed by his party’s sexual harassment scandal.

On Thursday, cold, hard numbers dealt another blow to this ill-made plan. The first serious analysis of the proposal’s financial impact showed that, for the Teachers Retirement System, Bevin’s “reforms” would cost an extra $4.4 billion over the next 20 years.

The consulting firm Cavanaugh McDonald figured that Bevin’s proposed changes to TRS would leave it at 71.3 percent funded in 2038, a deficit of $11 billion. But, 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.

…..
Actually, no one should have been surprised by this scoring. Pension plans benefit from the ability to diversify investments because of their huge size and the liquidity they achieve from current employees paying into the plan — meaning they don’t have to constantly sell investments to pay retirees and so can invest for the longer term.

When new employees are shunted out of the pension fund and into individual plans, as Bevin proposes, that liquidity dries up, so the funds must invest more conservatively to assure they will always have cash on hand to pay benefits.

Oh dear god, no.

That argument would almost make sense if the Kentucky plans were in a situation where they didn’t have to sell off assets to pay for current benefits.

KENTUCKY TEACHERS CASH FLOWS

Let’s consider the Kentucky Teachers plan alone, shall we? That’s the one under discussion in the article.

Public Plans Database page for Kentucky TRS.

Here is the graph of the net cash flow.

Hmm, that doesn’t look so bad, right?

Oh.

That is not a good pattern, you know.

Usually, the lie that keeping new entrants in the old plan makes it cheaper involves counting the cost of the plan as a percentage of total payroll… with some of the percentage covering old liabilities coming from the new entrants.

That’s not exactly fair, is it?

On top of that, the only year in the past decade Kentucky TRS has had a full contribution was in 2011… when they had the fake contribution coming from a pension obligation bond.

That POB didn’t really fill the hole very much. The funded ratio for the plan continued to slide til it hit rock-bottom at 52% in 2013. As it is, under a variety of projections, I have Kentucky TRS running out of cash in a decade or two, unless they really bump up the contributions.

Early retirements don’t make the pensions more expensive, either, unless there are no actuarial adjustments for retiring early.

The only thing that makes the pensions actually more expensive is promising more in benefits. What “it costs more” really means is that the expense of the benefits is getting uncovered faster.

Because if a 100% ARC payer like Kentucky CERS is showing a decreasing funded ratio…that’s a pretty good indication that the pensions never were well-valued (never mind well-funded) to begin with. “Oh, but we’d only be able to get 6%!”

Hey guys, you’re only getting 6% now:

(That was the 10-year average returns I’m talking about, not the recent higher results.)

The cash flows cost what they cost. It may be that valuing them at 7.5% was not a good choice for the long-term valuation rate.

A similar idiocy:


Dear god, you must be joking.

Yes, pensions are more expensive because they’re not promising more benefits to new people. This is not how cash flows work.

via GIPHY

HERE IS YOUR PROBLEM: OLD, DECADES-LONG ACCRUED LIABILITIES

The following is not the teachers plan, but the state plan. Essentially, the largest, worst-funded plan in the nation.

Here’s the pic:

I’m so looking forward to hearing how it’s not that bad because they can afford to pay for benefit cash flows on a pay-as-they-go basis.

The graph came from this story: Kentucky’s public pension debt jumps by more than $5 billion:

The unfunded liability of the agency that operates pension systems for Kentucky’s state and local government workers grew by more than $5 billion last year, according to data presented Monday to the Kentucky Retirement Systems Board of Trustees.

The unfunded liability of KRS, which operates five pension systems responsible for providing benefits to about 365,000 past and present employees of state and local governments, grew to $26.75 billion in the fiscal year that ended June 30, up from $21.17 billion the previous year.

The primary pension fund for state workers has only 13.6 percent of the money it is expected to need in coming years, down two tenths of a percent from last year.

The Kentucky Employees Retirement System (Non-Hazardous), which covers 122,145 active state workers and retires, had an unfunded liability of $15.33 billion as of June 30, up from $12.83 billion last year. Of that total, $13.47 billion is for future pension payments and $1.86 billion is for future health insurance payments.

The main pension fund for city and county employees — County Employees Retirement System (Non-Hazardous) — is 52.8 percent funded, the KRS board was told. The pension system has an unfunded liability of $7.17 billion, up from $5.44 billion last year. That includes a $6.04 unfunded liability for pension payments and a $1.13 unfunded liability for health insurance.

Kentucky’s pension systems are among the worst funded in the nation. The problem resulted from two decades of inadequate contributions from the state, a shortfall the legislature has only addressed in the last few years; weak investment returns; and unrealistic assumptions about how many public employees there would be (fewer than predicted), how much they would earn (less than predicted) and how long they would live (longer than predicted).

Apart from KRS, the state’s other major pension agency, Teachers’ Retirement System Kentucky, covers about 123,000 K-12 school teachers, regional university faculty and state Department of Education employees. KTRS faced a $14.5 billion unfunded liability last year.

Gov. Matt Bevin is pushing lawmakers to overhaul the state’s pension systems before the end of the year, but his proposal has bogged down in the Republican-led House in recent weeks.

Meanwhile, retirements are up 16 percent so far this year among state and local workers, pension officials were told Monday.

By the way, y’all, being retired will not protect you from benefit cuts. Ask the Detroit retirees.

So here is your problem:
$15.3 billion in pension & retiree health benefits for state employees
$7.2 billion for city/county employees
$14.5 billion for teachers

for a total of $37 billion in retirement benefits already accrued.

And those are just estimates, if you trust the valuation rate they’re using (which I don’t) as well as their other valuation items (which I haven’t dug into too much yet), and some of those numbers are a year old.

So that $37 billion needs to be taken care of. According to the State Data Lab, Kentucky has $11 billion in bonds outstanding. It may be a bit appalling that Kentucky is only #47 out of 50 states (the three states worse: my guess before even looking – Illinois, New Jersey, and Connecticut…. and IL is 49, NJ is 50, and CT is 48… yeah, I’m not giving myself any high fives over this very easy guess).

But seriously, that’s the problem. Moving people to a DC plan – all new entrants, and old participants over time – only prevents that hole from getting added to. It doesn’t fix that it needs to be filled.

None of the proposals I’ve seen really addresses that $37 billion (and likely much larger) hole.

STORY ROUND UP

Here’s a link dump, but as I said above, most of these stories are moot.

First, on all the protests against the plans and other public responses:

Next, separate proposals from various parties:

Finally, all the other politicking:

START FROM SCRATCH, SPLIT THE PROBLEMS

I have a few very basic proposals in terms of what needs to be done.

1. The problem needs to be split up: new entrants (easy) and old liabilities (very challenging)

2. For new entrants, there needs to be at least some non-zero retirement income guarantee. I propose the way to do this: all new entrants must participate in Social Security.

(That way, we don’t hear “They’re not even covered by Social Security!” whine)

You can do whatever on top of SocSec. I don’t think any state/local employees should be Social Security exempt, but that’s not the case in the U.S. right now. This would be a great opportunity to do this.

3. For old liabilities: there needs to be a reckoning of what can actually be “guaranteed” by the state. It’s pretty clear that as things stand, the state cannot fulfill all the promises already accrued.

There may be the need for a state constitutional amendment to be able to make this happen. I said this would be tough.

If you want disastrous, just pretend that the already accrued benefits will of course be paid. Unless you’re planning on some really extreme scenarios (like, I dunno, a plague pandemic or, more happily, aliens come bringing magical technology that makes all economic problems go away), they are not going to be.

What will happen is something like this:

Now, that’s a sample drawdown of Kentucky ERS assets. It’s in dire straits. But County & teachers – don’t assume you’re safe just because you’re better-funded than the state plan.

Here’s a sample drawdown of Kentucky CERS:

And the teachers:

Each of these drawdown graphs assume 7% investment returns, benefit cash flows increasing in historically average rates, and contribution rates only moderately rising.

All these can survive, but they require fairly large increases in contributions. That’s the reality.

The spreadsheet to play with, if you want to try it out.

That is just letting things ride as they always have, and that would be disaster. None of the proposals address those items. Period.

Throw them out and start from scratch.


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