Op-Ed: State Must Face Pension Debt

Published in State Journal, Frankfort, September 30, 2012.

Over the last several years, much of the focus given to Kentucky’s pension system has been on ways to shift new employees into some version of a 401(k)-style retirement plan. But as a presentation to the state’s pension task force recently showed, that idea has little or nothing to do with the state’s main challenge on this issue: how to pay back the existing unfunded liability.

Consultants hired by the state from the Pew and Arnold foundations presented preliminary information to the task force on the impact of various options of dealing with the liability. All of the options that cut pension benefits for employees barely made a dent in the problem.

That’s because the unfunded liability is for benefits already earned by existing employees and retirees — benefits that are both legally and morally obligated to them. Cutting benefits moving forward won’t make that debt any smaller.

Also, as the Pew Foundation’s David Draine noted, the employer costs for new employees under the current pension plan are already “relatively modest,” especially after cuts and shifts in costs to employees were made in 2008. Draine said that “seeking meaningful savings from a new plan is not possible.”

That is demonstrated in a chart from the presentation showing that the state costs for new employees would be basically the same under the existing system as under three different types of plans that include a 401(k)-type component.

The only options Pew and Arnold presented that truly address the liability involve the state making bigger contributions to the system. The consultants noted that the option of eliminating the income tax exclusion on all retirement income — which the governor’s blue ribbon tax reform commission is currently considering — and dedicating that revenue to the pension system until it is fully funded would reduce the liability by $7.5 billion.

Pew and Arnold noted that “the funding gap facing Kentucky is so large that even with an implausibly aggressive attempt to curtail benefits, costs would remain substantial.” They stated that “ultimately, more money will need to be put into the system to pay for the commonwealth’s pension problems.”

Many in Frankfort have wanted to dodge the fact that the pension issue is in fact primarily a revenue challenge. For most of the last 20 years, the state essentially borrowed from workers’ retirements to avoid making needed tax reforms while limiting some of the impact of a failing tax system on the state budget. Despite reforms passed in 2008, the state is still not making its full required contribution to the pension system, which means we’ll be paying much more in future years unless we come up with more revenue.

The state now spends over $12 billion a year through various tax exemptions and preferences — more than it spends on the entire state budget. Tax provisions are regularly passed by the General Assembly and then never revisited to ask if they are worth the lost revenue. They now seriously impinge on the state’s ability to fund needed services — and provide decent benefits to its employees.

Some pension task force members are recognizing that this issue is mostly about revenue. Rep. Brent Yonts talked about the need to merge the recommendations of the task force with ideas to raise new revenue coming out of the governor’s tax reform commission.

Let’s hope that the meeting was the first step toward focusing this issue on the real problem at hand.

Jason Bailey is director of the Kentucky Center for Economic Policy in Berea.

Another Corporate Tax Cut Is Not the Answer

A proposal to change the way Kentucky calculates corporate income taxes for big multistate corporations would be a costly experiment that’s just as likely to harm the state’s economy as it is to help it. Changing to “single sales factor” would reduce the revenue needed for schools, health and other public investments that are crucial to growing the state’s economy.

 Single Sales Factor Brief

Transitioning Adults to Postsecondary Education Crucial to Meeting Goals

Postsecondary education is increasingly recognized as an important means of improving the economy and increasing the financial well-being of individuals and families. But given Kentucky’s serious educational challenges, the state must start early in the education pipeline—including with a major focus on efforts that help adults obtain basic education, make the transition to higher education and then acquire a credential or degree.

Efforts to increase the percentage of adult education students who are transitioning to college are especially important given the low levels of education among adults in Kentucky, the growing skills gap and limited economic opportunities available to those with low levels of education.

In addition, Kentucky simply cannot make substantial improvement in overall educational attainment any time soon by focusing on traditional-age students alone. The state and country have ambitious goals to meet: the Obama administration aims to raise the national college completion rate from 40 to 60 percent by 2020, while Kentucky has established a goal to increase the share of adults with college degrees from the current rate of 32 percent to 43 percent.1

Efforts to increase college graduation rates abound, but very few treat adult education students as a critical target.

According to a new Working Poor Families Project policy brief, historically most adult literacy providers have viewed the endpoint of their services as the GED rather than a college degree or credential. However, there is an increasing recognition of the importance of helping low-skilled adults enter and succeed in higher education. The policy brief highlights three states—including Kentucky—that are leading the way by aligning adult education with postsecondary education systems in various ways.

Kentucky adult education efforts highlighted in the report include setting a statewide goal for the share of adults earning GEDs who transition to postsecondary education and establishing the Common Core Standards—developed by the National Governors Association and the Council of Chief State School Officers and adopted by 47 state public K-12 education systems—for adult education in Kentucky; instituting these standards should help ensure that the adult education curriculum is preparing students to succeed in college and beyond.

However, despite the state’s innovations, Kentucky’s adult education challenge is daunting. Approximately 26 percent of students earning GEDs enter postsecondary education within two years, but the state does not collect data on the further academic progress and graduation rates of these students.2 And only a modest share of adults without a high school education or GED enrolls in adult education courses.3 Progress may also be slowed by state budget cuts. As noted in a previous post, General Fund appropriations for adult basic education are 11 percent below their 2012 levels in the 2013-2014 state budget.

  1. Patrick J. Kelly, “Realizing Kentucky’s Educational Attainment Goal: A Look in the Rear View Mirror and Down the Road Ahead,” National Center for Higher Education Management Systems, September 6, 2011, http://cpe.ky.gov/NR/rdonlyres/81AB2E18-9122-4BAA-86C1-B6804D2CCE9A/0/NC….
  2. Kentucky Adult Education, “GED Graduates Enrolling in Kentucky’s Colleges and Universities within Two Academic Years FY 2007-11,” http://www.kyae.ky.gov/NR/rdonlyres/FEBCB71E-9B98-4F05-81EB-5D2CB0F29067/0/GEDGradsEnrllCollegesUniv.pdf.
  3. In Kentucky in 2011-2012, 39,487 students were enrolled in adult education. Kentucky Adult Education, “Enrollment Summary, Number of Students 2008-2012,” http://www.kyae.ky.gov/NR/rdonlyres/96373AEE-E8CF-4E6D-BFB3-16BA07D97AEE/0/Enrollmentsummary0812.pdf. More than a third of adult education providers surveyed in 2009 reported having waiting lists for service. Lennox McLendon, “Adult Student Waiting List Survey,” National Council for State Directors of Adult Education, 2010, http://www.naepdc.org/publications/2010%20Adult%20Education%20Waiting%20List%20Report.pdf.

Pension Issue is Primarily a Revenue Challenge

Over the last several years, much of the focus given to Kentucky’s pension system has been on ways to shift new employees into some version of a 401k-style retirement plan. But as a presentation to the state’s pension task force this week showed, that idea has little to nothing to do with the state’s main challenge on this issue: how to pay back the existing unfunded liability.

Consultants from the Pew and Arnold foundations presented preliminary information to the task force on the impact of various options for dealing with the liability. All of the options that cut pension benefits for employees barely made a dent in the problem.

That’s because the unfunded liability is for benefits already earned by existing employees and retirees—benefits that are both legally and morally obligated to them. Cutting benefits moving forward won’t make that debt any smaller.

Also, as Pew’s David Draine noted, the employer costs for new employees under the current pension plan are already modest, especially after cuts and shifts in costs to employees were made in 2008. Draine said that “seeking meaningful savings from a new plan is not possible.”

That is demonstrated in a chart in the presentation showing that the state costs for new employees would be basically the same under the existing system as under three types of 401k-style defined contribution plans.

The only options Pew and Arnold presented that truly address the liability involve the state making bigger contributions to the system. The consultants noted that the option of eliminating the income tax exclusion on all retirement income—which the governor’s blue ribbon tax reform commission is currently considering—and dedicating that revenue to the pension system until it is fully funded would reduce the liability by $7.5 billion.

Pew and Arnold noted that “the funding gap facing Kentucky is so large that even with an implausibly aggressive attempt to curtail benefits, costs would remain substantial.” They stated that “ultimately, more money will need to be put into the system to pay for the Commonwealth’s pension problems.”

Many in Frankfort have wanted to dodge the fact that the pension issue is in fact primarily a revenue challenge. For most of the last twenty years, the state essentially borrowed from workers’ retirements to avoid making needed tax reforms and to limit some of the impact of a failing tax system on the state budget. The state is still not making its full required contribution to the pension system, which means we’ll be paying much more in future years unless we come up with more revenue.

Some task force members are recognizing this reality. In Tuesday’s meeting, Representative Brent Yonts talked about the need to merge the recommendations of the task force with ideas to raise new revenue coming out of the governor’s tax reform commission.

Let’s hope that this week’s meeting is the first step toward focusing this issue on the real problem at hand. Video of the meeting is available here.

New Census Data: 29,000 More Kentuckians Had Health Insurance in 2011

New Census Data: 29,000 More Kentuckians Had Health Insurance in 2011

Affordable Care Act’s Coverage for Young Adults Contributing to this Trend

The share of Kentuckians without health insurance dropped last year, according to state Census Bureau figures released today. 14.4 percent of Kentuckians did not have health insurance coverage in 2011, a decrease from 15.3 percent in 2010.

“After years of falling health insurance coverage, we are seeing the trend reverse thanks to health care reform,” said Jason Bailey, director of the Kentucky Center for Economic Policy. “This underscores the urgent need for Kentucky to implement the rest of the Affordable Care Act, including the expansion of Medicaid to low-income Kentuckians.”

The Affordable Care Act contributed to the decline in uninsurance rates in Kentucky. Although much of the health reform law won’t be implemented until 2014, it now requires health insurance companies to allow people under the age of 26 to stay on their parents’ private health insurance plans, extending coverage to many Americans who otherwise would remain uninsured.

15,827 fewer 18 to 24 year olds in Kentucky were uninsured in 2011 than in 2010. The share of 18 to 24 year olds with private insurance rose from 55.7 percent in 2010 to 61.4 percent in 2011.

The positive impact of the Affordable Care Act’s young adult provision illustrates the critical importance of implementing the rest of the health care reform law.

Kentucky has an opportunity to continue to shrink the number of Kentuckians without health insurance by expanding Medicaid to additional low-income residents who can’t get health insurance through their jobs and can’t afford to purchase it in the private market. The federal government will pay for the vast majority of the cost of expanding Kentucky’s Medicaid program.

“We have the chance to help those who can’t afford health insurance receive the care they need at very little cost to the state and to boost Kentucky’s economy at the same time. It would be a mistake to let this opportunity pass,” said Bailey.

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The Kentucky Center for Economic Policy is a non-profit, non-partisan initiative that conducts research, analysis and education on important policy issues facing the Commonwealth. Launched in 2011, the Center is a project of the Mountain Association for Community Economic Development (MACED). 

Note: Figure on increase in number of insured was revised from 32,000 in the original press release to 29,000. The precise estimate provided by the new Census American Community Survey data is an increase of 28,583 from 2010 to 2011.

Policy Group Uses Census Data to Encourage Medicaid Expansion

Higher Education Helped in the Recession, but Doesn’t Guarantee a Good Job in Recovery

Those with higher education fared better in the recession and are more likely to obtain the new jobs being created in the recovery. However, those new jobs tend to pay lower wages than the jobs that were eliminated during the downturn.

Thus while more education can help shield families from recession, the path to greater family economic security must also include policies that spur the creation of more good quality jobs.

A report released last month by the Georgetown Public Policy Institute highlights how the recession impacted those with different levels of education. Since the recession began, unemployment rates have been high, even for college graduates. However, while the unemployment rate is currently 9.4 percent for high school graduates – and peaked at 13.4 percent in 2010 – the unemployment rate for college graduates has never exceeded 6.3 percent.

The Georgetown study finds that at the peak of the recession – between December 2007 and January 2010 – those with a high school diploma or less were more than three times likelier to lose their job than those with more education. Of the net jobs lost – 7.2 million – those with a high school diploma or less accounted for nearly 5.6 million of the job losses compared to 1.75 million for those with an Associate’s degree or at least some postsecondary education. Over this same period, those with a Bachelor’s degree or higher experienced a gain of 187,000 jobs.

More than two-thirds of the jobs lost during the recession were in construction and manufacturing—industries that historically have provided decent wages even for those without a postsecondary degree. The manufacturing industry alone accounted for 2.7 million of the losses – approximately one out of every six workers. And the construction industry lost 2.5 million jobs, more than a fifth of its workforce.

Likewise in Kentucky, from December 2007 through the trough of the recession in February 2010, the construction and manufacturing industries recorded 66,300 jobs lost. These two industries accounted for over 56 percent of the recession-induced Kentucky job losses.1

In the past couple of years as the economy has begun to recover, even jobs in occupations that traditionally have required low levels of education are now occupied by those with higher levels of education. Over half of the job gains in the recovery in these occupations went to individuals with some college or an Associate’s degree.

However, it is important to note that the new jobs that have been created are in many cases lower wage jobs than those that were previously eliminated. A new report by the National Employment Law Project indicates that while low-wage jobs accounted for only 21 percent of the total jobs lost during the recession, 58 percent of recovery growth has been in low-wage jobs. Mid-wage jobs account for 60 percent of recession losses but only 22 percent of recovery growth.

The job quality challenges can be addressed in part through more investment to spur faster overall job growth, reduce unemployment rates and create jobs in the sectors where they are needed. Proposals to expand investment in infrastructure, for example, can help create jobs in the construction sector, while aid to state and local governments can help stem the loss of mid-wage jobs in government due to state and local budget cuts.

And in the long run, higher levels of education in Kentucky will help more of the state’s residents obtain jobs with greater security. In Kentucky, nearly one in two adults aged eighteen to sixty-four are without any postsecondary education and only 27.2 percent have an Associate’s degree or higher.2 However, the state continues to cut funding for postsecondary education. As noted in a previous post, the state cut inflation adjusted per student funding by 23 percent between 2008 and 2012 – and additional cuts were made to postsecondary education in the 2013-2014 budget.

  1. KCEP analysis of Bureau of Labor Statistics data provided by the Economic Policy Institute.
  2. Working Poor Families Project, Population Reference Bureau, analysis of 2010 American Community Survey.

Debate Continues on Kentucky’s Economic Climate

A Discussion About the Federal Budget

State Cuts to Education Continue to Deepen

Kentucky is one of 35 states in which inflation-adjusted per student state funding for K-12 education is lower this school year than it was in 2008, according to a new report by the Center on Budget and Policy Priorities.

The report calculates that Kentucky’s core state funding for local schools has declined by 8.5 percent, or $399 per student, between 2008 and 2013. 26 states—including Kentucky—have deepened the already steep cuts to education over the last year. School funding per student in Kentucky decreased by 1.4 percent between fiscal years 2012 and 2013.

These cuts are associated with a range of negative consequences. Kentucky reduced the number of teachers and other certified staff in its schools between 2011 and 2012, cuts that are harmful to the economy as well as to the quality of education schools are able to provide. In many cases, the cuts counteract and sometimes undermine state education reform initiatives by limiting the funds available to improve schools and also by cutting specific reform initiatives. State education cuts are especially deep in areas not included in the Kentucky estimate, such as professional development, family resource and youth services centers, and textbooks.

State budget cuts are also putting additional pressure on property taxes and other local revenues, and several school districts are at least considering property tax increases. As highlighted in the report, Jefferson County’s school board has increased property taxes for the fifth year in a row to make up for declining funding.

These cuts are the result of several factors. State revenues remain depressed as the economy is slowly recovering. Costs are rising as more K-12 students are enrolling. States have avoided raising new revenues. And the federal government allowed emergency aid to states to expire prematurely.

As recommended in the report, restoring K-12 education funding should be an urgent priority for Kentucky. In order to do so without cutting other important state services, the state will need tax reforms that raise revenue.