Cash Balance Plan Likely to Increase Costs, Impact the Quality of Public Services and Reduce Retirement Security
While the primary pension challenge Kentucky faces is how to find the revenue to pay back the existing unfunded liability, much of the attention has instead focused on moving new employees to a defined contribution plan or a hybrid plan like the cash balance option included in Senate Bill 2. However, there are a number of reasons to prefer Kentucky’s existing defined benefit design over such a plan.
The cash balance plan for new workers proposed in Senate Bill 2 would make paying Kentucky’s unfunded pension liability harder by adding approximately $55 million in state costs over the next 20 years, according to the actuarial analysis produced for the bill.
In a presentation on the need for tax reform to the joint House and Senate Appropriations and Revenue Committee today, Secretary Mary Lassiter laid out a bleak outlook for the next biennial budget. The still-sluggish economy is likely to mean only modest revenue growth, and new revenue will be eaten up quickly by medical cost inflation, contributions to the pension system to pay previous liabilities and the replacement of one-time dollars used to help fund existing services in the current budget.
Lassiter said that revenue growth is likely to be somewhere around 2.5 percent to 3 percent in the next budget, which would mean $238 million to $286 million in new revenue. However, the state will have to come up with $157 million a year to replace the one-time money used to plug the current budget (which includes a $52 million carry-forward from the previous year and $50 million from the Rainy Day Fund). Another $28 million will be needed to make even modest contributions to the pension system–and at least another $100 million to make the full required annual contribution as Kentucky should be doing. Health care inflation will mean the cost of Medicaid and public employee health insurance (including for teachers) will add another $115 million.
That means all new revenue will go to necessary expenses that provide no new services or restore any of the cuts that have been made. And that doesn’t even leave money to address the impact of inflation in any other area of government.
Lassiter also outlined the cumulative impact of round after round of budget cuts that now total $1.6 billion:
- State employees haven’t had a raise in four years, and since 2008 their salaries have gone up only 2 percent while inflation has risen 11.8 percent. The state now has the smallest workforce since 1974.
- Many agencies have had their budgets cut between 15 and 40 percent.
- Per pupil funding for SEEK, the main program to fund local schools, has remained flat for six years while other areas of K-12 funding (like textbooks, professional development and afterschool programs) have been cut between 21 percent and 100 percent since 2008.
- Tuition is up over 200 percent at state universities and community colleges since 1998, while two-thirds of students who qualify for need-based financial aid are being denied assistance because of a lack of funds.
Lassiter’s presentation also identified trends that are putting more pressure on the budget, including the need for a more educated workforce, the elevated demand for services in an economy with high unemployment, the aging of the population and the impact of federal budget cuts.
Her presentation laid out an urgent case for tax reform that raises new revenue. The recently-announced cut to child care subsidies is only the latest example of a critical service being undermined by a lack of state dollars.
A tax plan that addresses Kentucky’s serious budgetary needs should be the number one issue on the legislature’s agenda.