Medicaid Expansion Would Benefit Workers Across Kentucky’s Economy

If Kentucky moves forward with the Medicaid expansion, uninsured workers across Kentucky’s economy could gain health coverage. Workers at restaurants, construction sites, grocery stores and child care centers are among those who would benefit.

Medicaid Expansion for KY Workers Brief

Workers Across Kentucky’s Economy Could Gain Health Insurance through Medicaid Expansion

New Brief: “Medicaid Expansion Would Benefit Workers Across Kentucky’s Economy”

Workers Across Kentucky’s Economy Could Gain Health Insurance  through Medicaid Expansion 

Workers at restaurants, construction sites, grocery stores and child care centers
among those who would benefit

Moving forward with the Medicaid expansion in Kentucky would provide health coverage to more than 146,000 uninsured workers across the Kentucky economy, according to a new brief by the Kentucky Center for Economic Policy using data from the American Community Survey.

The expansion would offer health coverage to workers in a broad range of industries and services that help drive Kentucky’s economy and improve our quality of life—including restaurants, motor vehicle production, schools and universities, nursing care facilities, and hospitals. The brief provides details of the industries with the largest number of workers who would benefit.

Through the Affordable Care Act (ACA) states have the opportunity to expand Medicaid to adults with incomes up to 138 percent of the federal poverty line—$31,809 for a family of four.

“Many of the workers who could gain coverage work at jobs that involve caring for the health and well-being of others,” said KCEP Research and Policy Associate Ashley Spalding. “And many do work that is physically demanding or that exposes them to significant health risks. The Medicaid expansion provides an opportunity to improve the health and well-being of these workers who are so critical to the state’s economy and our daily lives.”

In addition to benefitting workers and the state economy, the Medicaid expansion is a good deal for Kentucky. The state would pay nothing for the first three years, and no more than 10 percent of the cost after that.

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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). 

More Workers Could Get Health Care if Medicaid Expands

Retirement System’s Investment Return Assumption is Reasonable

One concern being raised in Frankfort about the existing defined benefit pension plan is that if the retirement system does not meet its expected rate of return of 7.75 percent per year, the cost to the state goes up. This concern is usually expressed by those who favor moving to a cash balance or defined contribution plan for new employees.

But a 7.75 percent return is in fact a reasonable assumption given historic performance and the realities of the market today, as explained by economist Dean Baker in recent testimony to the New Mexico legislature.

Baker notes that the stock market is inherently volatile, but that pension funds’ ability to meet their obligations is determined by the long-run rate of return, not the return in any particular year. A few bad years, or even a bad decade, do not sink a pension plan. A weak period is often followed by a strong period.

He notes that it is “nearly impossible that returns over the full projection period will fall substantially below the 7.75 percent return assumed by the state’s pension funds.” He says “there is very little downside risk to this projection,” calling 7.75 percent “a modest assumption.”

It should be noted that Baker gained a reputation as one of the few experts who accurately argued that the stock market was in a bubble in the late 1990s, and that there was an unsustainable bubble in the housing market in the 2000s. He is far from being a market optimist.

Baker explains that the key issue is return on equities, which either directly or through equity or venture funds make up about 70 percent of a pension fund’s assets. Baker notes that the historic rate of return for equities is over 10 percent. Assuming that the remaining 30 percent of the portfolio earns a return of about 3 percent, the total return would exceed 7.75 percent.

A key indicator in determining whether that rate of return on equities is likely, Baker notes, is the price-to-earnings ratio for stocks. When it is inflated, as it was during the two market bubbles of the 2000s, it would be wrong to assume strong returns in the future. But now that it is back down to normal levels, it is reasonable to assume historic rates of return moving forward.

Baker details how using reasonable assumptions for economic growth, corporate profits, inflation and dividend yields makes achieving a long-term rate of return for stocks of 9.5 percent quite plausible. In fact, he argues, it would be very difficult to construct a scenario with a much lower rate.

Historic experience in Kentucky is in line with Baker’s analysis. The Kentucky Retirement System’s overall rate of return for its pension fund since inception is much better than 7.75 at 9.36 percent.

Overheated concerns about the pension system’s ability to achieve its long-term investment targets are being used to promote changes that would cut benefits for many workers and shift risks to them. But we need to make decisions about these important issues based on a hard-eyed look at the facts and the experience.

For more, see here and here.

ADDENDUM

Here’s another look at the historic investment performance of Kentucky Retirement Systems. Since 1991, the KRS pension fund has exceeded the long-run rate of return of 7.75 percent in 14 of 22 years, and it’s on track to exceed the benchmark in 2013. While losses in the recessions of 2001-2002 and 2008-2009 were certainly painful, they don’t define the system’s investment history.

 investment returns

Source: KCEP analysis of Kentucky Retirement Systems data provided to Task Force on Kentucky Public Pensions. 2013 returns are for the first seven months of the year (through January).

Op-Ed: Pension Bill Focuses on Wrong Issues

Published in the Richmond Register on March 6, 2013.

To hear some in Frankfort these days, Kentucky needs pension reform now, now, now to avoid our own fiscal cliff, sequester, Greek economic meltdown or you name the financial calamity.

But in reality the urgency and rhetoric of so-called pension reform are a distraction from the causes of the pension funding problem and its solutions.

The real story goes like this.

Over the past couple of decades, the state has refused to fix its antiquated tax system. One way it dealt with inadequate revenues was to short-change contributions to employees’ retirement. The legislature hasn’t made the full required payment to its pension funds for 14 of the last 21 years. It also didn’t pay for cost-of-living adjustments and benefit changes when they were made.

Those factors created a big funding gap in the pension system. When the banks wrecked the economy in 2008 (only a few years after the dot-com bubble burst), the resulting investment losses worsened the problem.

But instead of talking about how to fix Kentucky’s revenue stream and assure responsible payment of the state’s obligations, the focus has been on moving new workers to a less-secure retirement plan like a 401k or hybrid cash-balance plan.

Yet, such plans do nothing to reduce the pension system’s unfunded liability. In fact, the proposed cash-balance plan is projected to cost the state more than the current plan over the next 20 years. It will also increase employee turnover, leading to more money spent on hiring and training, while reducing retirement security for career employees.

The existing defined-benefit pension plan for new workers is in fact quite cheap, costing about four percent of what is spent on salaries for typical workers. Its risk is low, if contributions are made on time and any cost-of-living adjustments are funded.

Instead of a financial plan to address the debt, the liability is being used as an excuse to achieve an ideological goal. The same people who want to privatize Social Security nationally want to move toward 401k type plans for public employees. And along the way are not-so-subtle hints about supposedly-overpaid public employees.

Yet while overall benefits are better in government than in the private sector, wages are far worse – such that public-sector workers in Kentucky receive about 9 percent less in overall compensation than private sector workers with comparable education and experience. The public workforce also hasn’t been receiving raises in recent years.

And pitting workers against each other is a distraction from the real problem that all workers now face in maintaining middle-class economic security.

In the private sector, workers have seen secure pensions replaced by inferior 401k plans or nothing at all. Median wages have been stagnant for the past decade. The result is a growing number of Kentuckians who are unprepared for retirement, and anxious about it.

All this suggests two important issues that should be the focus.

The first is finding the resources to responsibly address past failures to properly fund public workers’ retirement. That conversation is about revenue, not pensions. It involves looking at ways to sustainably and fairly generate the money needed to pay the obligation to workers while making other crucial public investments.

And the second conversation is about what we can do to support more secure retirements for all Kentuckians – including those in the private and the public sectors. Some states are beginning to look at ways to let small businesses participate in some version of state pension plans to access professional investment management, low administrative costs and risk pooling. Protecting and even strengthening Social Security – rather than cutting it – must be part of the answer. So should protecting traditional defined-benefit pension plans.

Reductions in retirement benefits are just one example of how we are slowly chipping away at the policies and institutions that built a middle class in this country. We in Kentucky shouldn’t let ourselves get distracted from the real issues impacting our economic future, including our retirement security.

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

In the Game of Pension Risk, Cost Isn’t the Only Thing Lawmakers Are Considering

New Projections Say Senate Pension Bill Is $206 Million More Expensive than House Plan

The Senate version of pension legislation will cost $206 million more than the House version over the next 20 years according to analysis of the new actuarial projections for Senate Bill 2.

The Senate plan would cost state government $59 million more than the House plan and is $147 million more expensive for local governments than what the House proposed, resulting in a total cost increase of $206 million. The projections come from the retirement system’s actuary, Cavanaugh Macdonald.

Earlier analysis projected that switching to a hybrid cash balance plan for new workers rather than keeping the current defined benefit plan would add $55 million in state costs. The difference in state costs in this analysis is due to provisions related to early retirement for state police and hazardous duty workers that are included in the House version and save $4 million.

The new projection provides the first opportunity to estimate the impact on local governments of the cash balance plan and other measures in the Senate version of the bill.

While these estimates are a small percentage of what employers will pay over the next 20 years, it’s important to ask why Kentucky would add any more costs to the many billions that are already owed to the retirement system–especially since most workers prefer the current defined benefit plan while a cash balance plan will increase employee turnover costs and cut benefits for those who devote their careers to public service.

The expected employer cost of the current defined benefit plan for new workers is modest—ranging between 2.2 percent and 6 percent of what state and local governments spend on salaries for non-hazardous workers according to earlier estimates provided by Pew—as long as full contributions are made and any cost-of-living adjustments are paid for ahead of time.

The cost savings from the House version of the bill do not take into account the additional revenue the House is proposing to generate.

(Note: the Senate plan actually adds $216 million in pension costs relative to the House plan including $157 million in extra costs to local governments and $59 million to the state government. The $206 million figure used in this blog takes into account the impact on both pension and retiree health costs of the Senate plan relative to the House plan).