Pensions Need Responsible Funding Plan, Not Exaggerated Claims

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The series of reports from PFM on Kentucky’s pension systems overstate serious challenges with the condition of the state’s plans to justify drastic cuts in benefits. PFM overgeneralizes about assumptions in the plans to assert employers should contribute $1.8 billion more in 2019 above what prior assumptions would suggest, in some cases nearly doubling what contributions would otherwise be.1

While Kentucky has substantial unmet pension funding needs, exaggerated numbers do not help the problem and inaccurately imply radical action should occur to roll back and cut already-modest public pensions. Kentucky must responsibly pay down its pension liabilities over a period of decades. The need to meet our obligations to workers and retirees is one of many reasons the state must clean up our tax code to generate additional revenue, which will allow targeted extra dollars for pensions in the short term and consistent funding in the long term. But overblowing the problem encourages actions that would cause unnecessary additional harm to workers and retirees and could make the pension funding problem even worse.

We Should Address Actual Problems, Not Create More By Overstating Crisis

PFM bases its huge funding gap assertion on claims that wrong assumptions are being used in all Kentucky pension plans to calculate what should be contributed each year. Particularly, PFM is critical of the method of calculating contributions as a percent of payroll (and assuming payroll will grow in the future) and what they claim are too-high assumptions of future investment returns (assumptions were until recently 6.75 percent to 7.5 percent per year across plans).

Payroll growth

If you look at the last decade, payroll costs have not been growing in some of the plans (especially the Kentucky Employees Retirement System (KERS) non-hazardous system, which has had negative payroll growth). That’s due to round after round of state budget cuts that have shed employment and denied raises to employees, and because some employers in the KERS non-hazardous system have responded to pressure from rising pension liabilities by privatizing and outsourcing services. When contributions are pegged to how much is paid to employees and payroll does not grow as assumed, contributions are too small to adequately pay down liabilities. That is especially problematic for KERS non-hazardous because the plan is so poorly funded already.

But political leaders have gone far beyond that empirical statement to claim using a percent of payroll method is itself fundamentally flawed. But the state’s existing method is not controversial: actuaries consider it standard practice. The Conference of Consulting Actuaries identifies the method as its “model” policy, noting it is the best approach to match benefits like Kentucky’s that are based on the pay of the covered employees.2 The method allows employers to contribute a stable amount as a share of compensation expenses over time, rather than having to find and contribute much more money as a share of total expenses at first and then much less money in later years (which is necessary under the “level dollar” approach that PFM says Kentucky should be using in all its plans, in which employers contribute approximately the same dollar amount of money each year). PFM admits in their report the level percent of payroll approach is “common nationally and widely accepted.”3 And the Legislative Research Commission recently reported 41 of 50 states use level percent of payroll.4

For the plans that are experiencing payroll growth, such as the Teachers Retirement System (TRS) and the County Employees Retirement System (CERS), percent of pay remains the right approach. A level dollar method may be appropriate in the short-term for other plans, but Kentucky must return to a status where workforce and salaries grow in order to provide an adequate level of services and attract the qualified teachers, social workers and other employees needed. We cannot continue on our current payroll-cutting path, which has created unreasonable employee caseloads, eroding payscales and damaging gaps in public services that ultimately hurt communities across the commonwealth.

Investment returns

As for investment returns, because of the Great Recession returns fell short of the target over the last 10 years, although they come close to or even exceed the target over the last 5 years, 20 years and beyond.5

The poorly-funded KERS non-hazardous plan has a more difficult time achieving its investment targets due to depleted assets and negative cash flow necessitating a more liquid portfolio to pay benefits. Despite that challenge, the plan earned returns of 12.09 percent in the year that just ended, and thanks to investment earnings and additional state contributions in 2017, its cash flow is finally positive for the same time frame.

The better funded plans do not face the same barriers in achieving investment goals. Those plans’ return assumptions are in line with other pension plans around the country, and nationwide systems are a healthy 76 percent funded as a whole and their financial status is improving.6 That’s because governments in most states — unlike Kentucky — made the required annual payments to those systems. The median investment return assumption for plans nationally is 7.52 percent, with only 8 percent of plans using an assumption below 7 percent. None of the 127 plans surveyed by the National Association of State Retirement Administrators uses an assumption as low as 6 percent, which PFM recommends for TRS, KERS Hazardous, CERS and the Judicial Form Retirement System (and 5.1 percent for KERS Non-Hazardous and the State Police Retirement System), as shown below.7

PFM takes one-size-fits-all approach to assumption changes 

Dramatically and immediately adopting more conservative assumptions across the board causes the big increase in required contributions PFM says is necessary. Only 26 percent of the $1.8 billion in additional monies PFM calls for goes to the severely underfunded KERS non-hazardous plan, as shown the graph below. In contrast, 65 percent of those monies go to plans that are nearly 60 percent funded — TRS and the CERS non-hazardous plan.

PFM does not present a sound case for that level and allocation of additional resources as the smartest or most practical for the next budget period — especially if it is met in significant part through cutting other parts of the state budget and slashing workers’ benefits. The $862 million more PFM alleges is needed for TRS is over 80 percent above what is now being contributed, as shown in the graph below. Kentucky finally stepped up to nearly paying its full ARC contributions to TRS in the 2017-2018 budget, and the state’s failure to pay the ARC before those years is the main reason TRS is underfunded. Kentucky is only just now on the right track for funding TRS, but PFM is claiming that contribution is far too small.

That higher number for TRS comes from using a level dollar assumption that teacher payroll will not grow over the next 30 years — meaning we will fail to add any teachers to keep up with a growing population and fail to pay them any more than we pay them now, both of which are implausible and would be deeply harmful. The number is also derived, as mentioned, from assuming the plan’s investments will earn 6 percent annual returns on average, as opposed to their current assumption of 7.5 percent. Although no one can guarantee future returns, TRS has $17 billion in assets from which to invest in financial markets, and it earned 15.4 percent returns in the year that just ended and 8.1 percent over the last 30 years. As noted above, in a national survey no plan had adopted an assumption as low as 6 percent and certainly not a plan with the assets of TRS.8  PFM itself was part of a survey of 35 investment advisors in 2016 that projected pension funds have a 48.8 percent chance of earning at least 7.5 percent returns over the next 20 years.9

Claims that dire actions are necessary today to radically increase contributions could lead to counterproductive and extreme changes to benefits. On the table now are clawbacks of past cost of living adjustments (COLAs) and elimination of future teacher COLAs, big increases in the retirement age and the closing of defined benefit plans to shift to less efficient and less attractive 401ks.10 Such cuts and changes will break promises to employees, reduce their standard of living, make it much harder to attract and retain qualified public servants and hurt the entire economy by reducing retiree spending in local economies.11 Existing benefits for employees and teachers are inexpensive for the state as long as they are properly funded, and have been reduced already through multiple rounds of benefit cuts including in 2008 and 2013 and a lack of employee raises that results in a subsequent decline in pension incomes (which are tied to an employee’s salary at the end of their career).12 Furthermore, moving to a 401k-style defined contribution plan would make it more expensive to pay down existing liabilities over time, worsening the challenge we now face.13

A Responsible Approach: Short-Term Aid and Long-Term Consistency

A sound approach would protect already-reasonable benefits and provide responsible funding levels in the near term to get the plans on the right path so that challenges diminish over time. The General Assembly has already made major strides in that direction recently. In 2015, the state began paying the full actuarially required contribution (ARC) for the KERS non-hazardous system and paid $58 million above the ARC in 2017 and $68 million above the ARC in 2018. And, as mentioned previously, in the 2017 and 2018 budget, the state paid about 94 percent of the ARC for the teachers’ plan after paying only about 50 percent in the prior year.

A responsible plan would include additional aid to the KERS non-hazardous plan, which needs higher contributions for the time being than its prior actuarial assumptions would suggest. Given that system’s depleted state, extra caution and resources are warranted to help the plan get back on its feet and headed in the right direction.

The state should contribute an amount that would improve the short-term financial condition for KERS non-hazardous. At a minimum Kentucky could target funding to the amount needed to pay benefits each year. By preventing negative cash flow, that would free up the plan’s existing $2 billion of assets from being liquidated to pay benefits — allowing it to maximize its investment portfolio for long-term returns.

How much is that? In 2017, the plan paid $948 million in benefits and it received $703 million in employer contributions, so a payment achieving that target would be at least $245 million or 35 percent above what is now being contributed. That’s a big increase in the next budget, but is less than the consultant group’s suggestion that the plan needs $474 million or 67 percent above the current contribution for the KERS non-hazardous plan.

While KERS non-hazardous needs special attention, other plans like the local workers’ plan (CERS) and teachers’ plan are in much better shape and will be on their way to healthy funding levels as long as annual required contributions continue to be made (local governments must make those full contributions by law). Since the state paid 94 percent of the teachers’ contribution in the current budget, that means an additional contribution in the neighborhood of $50 million a year beyond that level. There is not a demonstrated need for dramatic changes in assumptions for these plans. If their boards wished to err on the side of caution, they could phase in modestly lower assumptions over a period of years rather than making large changes all at once.14 PFM actually recommends such a cap for CERS in how much annual contributions change due to assumption changes, but does not apply the same logic to the state-level plans.

Some will inevitably charge that an approach ratcheting down the alarmism around assumptions across the board is just “kicking the can down the road.” But, as noted above, Kentucky is only recently beginning to make much more aggressive contributions to these systems, and the suggestions above would increase contributions further. Pension liabilities cannot be paid off overnight, but the obligations are also not owed to retirees immediately, and getting the systems back to healthy funding levels will take decades.

Additional Revenue is Key

The real challenge we face now is this: even just replicating the historic increase in pension contributions made in the current budget looks to be very difficult moving forward. That’s because the budget was built with significant one-time money unlikely to be available for the next budget.15 Revenue growth is modest with another shortfall of $200 million expected at the end of the year, and the state is on track to deplete its rainy day fund in 2018.16 There is also pent-up demand for reinvestment after years of budget cuts that have led to strain on nearly every public service the state provides, soaring college tuition and a lack of employee raises.

Our budget challenge can be solved, but we need to take a responsible approach and not one based on overgeneralizations about assumptions. The key to solving it will be action to clean up the tax code and raise new and more sustainable revenue — to meet our obligations to employees and retirees and invest in a stronger Kentucky.17



  1.  PFM, “Pension Performance and Best Practices Analysis, Report #3: Recommended Options, Summary Presentation to Public Pension Oversight Board,” August 28, 2017,
  2. Conference of Consulting Actuaries, “Actuarial Funding Policies and Practices for Public Pension Plans,” October 2014,
  3.  PFM, “Pension Performance and Best Practices Analysis, Interim Report #2: Historical and Current Assessment,” May 22, 2017,
  4.  Legislative Research Commission, “Payroll Growth Assumption,” Public Pension Oversight Board, March 27, 2017.
  5. Rates of return for KRS are: 1-year 13.47%, 5-year 8.08%, 10-year 4.86%, 20-year 6.46%; inception to date 9.16%. KRS Monthly Performance Update, June 2017, Rates of return for TRS are: 1-year 15.37%, 5-year 10.1%, 10-year 6.3%, 30-year 8.1%. TRS, “Teachers’ Pension Fund Gains 15% with New Funding,”
  6.  National Conference on Public Employee Retirement Systems, “Economic Loss: The Hidden Cost of Prevailing Pension Reforms,” May 2017,
  7.  NASRA Issue Brief, “Public Pension Plan Investment Return Assumptions,” February 2017,
  8.  NASRA, “Public Pension Plan Investment Return Assumptions.”
  9.  Horizon Actuarial Services, “Survey of Capital Market Assumptions: 2016 Edition,”
  10.  Jason Bailey, “PFM Report Uses Exaggerated Claims to Justify Harsh, Counterproductive Cuts,” Kentucky Center for Economic Policy, August 28, 2017, Jason Bailey, “Clawback of Cost of Living Adjustments Would Be Major Hit to Retiree Checks,” Kentucky Center for Economic Policy, August 30, 2017,
  11.  Jason Bailey, “Pension Benefits Inject $3.4 Billion into the Economies of Kentucky Counties,” Kentucky Center for Economic Policy, June 6, 2017,
  12.  Jason Bailey, “Kentucky Public Pensions Are Not Expensive — If You Fund Them,” Kentucky Center for Economic Policy, June 21, 2017,
  13.  Jason Bailey and Stephen Herzenberg, “Switch to 401k-Type Plan for Kentucky Public Employees Will Cause More Harm,” Kentucky Center for Economic Policy and Keystone Research Center, August 22, 2017,
  14.  The Board of Kentucky Retirement Systems already recently lowered the investment return assumption of CERS from 7.5% to 6.25 %.
  15.  Jason Bailey, “Budget’s Reliance on One-Time Funds Presents Challenge Next Time Around,” Kentucky Center for Economic Policy, August 30, 2016,
  16.  Pam Thomas, “Four Added Concerns About Kentucky’s Fiscal Outlook,” Kentucky Center for Economic Policy, August 4, 2017,
  17.  Anna Baumann, “Revenue Options that Strengthen the Commonwealth,” Kentucky Center for Economic Policy, February 2, 2016, Anna Baumann, “What Good Tax Reform Looks Like,” Kentucky Center for Economic Policy, April 17, 2017,

New Study Provides More Evidence Harsher Penalties Are Not Solution to State’s Drug Problems

At the same time our state is increasing criminal penalties for heroin, a new analysis further bolsters existing research showing such an approach is not an effective way to address Kentucky’s drug problems.

House Bill 333, which the Kentucky legislature passed earlier this year, increases penalties for low-level heroin and fentanyl trafficking — rolling back the drug sentencing reforms in 2011’s House Bill 463. The new law makes trafficking in heroin in less than 2 grams a Class C felony, with a 5 to 10 year sentence and no eligibility for parole until 50 percent of the sentence is served. This increase is a big jump from the crime’s former classification as a Class D felony with a 1 to 5 year sentence and parole eligibility after serving 20 percent of the sentence. Kentucky’s broad definition of trafficking means those charged with trafficking in these small amounts may be sharing drugs or selling just enough to support their habit, rather than engaging in large-scale dealing.

Despite compounding evidence to the contrary, legislators involved in passing HB 333 cited the need to do something about the state’s devastating opioid epidemic. But the new study by Pew adds to the large body of research showing harsher penalties for drug crimes do not reduce substance abuse.  They are, however, costly to individuals and families as well as the state.

Pew set out to understand “whether and to what degree high rates of drug imprisonment affect the nature and extent of the nation’s drug problems” by comparing publicly available data from law enforcement, corrections and health agencies. If imprisonment was an effective deterrent to drug use and crime, then states with higher rates of imprisonment for drug offenses would have lower rates of drug use among their residents — other things held constant. However, when Pew compared state drug offender imprisonment rates with three important measures of state drug problems — self-reported drug use rates (excluding marijuana), drug arrest rates and drug overdose death rates — no statistically significant relationship was found. These results account for variation in states‘ education level, unemployment rate,  racial diversity and median household income.

According to Pew: “What research does make clear is that some ways of reducing drug use and crime are more effective than others — and that imprisonment ranks near the bottom of the list. Putting more drug offenders behind bars — for longer periods of time — has not yielded a convincing public safety return. What it has generated, without doubt, is an enormous cost for taxpayers.” The increased costs associated with greater imprisonment for drug offenders means less funds for “programs, practices and policies that have been proven to reduce drug use and crime” — which is a net loss for public safety.

Kentucky is clearly heading in the wrong direction with its drug laws — a trend that is especially troubling given recent reports of jail overcrowding, plans to reopen private prisons and a Department of Corrections budget that is $43 million over projections for this year alone, according to the Justice Cabinet.

New Retirement Plan for Private Sector Workers Would Strengthen Economic Security in Kentucky

When it comes to a secure retirement many Kentuckians are in danger in part because they lack access to a retirement account at work that can help them save, new research by the Kentucky Center for Economic Policy shows.

The population is aging in Kentucky and across the country as the baby boomers reach retirement age, with the share of Kentuckians over the age of 65 expected to grow from 15 percent today to 20 percent by 2030. Yet too many in the state are deeply underprepared for financial security in retirement. The growing elimination of more secure defined benefit plans in the private (and more recently the public) sector has worsened the problem, and the current level of Social Security benefits is not adequate for a decent standard of living. The average defined contribution account (such as a 401(k)) balance for current workers in Kentucky was only $32,499 in 2012, and many workers have jobs where no type of plan is offered at all. More must be done at all levels of government to promote a more secure retirement for the sake of retirees and the economy as a whole.

To read the report in PDF form, click here.

Kentucky’s Class of 2016 Faces Lingering Slack in Labor Market

Despite improvement, the labor market is still weak for young Kentuckians graduating from high school and college in 2016 according to a new report from the Economic Policy Institute (EPI). These graduates join the previous seven classes who have faced “profound weakness” following the Great Recession.

In 2015, the unemployment rate for workers under age 25 in Kentucky was still 0.5 percentage points higher than before the recession (unemployment includes people who are currently without work, but actively seeking a job). Even more indicative of the extent of labor market weakness, the underemployment rate for young Kentuckians is 23.3 percent and still 3.7 percentage points above the 2007 rate (underemployment includes the unemployed and also those who are employed part-time but would rather have full-time work and those who have given up looking for work in the last four weeks but have actively looked in the past year). In contrast, the 2015 unemployment rate for all Kentucky workers was back down to its prerecession level and underemployment was elevated just 1.1 percentage points.

class of 2016 1

Notes: Includes all workers age 16 and older. Click here to compare rates across states.
Source: EPI analysis of CPS Microdata.

Young workers face competition from older, more experienced workers in a strong economy and their employment prospects are hurt disproportionately in hard times. The depth and length of the trouble for young workers since 2007, EPI points out, is not due to some unique characteristic of young people today – such as a lack of education – but to the historical severity of the Great Recession and the slowness of the recovery.

In fact, Kentuckians “are more educated than ever.” Yet many educated young people are working in jobs that do not require a college degree – nationally, 44.6 percent of college graduates under 27 were in this predicament in 2015. That’s up from 38 percent in 2007.

Despite these unfavorable conditions, it’s not true that young people today are taking refuge from the recession in large numbers by returning to school. Enrollment at Kentucky’s universities and community colleges jumped from 211,179 in 2008 to 235,833 in 2011, but had fallen back to 208,251 by 2015. As the table below shows, a smaller share of young Kentuckians were enrolled in 2013-14 and 2014-15 than before the recession. Nationally, EPI notes, enrollment growth is in line with long-term historical trends and does not indicate that young people are attempting to “ride out” the weak employment situation in school. Combined with the lack of employment, that means an elevated share of young people are “idled” by the bad economy—neither working nor in school.

class of 2016 2

Source: EPI analysis of CPS Microdata.

One possible explanation for why postsecondary enrollment isn’t higher is that decreased public investment in higher education over recent decades has led institutions to raise tuition. With generally stagnant wages over the last 15 years that have only recently returned to 2007 levels, the money people have to pay for college has not kept up with the cost. And while other states have begun reinvesting in higher education after deep cuts through the recession, Kentucky continues to cut state funding including in the new 2017-18 budget.

Young people who do manage to get through college are graduating with more debt. Nationally, average debt has tripled since 1989 according to EPI. In a slack labor market, with fewer (and lower-quality) jobs and stagnant wages, repayment is more difficult. Kentucky students have the third-highest student loan default rate in the nation.

Overall data for the graduating class of 2016 show reason for continued concern, but disaggregated data by race/ethnicity reveal that young black and Hispanic workers face even deeper challenges in the labor market. Nationally, today’s unemployment rate for black college graduates is still 0.4 percentage points higher than peak unemployment was for white graduates during the recession (9.4 percent compared to 9 percent). The current unemployment rate for white college graduates is 4.7 percent. Unemployment is also higher for black high school grads than their white peers. For Hispanic high school and college grads, unemployment rates tend to be higher than for white but lower than for black graduates.

And while women have tended to fare better in the recession in terms of employment – due in part to the fact that traditionally male-held jobs in manufacturing, construction and transportation are hit harder by recessions – women college grads make 79 cents on the dollar what men do. The pay disparity among high school grads is smaller (92 cents on the collar) and has actually shrunk since 2000, possibly due in part to state minimum wage increases which disproportionately benefit women who make up a larger share of the low-wage workforce.

Young Kentuckians will suffer the consequences of the weak labor market they are entering for some time to come. EPI lists two main types of federal and state policies that would tighten the labor market for all Americans, including young people: 1) policies that move the country toward full employment such as continued low federal interest rates and state and federal investments in infrastructure and 2) those that put more money in workers’ pockets like raising the minimum wage, strengthening the EITC, protecting collective bargaining, ending discriminatory practices and raising the overtime threshold.

Visual: Who Benefits from Lexington Raising the Minimum Wage?

The Lexington-Fayette Urban County Council is considering an incremental minimum wage increase to $10.10 per hour for its workers over the next three years. Lexington would be the second city in Kentucky, and in the South, to raise its wage above the current $7.25 federal minimum wage. Recently, Louisville joined 29 states and a growing number of cities nationwide that have tackled the eroding value of the federal minimum wage through their own increases. You can see more data on who would benefit here.

Lexington Min Wage Infographic

“New Americans in Kentucky” Are Diverse and Contribute Substantially to State’s Economy

immigrantsprofileKentucky’s immigrants are a diverse, rapidly growing population that contributes to the state’s economy at a rate consistent with or even exceeding their share of the state’s overall population, according to a new report by the Kentucky Center for Economic Policy. But in the absence of immigration reform, these Kentuckians face barriers that have implications for the entire state economy.

The report, “A Profile of New Americans in Kentucky,” uses data primarily from the U.S. Census Bureau to paint a picture of immigrants in Kentucky and their role in the workforce and economy. Among the report’s findings are:

  • Kentucky’s immigrant population is small compared to other states but grew at a faster rate than all but six states in percentage terms between 2000 and 2012.
  • Immigrants are well-represented across the state’s workforce and occupations.
  • More than one in three are naturalized citizens, many others are legal residents (refugees, students and workers, for example), and estimates range from 50,000 to 80,000 on the number of immigrants who are in Kentucky without authorization.
  • Kentucky’s immigrants are ethnically and racially diverse, having come to the U.S. and to Kentucky from all around the world.

“Our public dialogue tends to cast immigrants as a separate, homogenous group but in fact they are people from all walks of life who are already at home in our Kentucky communities, who already contribute significantly to our economy and pay taxes to support the public good,” said Anna Baumann, policy associate at KCEP. “We need to better understand the diversity of Kentucky’s immigrants and the barriers they face in order to create policies that benefit us all.”

Compared to U.S. born Kentuckians, immigrants are overrepresented among those with less than a high school diploma as well as those with a bachelor’s degree or higher. Immigrants are more likely than other Kentuckians to be small business owners—one in 33 Kentuckians are immigrants, but one in 20 small business owners are. However, the overall poverty rate for immigrants is higher than U.S. born Kentuckians. Low-income immigrants are paid less than U.S. born citizens in the same income category as a result of many factors including their overrepresentation in occupations where wage theft is common and in sectors where employers are more likely to pay unauthorized immigrants low wages, including under the table.

“A level playing field between employers who pay illegal wages and those who play by the rules is just one example of how immigration reform would make our economy fairer and stronger,” said Baumann. “When our neighbors are paid fairly and can spend to meet their families’ needs—and when unscrupulous employers can no longer suppress wages and avoid paying taxes by exploiting a particular group–our local economies and communities benefit.”

About one in three Kentucky immigrants are Hispanic, yet the majority of Hispanic Kentuckians (60 percent) were born in the U.S. The top five most common countries of origin are Mexico, Germany, India, Cuba and Japan. More than half of Kentucky’s immigrants speak English very well or speak only English, and there are 116 languages spoken by “Limited English Proficient” public school students in Kentucky.

For more information about immigrants in Kentucky, the full profile is accessible here: “A Profile of New Americans in Kentucky.”


Increasing Kentucky’s Minimum Wage Would Help One in Four Workers Make Ends Meet

The decline in the real value of the minimum wage for tipped and non-tipped workers has been contributing to poverty and inequality in Kentucky. Increasing the state’s minimum wage to $10.10 an hour, as proposed in legislation in the 2014 Kentucky General Assembly, would lift the wages of one in four Kentucky workers. It would also benefit more than one in five of the state’s children by increasing the earnings of at least one of their parents. KCEP’s new policy brief outlines the need to raise the minimum wage and the benefits to Kentucky of doing so.

Minimum Wage Brief

Minimum Wage Fact Sheet

min wage