Kentucky needs a smart and measured plan to pay down our pension liabilities over time and improve our financial condition. But the bill released last week would cause unneeded harm to Kentucky’s workforce while creating an avoidable near-term crisis for our state budget and public services.
Underlying the plan are overstated claims about the size of Kentucky’s pension liabilities and the urgency with which these liabilities must be paid. There is a middle path between the denial that plagued lawmakers about these liabilities in the past and the “chicken little” mentality driving the discussion today.
A close look reveals the sky is not falling on the state’s retirement plans as a whole. The Kentucky Employees Retirement System (KERS) non-hazardous plan is overly depleted and needs extra resources as it gets back on its feet. But other plans don’t face those same challenges and the systems as a whole will return to full health over time through responsible funding.
Take the retiree health plans, for instance. Those plans are allegedly in such bad shape that employees who haven’t gotten a raise for most of the last decade must make an additional three percent contribution (the resulting monies don’t even benefit those funds, but that’s a different story). In fact, Kentucky’s retiree health plans are far better funded than similar plans around the country, which are typically operated on a pay-as-you-go basis. And Kentucky already took actions in 2003, 2008 and 2010 to cut retiree health benefits and increase contributions from employees and other stakeholders. These plans are on strong footing, with their funded status improving rapidly over the last decade.
The teachers’ retirement system is also treated as if it is in crisis, but it has $17 billion in assets. Only last year did the state finally get back on track to fully fund that system. With its 30-year debt over half-paid at this point, the plan’s health will steadily improve if we stay on that funding path. The same is true with the county employees’ plan. The other state plans are small, making their liabilities manageable compared to Kentucky’s budget.
The pension liabilities we owe are a serious challenge, but it is important to remember they are not owed immediately. Over the next 30 years, the time frame in which we aim to pay them off, the Kentucky economy will generate trillions of dollars in income from which the state collects tax revenue. The plans are not set to run out of money, as is falsely claimed, unless the state reverts back to its old pattern of skipping contributions – which no one is proposing.
With time on our side, we don’t have to overreact if assumptions in the underlying plans don’t pan out over relatively short time periods. We can and should make regular course corrections to assumptions and tweaks to benefits while we steer the plans over time toward better health.
But “house on fire” claims have led to proposals that will unnecessarily harm current workers and even already-retired teachers through legally questionable cuts. And moving new employees to 401k-style plans will make attracting a well-qualified workforce very difficult and provide no savings to the state – just more costs as investment returns decline in closed defined benefit plans whose portfolios must become more conservative.
The bill sets up a fiscal train wreck in the next budget with its requirement for immediate level dollar funding of pension liabilities, even for the better-funded teachers’ plan. By one estimate, it would mean finding an additional billion dollars in 2019 — revenue Kentucky does not now have. The method would massively front-load costs by making Kentucky put the same amount of money into pensions today as 30 years from now, ignoring how revenue and therefore ability to pay grows by about 3 percent each year.
Instead, we could take a careful approach to funding these liabilities that builds on how the General Assembly has aggressively stepped up funding to the plans in the last couple budgets. We can clean up some of Kentucky’s $13 billion in tax breaks. The resulting resources could further shore up KERS non-hazardous and allow us to continue fully funding the other plans as we have only just recently begun.
Importantly, doing so would also allow us to protect the investments in our schools, health and other building blocks of thriving communities. That’s a plan that not only meets our obligations, but ensures our future has promise as well.