Op-Ed: State Must Face Pension Debt

By Jason Bailey
September 30, 2012

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.