The long pension saga of the last year gave rise to the largest mobilization of Kentuckians to the Capitol the state has seen in decades. The unpopularity of proposals led lawmakers to try sneaking the final pension bill into sewage legislation, which the Franklin Circuit Court declared unconstitutional last week.
The whole episode will mean a halt to more legislative attacks on pensions for the time being. That presents an opportunity for a fresh start on the issue — one that fully protects pensions and also lessens the strain now facing state and local budgets, where on July 1 pension payments will jump to as much as 83 percent of what is spent on employees’ salaries.
A new approach requires discarding the myths and misinformation that have plagued the pension discussion over the last year. Those seeking pension cuts regularly exaggerated the size of liabilities and the urgency with which they must be reduced. Proponents argued for ideas that actually cost more money rather than less, unnecessarily choke the budget in the short-term, have no impact on the unfunded liability or are patently illegal.
For instance, the governor-appointed majority on the Kentucky Retirement Systems board spurred a crisis by suddenly lowering the retirement plans’ assumptions to the most conservative in the country. Employers will be making pension payments starting in a few days that are as much as 82 percent above the already-high actuarially required contributions made in the last budget. That is resulting in big cuts to vital public services.
The truth is Kentucky’s pension debt, while a serious issue, is not nearly as big nor as insurmountable as has been claimed. In addition to raising more revenue to help fund the plans — which everyone knows Kentucky needs — we can take commonsense steps to ease the pressure we face.
Contributions are so high in part because we are trying to get all 16 pension and retiree health plans to full 100 percent funding in less than 3 decades. While full funding makes sense for private businesses that can come and go, it is not ultimately a necessity in government where states like Kentucky are at no risk of disappearing. Pensions owed are not paid all at once, so there will never be a point in time where full pre-funding is required.
Rather than emphasizing our distance from a goal that is not essential to meet, we should put more focus on the health of the plans today. The important question for Kentucky is what contribution amounts will ensure pension plan assets are on a positive growth trajectory while avoiding the deterioration caused by underfunding in the past. An approach aimed at steady progress will result in more manageable annual contributions, and feasible long-term targets will mean less is eventually owed in unfunded liabilities.
Part of that approach will require re-thinking how we fund retiree health plans. Kentucky has saved far more money in those plans than most all other states, putting aside nearly $6 billion. Many states still make the practical choice of managing retired employee health plans on a pay-as-you-go basis, which means they are not prefunded at all. Added together, retiree health plans across the country are only 7 percent funded, but Kentucky’s are much higher at 48 percent funded. Despite that, new more austere assumptions will cause contributions to the Kentucky Employees Retirement System non-hazardous health plan to jump 49 percent starting in July.
Recent events create an opportunity for a turning point on the issue. We can finally stop cutting workers’ already-modest retirement benefits or squeezing their salaries through requiring them to contribute more, as happened in 2003, 2008, 2010, and 2013 in addition to the 2018 changes now thrown out by the court. Funding will get us where we need to be — and less painfully than has been claimed. We can target a sweet spot between the inadequate funding of the past and the demands that pension opponents’ manufactured crisis have forced on us today.
A commonsense approach would protect benefits, get the plans on a steady path to greater health and make more room for other public investments Kentucky needs to prosper.