March 23, 2013

Overspending is what created pension crisis

The soaring cost of public employee pensions in Kentucky has become a major societal issue. The debate is about more than the security of a retirement livelihood for public servants. The standard of living of all Kentuckians is at stake.

Diverting money from essential government services, such as education and public safety, to keep the pension funds solvent is badly draining the budgets of state and local governments.

The state’s six retirement systems have a collective unfunded liability of $33.7 billion, one of the most unsound pension systems in the nation. The Great Recession didn’t cause this overwhelming debt, nor did the failure of the General Assembly in recent years to make its full payments, as claimed by some of those crying out for enactment of Senate Bill 2 as the panacea for all pension woes.

Kentucky’s pension debt is a creature of public policy, not world economic cycles, or the state not paying its full employer contributions on time. While market conditions and employer/employee contributions — along with medical inflation, faulty actuarial assumptions and other factors — are cost drivers, Kentucky’s pension crises stems from our state’s political culture.

Evidence supporting that conclusion can be found right next door in Tennessee. The Volunteer State’s overall unfunded pension debt is $3.3 billion — a pension sinkhole only 1/10th as deep as the one on the Kentucky side.

But there’s a number that is more reflective of a pension system’s health than dollars, and that’s the percentage number that expresses the ratio of assets to liabilities.

Kentucky has only 46.9 percent enough assets to cover its pension obligations in all plans, compared to Tennessee’s 91.4 percent. Only one of Kentucky’s state-administered pension systems is on the brink of bankruptcy, and that is the state workers’ fund (KERS), which is just 28.1 percent funded. The comparable state workers’ plan in Tennessee is 85.5 percent funded.

Pension experts say a pension system is healthy when its funding level is 80 percent or higher. Tennessee’s plans are healthy; Kentucky’s plans are sick.

How can there be such a mountainous difference in the solvency of the pension funds in Kentucky and Tennessee, when geographically only an imaginary line divides us? The answer is in public policy — Kentucky is a government-dominated state and Tennessee is not. Consequently, embedded deep in the Kentucky culture, there is a prevailing view held by the bipartisan political class to milk the public employee pension funds — for themselves first and most, and then for their constituents — as if the pension funds were a big chocolate milk cow.

During my extensive research of Kentucky’s public employee pension systems, a reliable source said to me, “You’d be amazed at how many people in this town (Frankfort) are drawing two and three pensions.”

And nowhere is our “chocolate milk” culture more prevalent than inside the legislature itself and its staff. In 2005, legislators, on a bipartisan vote, passed without shame a self-serving pension bill (HB 299) that spiked their own pensions in five major ways, the main one being “reciprocity,” a code word for legal plunder, which allows legislators to base their pension NOT on their part-time salary as a legislator but on their full-time salary from another state or local government job after they leave the legislature (or before they came).

There’s a history of greed in the legislators’ pension plan; the plan was born in greed in 1980. But HB 299 marks the beginning of legislators’ super pensions.

Rep. Harry Moberly retired from the legislature in 2010 after voting for HB 299, and he calculated his legislative pension based on his salary at Eastern Kentucky University. Moberly’s legislative pension, from his part-time job as a member of the General Assembly, exceeds $168,000 a year.

Former Rep. J.R. Gray voted for HB 299 and later resigned from the legislature to head the Labor Cabinet under Gov. Beshear, which boosted Gray’s legislative pension to roughly $136,500 a year. 

House Speaker Greg Stumbo’s legislative pension, once he retires, will be based on his salary as Attorney General, an estimated lifetime windfall of $1.2 million from serving four years as Attorney General.

That’s not counting Moberly, Gray and Stumbo’s double dipping (and COLAs). In 1998, legislators quietly voted to give themselves a second pension in the retirement system for state employees (KERS). The second pension begins automatically once a legislator “maxes out” in the Kentucky Legislators’ Retirement Plan; to “max out” means the lawmaker has reached the point that he or she will draw 100 percent of their legislative pay.

Other perks that legislators have bestowed on themselves:

• 100 percent healthcare coverage for life (including for spouse and dependent children) after 20 years of service;

• The formula for calculating a legislator’s pension is much richer than any government worker in Kentucky — a legislator, who came into office in 1982 or afterward, can retire after 36 years and four months and draw 100 percent of salary; by comparison, a typical state employee has to work 50 years to draw 100 percent of salary.

I point these out merely to illustrate the culture in Frankfort, the underlying cause of the present-day pension crisis, and to say that SB 2 does not address the infrastructure that has caused the pension crisis [except for its proposed hybrid cash-balance benefit plan], nor does it make any significant attempt to rollback any of the greed-based laws legalizing super-rich benefits for legislators.

SB 2 was not designed to “fix” the pension problem, only to improve it; the co-chairs of the legislative pension task force last year asked The Pew Charitable Trusts, advising them, to come up with a plan they can “pass” [not a plan to fix the pension problem]. Yet, SB 2 is being sold to the press and to the public as a savior of all of our pension woes. Should the bill be enacted into law, even with full funding as proposed in its current form, it will only kick the can down the road, and, in a few years, the can will kick back.

If the public only knew what’s going in our public pension systems, there would be a revolution. (To read why, go to, and in the menu bar, click White Papers.)

The most important thing the General Assembly should do with the pension issue — other than provide adequate funding to stave off bankruptcy of KERS — is transparency. Open the pension records for public viewing, so all can see who’s milking the systems. Public outcry, or even the threat of it, is a powerful force for change. — Lowell Reese