Here’s what he said about public employee pensions. He is referring to Senate Bill 2, the pension reform bill enacted in April 2013.
“This spring, Gov. Beshear led weeks of bipartisan negotiation which resulted in the passage of bills to stabilize and modernize the state’s pension system [emphasis is the governor’s]. The legislative package created funding to pay the state’s full (sic) recommended annual pension contribution without threatening key state services like education and public safety. The increased cost to fully fund the actuarially required contribution to the Kentucky Retirement Systems is estimated at $100 million per year from the General Fund.
“The looming pension liability threatened to gut funding for education and all other priorities. It demanded our immediate and bipartisan cooperation,” said Gov. Beshear. “No matter our political philosophies, none of us were willing to put our kids at risk of a stripped-down education.”
Well, I should tickle the governor before I pinch him. He should be congratulated with a great deal of enthusiasm for connecting the dots between public employees pensions and education, and for saying so in such a high-profile release.
Education is the best hope — no, the only hope — for a relatively poor state like Kentucky to become un-poor. And the most immediate threat to that opportunity right is now is the $33.7 billion public employee pension debt, which must be paid, and doing so is crowding out funds for education at a rapid pace.
Since 2008, base funding for K-12 is down 1 percent, funding for higher education is down 14 percent, while the cost of state employee pensions is up 63.5 percent.
Now the pinch: The governor boasts of “the passage of bills” (SB 2 and HB 440) to “stabilize and modernize” the state’s pension systems. SB 2 is the much ballyhooed and oversold pension reform bill. It did not stabilize the pension systems — certainly not in the short term, and probably not in the long term. Actually, SB 2 raises the employer (taxpayer) cost 44 percent in each year of the next two-year budget, and will continue to cost more than the present system through 2018. After that, the Kentucky Retirement Systems’ actuary projects that savings will kick in, and over the next decade save $10 billion.
There are two reasons why the purported $10 billion savings is hyperbole. The 20-year projections producing the savings is based on (a) “0” changes for two decades in the assumptions used in making the projection, such as medical inflation, market yields, size of the government payroll, and a variety of other factors; and (b) the projection is based on “0” benefit improvements for public employees for two decades — both defy logic.
Given the nature of politicians — and the subject of pensions is a public policy issue — and the culture in Frankfort in which they operate, a culture of double and triple dipping government pensions, there may be no savings at all from SB 2 after the next two decades, only rising costs.
There’s going to be a see-saw effect out of this — as medical inflation and other cost-drivers go up, savings go down; as employee benefits go up, savings go down. Every new cost will erode the savings a little bit more until possibly there are no savings.
Also in the governor’s release, he said the “increased cost” to fully fund the ARC payments to KRS is “estimated at $100 million per year from the General Fund. What he conveniently ignored (it’s called spin) is that not all of the increased cost for going to 100 percent of the ARC is paid out of the General Fund. Some agencies pay with fees; aquasi- and non-government entities pay directly and so on. The total increased cost for the biennium is about $450 million in additional revenue. Further, the governor’s $100 million ($200 million for the biennium) from the General Fund is low-balling it.
Besides, where will the $200 million extra that the governor is talking about come from, in an already very tight budget? Well, lawmakers have three choices: raise taxes, borrow, or rob Peter to pay Paul — which means further crowding out of essential government services, and education is the biggest slice of the budget pie.
In the meantime, the red ink in rising in the public pension systems, and the cost of pensions will continue to devour funds for education —unless education leaders, together with taxpayers, revolt and demand of politicians that they get pension expenditures under control.
The pension crisis is not a revenue problem; it’s an expenditure problem. With apologies to James Carville: “It’s about the expenditures, stupid.”