Attached is a copy of my op-ed on the pension issue, which ran Sunday, Jan. 12, 2014, in The Courier-Journal.
Sunday, Jan. 12, 2014
Written by Lowell Reese
Written by Lowell Reese
Special to The Courier-Journal
The pension crisis will only persist
Benefit creep, lack of transparency hurt KY
The six state-operated pension systems for Kentucky’s public employees had unfunded liabilities of $33.7 billion last year. New figures that will be available in the next few weeks are expected to show the red ink is rising. A recent actuarial report reveals that the Kentucky Employees Retirement System has only 23.2 percent of the funds needed to cover its pension liabilities. Red lights flash when the funding level dips below 60 percent.
The financial straits of KERS, unfortunately, are similar to Illinois’ pension system; they’re the worst in the nation. So, the Kentucky General Assembly’s first priority is to keep KERS afloat, and secondly to pay down the massive debt in all the systems. This is important because pensions are promises made to public servants that must — and will be — paid, and also because funding for education and essential government services is being diverted to pay for pensions.
Between 2008-2014, base state funding for K-12 education is down 1 percent, and the funding for higher education is down 14 percent, while funding for public pensions is up 63.5 percent. As educators beg the General Assembly to restore their funding, the Kentucky Teachers’ Retirement System announced it will ask legislators for an additional $800 million in the next two-year budget, and the pension reform bill (Senate Bill 2) enacted earlier this year calls for about $450 million more during the biennium from the General Fund and other employer funds.
Pensions are dipping into the budget of the commonwealth as never before. Pensions are crowding out education. They are crowding out infrastructure. They are crowding out programs that affect the lives of all Kentuckians.
The pension reform bill was promoted as a measure to solve the pension crisis. But it was purposely limited to doing what was politically “feasible.” Which meant, no heavy lifting, and don’t mention expenditures, or what caused the crisis. The primary cause, benefit creep, was off limits because it's the other third rail in politics, and, in part, because it would draw attention to the legislators’ role in creating the crisis.
The reform goes in effect Jan. 1, 2014. But it affects only new hires and excludes teachers. In time, we shall see how it works. What we do know now, however, is that the contribution rate for state agencies and non-government entities, like Seven Counties Services, will increase from 26.79 percent of payroll to 38.77 percent next year — a spike of 44 percent. The rates are projected to stay slightly above that level (rising to 40.1 percent) for at least the next 20 years. What business in the private sector can survive paying 40 percent of payroll for pensions?
So the reform will make things worse over the next four years, then savings kick in. Actuarially, proponents are quick to say, the reform will save $10 billion over two decades. But there are a couple a major problems: the projections are based on no changes in the actuarial assumptions, and zero benefit improvements for state employees for 20 years — which defies logic.
Given the nature of politicians and the culture in which they operate in Frankfort, a culture of double and triple government pensions, benefit enhancements are bound to continue. The reform does nothing to prevent benefit creep, nor was it designed to. Each new benefit will reduce the savings, and that is the fallacy of SB 2.
Of all the public pensions systems in Frankfort, the richest is the legislators’. In 2005, they sneaked through a bill (HB 299) to greatly enhance their pensions in a variety of ways. The most offensive of which, they can now switch salaries in the pension formula and calculate their legislative pensions using their salary in a full-time government job before or after leaving the legislature. As a result, a growing number of former legislators are, or will, draw a legislative pension exceeding $100,000 a year — for doing a part-time job. One former House member has a legislative pension of at least $168,686 a year by using his salary as a vice president of a regional university to calculate his legislative pension. It’s called reciprocity.
Politicians created the pension crisis and only they can fix it, which, of course, they’re not likely to do without transparency. Kentucky’s pension records are not subject to the open records law. They are shrouded in secrecy.
Lowell Reese is editor and publisher of Kentucky Roll Call, a political newsletter in Frankfort. See www.kentuckyrollcallbooks.com.