Kentucky’s latest pension proposal still a problem to local governments

27 February 2018

Kentucky’s latest proposal to address USD 42bn in pension liabilities still imposes a high burden on local government, said two retiree advocates and a pension fund official.

 

The proposal arrived last week in the form of Senate Bill 1, introduced by Republican Senator Joe Bowen. While it still poses a burden to local governments, the measure is a significant departure from what Governor Matt Bevin (R) had pitched back in October.

 

Chief among those changes is that public employees and teachers would no longer be obligated to switch to a 401k plan. Instead, the new measure gives new public employees and teachers the option of enrolling in a defined benefit, hybrid cash plan or enrolling in a 401k-style plan, said David Eager, interim director of Kentucky Retirement Systems (KRS) in an interview with Debtwire Municipals. Current retirees would also have the option of switching from their current plans to either one of those tiers, added Eager.

 

Senate Bill 1, however, stands firm on lowering return rate assumptions to more conservative levels and switching to level-dollar funding as a way to pay down pension liabilities.

 

Level-dollar funding means a system amortizes the cost of reducing the unfunded liability into equal dollar amounts over a fixed period of time. The current system employs level percentage of payroll, which sets amortization payments as a constant percentage of projected payroll over a given number of years.

 

The changes are troubling enough for the state, which is expecting pension costs to rise by an additional USD 700m by FY19 (beginning 1 July). That’s on top of a projected USD 200m shortfall in the general fund by the close of FY18 on 30 June.

 

For counties and local governments, there is an acknowledgement that level-dollar funding is a better method, but the immediate costs might not be doable today, said Larry Totten, president of the advocacy group Kentucky Public Retirees, in an interview with Debtwire Municipals.

 

“In terms of state government, it can raise the revenues it needs to pay the bill and right now they seem to be choosing to take money from other [state programs],” said Totten. But for local government, options are more limited.

 

The KRS umbrella includes the state plan, otherwise known as the Kentucky Employees Retirement System (KERS), and the county-level plan, rightfully named the County Employees Retirement System (CERS). The larger, non-hazardous divisions of those pension plans have funded ratios of 16% and 59%, respectively, according to one of three reports developed by PFM, the firm hired by Governor Bevin to assess Kentucky’s pension crisis.

 

In the case of KERS, governors and the legislatures were presented with an actuarially required contribution (ARC) and they just didn’t pay it, said Jim Carroll, president of another advocacy group, the Kentucky Government Retirees.

 

From the early years in the 2000s to FY14, government employees were short-changed by billions of dollars, said Carroll. In the county system, meanwhile, the employers were always required to pay the ARC and that’s why there’s such a large gap in the funded ratios, said Carroll. CERS is still underfunded but there’s no solvency crisis.

 

“If you go to a zero payroll growth, you’re essentially in level-dollar funding, because you’re assuming that whatever percent of payroll you decide that you’re going to put in stays the same,” said Eager.

 

“The difference is when you’re expecting the payroll to grow by 2%, as it is in the CERS plans — in that case, level-dollar is going to be more expensive in the early years, and less expensive in the later years if in fact payroll goes up by 2% annually,” he said.

 

Measuring the precise impact that Senate Bill 1 would have on Kentucky’s pension system is hard to do at the moment. The measure has yet to be scored, and actuarial reports tied to it haven’t been released, said Eager. GRS is the firm that developed the report for KRS, and Cavanaugh McDonald was assigned to the Teachers Retirement System.

 

Despite the absence of those critical figures, supplemental bills are on their way to phase in the costs of the new pension structure, said Totten.

 

“We’re still analyzing Senate Bill 1, but the supplemental measures would be of tremendous help,” said Christie Dutton, a spokesperson for the Kentucky Association of Counties. The Bluegrass State is comprised of 120 counties.

 

Kentucky’s Office of State Budget did not return calls requesting copies of the actuarial reports.