Bluegrass Beacon: Salvation for sins of the pension fathers

Kentucky’s pension children shouldn’t pay for the sins of their retirement-systems’ fathers. Mankind shouldn’t break the Ten Commandments, either. But both scenarios have been occurring for a long time.

The primary reason the Kentucky Employees Retirement System’s (KERS) funding level has dipped from nearly 140 percent to under 13 percent in less than 20 years is because previous politicians and actuaries – fathers of today’s pension crisis – colluded to not only increase benefits without any actuarial justification, but also to award those higher benefits to employees’ previous years of service.

Our commonwealth is now paying the price for the political justification of this economically devastating policy.

The checks going out to most retirees in Kentucky’s two large pension plans – Kentucky Retirement Systems (KRS) and Teachers’ Retirement System (TRS) – are much fatter than the amount of grain stored up in the barn to support them. In fact, the grain supply is dwindling as the number of people retiring grows more rotund with each passing year. Perhaps no group has been penalized for this scenario more than quasi-governmental employers, which have taken center stage in the commonwealth’s pension crisis.

Kentucky’s seven regional universities, local health departments, rape crisis centers and other quasi agencies face bankruptcy and closure if action isn’t taken before July 1 to relieve them of a requirement that their pension contribution to KERS for each employee dramatically increase from 49 percent to 83 percent. Just freezing their contribution rates for another year may be politically palatable to some politicians and stakeholders in Frankfort, but it simply delays the inevitable while the KRS pension-liability hole grows deeper.

“The days of ‘kicking the pension can down the road’ are over,” Gov. Matt Bevin wrote in a letter to lawmakers urging them to act.

But what happens when the kicking stops and the can quits rolling is key to solving – not just delaying – the crisis faced by these quasi agencies.

The plan being debated in Frankfort would allow the groups to leave KRS altogether, a move that would result in payroll contributions being diverted away from the ailing state retirement systems and into defined-contribution plans. A caution flag, however, appears as this approach would likely result in a court battle over future benefits of longtime employees who serve in these agencies.

My organization, the Bluegrass Institute for Public Policy Solutions, offers a plan that stops the rolling can while also protecting future benefits of both long-time employees of these agencies and newer hires by creating a separate plan we’ve labeled the Quasi-governmental Employees Retirement System (QERS), which would be separated from the failing KERS, the state workers’ system, but remain under the KRS umbrella.

Being lumped in with KERS has resulted in these quasi agencies – whose employees generally don’t work in the system as long as full-fledged state workers and thus have much-different retirement patterns – making prohibitively higher payments than what they actually cost the fund.

This approach offers a long-term solution for the quasi agencies as it will immediately reduce their liabilities to the retirement system by hundreds of millions of dollars. It also keeps the commonwealth out of court, gets reforms implemented this fiscal year, avoids the complex legislative and administrative changes that would accompany these groups leaving the system altogether and saves taxpayers the estimated $827 million their exit would cost.

Placing quasis in their own plan with Annual Required Contribution (ARC) payments based on their specific liabilities and actuarial assumptions rather than being forced to pay for the sins of the rest of the system will be their salvation.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Reach him at jwaters@freedomkentucky.com and on Twitter @bipps.

Editor’s note: The Bluegrass Beacon is a weekly syndicated newspaper column posted on the Bluegrass Institute’s website after being released to and published by newspapers statewide.