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Bluegrass Beacon: Overcorrecting pension system has created bigger problems

By JIM WATERS
Bluegrass Institute for Public Policy Solutions

Thursday, May 2, 2019 — The Kentucky Retirement Systems Board of Trustees grabbed the wheel two years ago this month and abruptly overcorrected a pension system whose tires had dropped off a steep shoulder on the side of a road winding toward a very uncertain future for the commonwealth’s retirement plans and, by extension, its entire economy.

By suddenly lowering the actuarial assumptions for the state employees’ pension fund from 6.75 percent to 5.25 percent, the board with one move greatly increased the contribution agencies are required to pay.

Casual observers may flippantly conclude that a 1.5 percent drop in actuarial assumptions is hardly consequential.

They would find out how wrong they are by speaking with Magoffin County health director James Shepherd, who told reporters he’s “very worried” whether his department – which already has suffered dramatic budget and personnel cuts in their budget – can continue providing services if forced to increase pension payments for each employee from the current 49 percent to 83 percent beginning in fiscal year 2020, which starts on July 1, 2019 and will happen if the legislature doesn’t act soon.

Who do you think will pay for the additional $7 million charge in next year’s Western Kentucky University budget and the $13 million increase in Northern Kentucky University’s pension payments caused by the KRS board’s rapid and precipitous drop in actuarial assumptions?

Deep-pocket donors to universities want to write checks for buildings they can put their names on, not public-pension bailouts.

Students, however, will have little say about likely resulting tuition increases – at least not until enough of them simply can’t afford to enroll.

How will 11 of Kentucky’s 14 community health centers come up with the additional $31 million needed to both meet their increased pension obligations and continue providing badly needed services to clients?

It’s imperative, of course, that the Bevin administration and legislature come together in a special General Assembly session to at least pass legislation allowing regional universities, health departments, mental health centers and other quasi-governmental agencies more time to figure out how to meet the higher obligations.

While the KRS board did in one day what it should have taken a few years to do, considering some agencies now are facing the possibility of bankruptcy without some reprieve, the fact is we didn’t reach the current 49-percent contribution rate in a day, either.

Employer contributions to Kentucky’s public pension funds have risen from less than 6 percent to the current 49 percent in just 13 years.

What opponents of spending reforms refuse to consider but which must be confronted is the fact that dramatic benefit increases – of which there have been many throughout the history of Kentucky retirement systems – require corresponding upsurges in revenues.

One of the limited options for states in such predicaments is increased contributions by both employer agencies and beneficiaries.

The KRS board may have overcorrected but failing to rein in pension spending will, indeed, catapult the car over the cliff.

While the legislature must find a path to relief for these agencies in the short term, they must also “reform how they participate,” Sen. Chris McDaniel, R-Taylor Mill, told reporters during this year’s legislative session. “They’ll either have to come up with a way to fund their full freight, or they’ll have to come up with a way to quit accruing liabilities moving forward.”

In fact, quitting “accruing liabilities moving forward” sounds like a map for a better economic future for Kentucky and all of its pension systems.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Read previous columns at www.bipps.org. He can be reached at jwaters@freedomkentucky.com and @bipps on Twitter.

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