by RONNIE ELLIS CNHI News Service –
FRANKFORT — When state coffers were flush in the 1990s, lawmakers were happy to sweeten the pie for state workers and retirees, adding cost of living adjustments and other enhancements to their retirement benefits.
Now with the state pension funds collectively facing $38 billion (some say it could be much more) in unfunded liabilities, a group set up to study the problem is casting its collective eye at those enhancements, wondering if they can be retroactively scaled back.
William F. Smith, a board member of the Bluegrass Institute for Public Policy Solutions, a conservative think tank which advocates conservative policies on a wide variety of issues, told the Public Pension Oversight Board those enhancements make it impossible for the retirement systems to dig out of the hole.
Smith, a physician, was previously appointed to the Kentucky Retirement Systems Board of Trustees by Gov. Matt Bevin but later withdrew when critics and a state retiree group suggested he didn’t have the investment background required by statute to serve.
He told the board Monday that the retirement system was set up to pre-fund its obligations, with money appropriated based on current benefits for the expected number of retirees.
But when lawmakers in later years enhanced benefits retroactively, the enhancements weren’t accompanied by a corresponding amount of money to fund the added costs. And because they were retroactive, they compounded the future liabilities.
Smith also seemed to suggest those enhancements might not be covered by what is known as the inviolable contract which requires promised benefits to be paid by the state when they are due.
Other enhancements which increased the state’s liability, Smith told the board, include allowing retirees to calculate benefits based on the “high three” or highest three years of pay, rather than on five and allowing retirees to calculate unused sick days as part of their time of service.
He suggested three ways to reduce the unfunded liability: reduce or eliminate health insurance benefits; eliminate the high three calculation; and eliminate the “spiking” of using the sick days.
Hanging over Monday’s discussion was the question of reducing benefits in ways that could withstand court challenges because of the inviolable contract. No one, however, openly suggested doing so Monday.
However, board chairman, Sen. Joe Bowen, R-Owensboro, said the board has zeroed in on three areas in its examination of the problem: assumptions for investment returns and payroll growth; contributions by the legislature based on actuarial studies of what is required, what is known as the actuarially required contribution or ARC; and the retroactive enhancements.
Lawmakers, governors, system trustees and retiree groups have argued for years over who or what is to blame for the problem: insufficient contributions by the legislature or poor investment returns and management of the system?
Part of the problem, according to Smith and legislative staff researches, has been inaccurate payroll assumptions.
The ARC was computed in most years while assuming a 4 percent growth in state payroll which would have increased employee and employer contributions as payroll increased. But, in fact, the state payroll remained static or even decreased at times due to reductions in workers during the long recession.
Investment returns also fell below projections during the recession although they have historically outperformed projections over 20 and 30 years.
Bevin made the pension problem a top priority and at his urging lawmakers significantly increased contributions in the current budget and budgeted larger surpluses which Bevin hopes the legislature will agree to allocate to pensions once a system wide audit is complete.
He’s also called for a special session later this year to deal with pension and tax reform. No time has been set for that special session.
Ronnie Ellis writes for CNHI News Service and is based in Frankfort. Reach him at [email protected]. Follow CNHI News Service stories on Twitter at www.twitter.com/cnhifrankfort.
