Why Kentucky's Pension Reform Has Some Governments Yawning

Kentucky Gov. Steve Beshear calls its pension reform “a good solution to a thorny problem." But the state’s local governments are far less impressed.
April 1, 2013
 

When Kentucky lawmakers -- in the wee remaining hours of the legislative session last week -- passed pension reform that included more money to address the state’s unfunded liability, Gov. Steve Beshear called the move “a good solution to a thorny problem.”

But the state’s local governments are far less impressed.

“We’ll just wait and see,” said Denny Nunnelley, executive director of the Kentucky Association of Counties. “If they start contributing 100 percent of what they say they’re going to … that’s what I wanted.”

The reason for the skepticism is a well-kept secret of Kentucky’s pension system: The fact is, it would look a heck of a lot worse without the counties and cities – and it’s been a sore topic between the state and localities as the total system’s unfunded liability has grown while local governments are helpless to stop it.

Their beef has been that the County Employees Retirement System (CERS) has been required by state law to fully pay its actuarially required contributions each year. Meanwhile the state has been taking breaks from making its payments or has been putting in partial payments into its fund, the Kentucky Employees Retirement Systems (KERS). Both systems are managed by the state under the parent, Kentucky Retirement Systems, along with a state police fund and a teachers’ fund. State fund managers dictate to cities and counties what their annual contributions should be.

But even with fully funding pensions according to state-mandated levels, CERS is only slightly more than 60 percent funded. (A pension system that is 80 percent funded is generally considered healthy.)

“We don’t set our contribution rate every year, the pension board sets rate,” said Boone County Judge-Executive Gary Moore. “In theory they’ve been charging us our full actuarial rate every year so you stop and scratch your head and say, how are you guys $6 billion underfunded?”

Still, it’s a far cry from the state’s fund – KERS is less than 30 percent funded and accounts for $11.2 billion of the system’s $33 billion total unfunded liability.

For localities, following the state-mandated funding levels has also become increasingly burdensome. In Louisville, pension payments have gone from 6 percent of the general fund in 2002 to 15 percent of the budget this year, according to Mary Ellen Wiederwohl, Mayor Greg Fischer’s deputy chief of staff and chief of strategic initiatives for the city.

“The major thing was benefits were enriched for retirees and those enrichments were not added into the system,” Wiederwohl said. “One of the biggest was COLAs [cost-of-living-adjustments]: That was the No. 1 issue on the funding side where we were consistently awarding COLAs to retirees but not funding them.”

The Kentucky Association of Counties and many local officials have argued for more autonomy for CERS as they fear that the state’s management of the system overall has been to their fund’s detriment. Additionally, KRS’ unfunded liability has contributed to ratings downgrades for state bonds, a credit hit that localities have worried will have a trickle-down effect. Most recently, Standard & Poor’s rating service downgraded the commonwealth’s outlook in February to negative from stable.

“We just don’t want the governance of being under the Kentucky retirement system because we’re one of the children that’s doing right,” Nunnelley said.

The bill passed last week somewhat addresses that sentiment by expanding the pension board’s membership to 13 members (from nine) and upping CERS’ representation to three people (from two). The board consists of seven members representing employers and six members representing employees.

“Right now we’re going to embrace this enhancement,” Wiederwohl said, “and make sure our interests as a city are protected.”

The bill also creates a 401(k)-style plan for new workers, allows COLAs only if they are pre-funded and requires the state to pay its full actuarially required contribution (about $100 million per year) to the pension system beginning in February of 2015. The new hybrid retirement system for future hires would guarantees a 4 percent return while basing additional benefits on investment performance. Nunnelley said if the state holds up its end of the funding bargain, he’ll “back off” his push to separate the CERS plan from the state system. But he’s not optimistic.

“Who knows whether they will or won’t,” he said. “Recent history in the past 20 years says they won’t.”

This post has been updated to clarify that the legislation does not mandate continued COLAs.

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