Report: Kentucky's Proposed Pension 'Reforms' Could Make Everything Worse

by | October 17, 2017

Sweeping changes recommended for Kentucky's public pension systems would cost taxpayers and public employees more money while making public employment far less attractive to future generations, according to a report released Monday.

In the report, Colorado-based consultant Pension Trustee Advisors said ideas put forward by Republican Gov. Matt Bevin's advisers at the PFM Group in August would only worsen Kentucky's pension mess. Specifically, PTA said, Kentucky should not switch from a defined-benefits pension for state employees and school teachers to a defined-contribution 401(k) account that might run dry while many of them are still alive.

"Under the proposed analysis, which is based on optimistic returns, well over half of the individuals will run out of money," William "Flick" Fornia, an actuary who founded PTA in 2010, wrote in the report.

PTA was hired to examine the PFM Group's recommendations by two groups critical of those proposals, the Kentucky Public Pension Coalition and the Kentucky Retired Teachers Association.

Although the Bevin administration paid the PFM Group nearly $1.2 million for its advice, Republican lawmakers meeting privately with Bevin to draw up a bill for a special legislative session on pensions have said that not everything the PFM Group suggested will be included.

A spokesperson for Bevin did not respond Monday to a request for comment about the report by Pension Trustee Advisors.

The crux of the PFM Group's proposals -- that it would be cheaper to provide public employees with largely self-financed defined-contribution accounts -- isn't accurate, Fornia wrote.

For one thing, he said, either the state of Kentucky will have to spend millions of dollars every year to cover the new costs of Social Security for school teachers or else it will have to force that burden onto local school districts. At present, teachers get pensions, and they are excluded by law from Social Security withholding.

Changing to 401(k) accounts would also cost the state more than maintaining the model it has used since January 2014, which is known as a hybrid cash-balance plan, Fornia wrote. Under the PFM Group's proposals, Kentucky simultaneously would have to pay down tens of billions of dollars in unfunded pension liability from past years as well as the higher administrative costs and investment fees associated with defined-contribution plans, Fornia wrote.

"The proposed plan for future employees quite simply is more expensive," Fornia wrote. "There is no savings to Kentucky or its public workers from the proposed changes."

From the viewpoint of public employees, the loss of pensions means an end to financially secure retirements, Fornia wrote. Even if state workers and school teachers contribute the maximum sums allowed to their 401(k) account every pay period and enjoy an unbroken string of good fortune in their stock market investments, which seems doubtful, they are likely to run out of money if they survive into their 80s, he wrote.

The change also would end the disability pensions that thousands of injured or sickened public employees in Kentucky have used to retire early when medically necessary, Fornia said. Under the model proposed by the PFM Group, future workers would be left with no such safety net.

Finally, Fornia challenged the idea that defined-benefits pensions don't work. They work fine when you pay the bills on time, he wrote. Fiscally prudent states that properly funded their retirement systems, such as South Dakota, Oregon, Wisconsin, North Carolina, Tennessee and New York, aren't struggling today. But Kentucky governors and legislators failed for most of the last two decades to adequately fund the state's two major pension systems, leading to the massive shortfalls the state faces now, Fornia wrote.

"It is disingenuous to simply conclude that defined-benefit programs are inherently not sustainable," he wrote.

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