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As Pension Prospects Worsen, Kentucky Lawmakers Spar Over Worst-Funded Plan

Nowhere are the problems with pension funding more evident than in Kentucky, where the state lost millions because of the stock market. Lawmakers are now debating how to recover.

Kentucky state House Speaker Greg Stumbo
(AP/Timothy D. Easley)
Amid new predictions that public pensions are facing another downturn, at least one pension plan may be heading toward life support.

Since several plans' fiscal year started last July, the stock market has been extremely volatile. As a result, Moody’s Investors Service predicts pension plans are likely to report 10 to 50 percent increases in liabilities when they close out their 2016 fiscal years on June 30.

The bad forecast comes just after most plans reported meager investment returns in fiscal 2015. The two-year hit, warned Moody’s, will effectively wipe out the funding progress that many plans made in 2013 and 2014.

The situation could force governments to put in more money over the next few years than was previously forecast. That notion, in turn, could trigger lawmakers to discuss other solutions for funding pensions or ways to control future pension costs.

Nowhere is this more evident than in Kentucky, where the state lost nearly $53 million in investments during the last six months of 2015 because of the stock market dip and lawmakers are now debating how to recover.

For years, lawmakers have shorted the state's annual payment into the Kentucky Employees Retirement System (KERS). That's played a big part in turning the state employee plan into the worst-funded among the 50 states. As of last summer, it reported holding just 19 percent of the assets it needs to meet nearly $12.4 billion in total liabilities.

The legislature tried to shore up KERS in 2013 when the state enacted a new law that reduced its pension contributions for new hires and also required it to make its full pension payments. But some worry the changes came too late.

The fund's assets have continued to shrink, and stock market losses have exacerbated the problem because the fund’s investment earnings are ideally supposed to cover the gap between what the fund pays out to retirees and what it collects from state and worker contributions. Halfway through the current fiscal year, the plan lost $212 million in assets, according to the latest figures from plan actuaries. The fund -- which pays out more than $900 million in annual benefits to retirees -- now has a little more than $2 billion in total assets.

The pension system's low funding level has now prompted a cash-flow problem. If its assets drop to $1.3 billion, actuaries warn KERS officials that they'll be forced to convert all investments to cash.

"There’s no fixing a fund once it goes to a cash portfolio," said Jim Carroll, cofounder of Kentucky Government Retirees, an advocacy group. "It goes from intensive care to hospice care."

The state House and Senate conference committee is meeting this week to iron out differences between the two chambers’ budgets. How to deal with the state’s ailing pension system is one of the key differences. Both budgets call for putting in more money than required, but the Senate's calls for substantially more.

Carroll’s group is backing the Senate’s version of the budget bill, which is similar to Republican Gov. Matt Bevin’s proposal. That bill (which includes more than $600 million in spending cuts) proposes up to $256 million in additional pension payments to KERS -- on top of the required contribution -- over the next two years. The House bill proposes an additional $89 million over the next two years.

Bevin and the Senate also want to use a $500 million surplus in the state’s health-care fund to start an endowment fund to supplement the state's two largest pension plans. Investment earnings from the proposed fund would go toward helping KERS and the Kentucky Teachers' Retirement System make their payments.

The House, where Speaker Greg Stumbo has several times proposed issuing bonds to help fund the teachers' retirement plan, has other ideas. Its budget plugs the $500 million surplus directly into the teachers fund, which is better funded than KERS but doesn't have the same funding promise given in the 2013 legislation.

Carroll's group has been actively lobbying legislators on the conference committee, but he's still unsure which budget will get more support.

Stumbo has argued that the House budget avoids potentially devastating cuts to state higher education while still putting in more than is actuarially required into the state pension system.

But Bevin has warned that any budget that doesn’t address pension funding now will lead to bigger cuts for everybody down the road.

“If we don't pay our pension obligations down ... we won't be able to borrow money,” Bevin recently told a Louisville television station. “And we will be in such a level of debt, in such a level of unfunded financial obligation, that we will be cutting [services] 19 and 29 and 59 and 99 percent.”

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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