Lawmakers wait on audit to see a way forward with ailing pension system
Despite an injection of state money into one of the worst-funded pension funds in the country, state employee pension system Interim Executive Director David Eager told lawmakers Monday that a plan must be devised for Kentucky’s nonhazardous employee pension fund with a looming $11.11 billion of unfunded liabilities.
Eager testified before the Public Pension Oversight Board at the Capitol Annex, reporting a continuation of many of the same ailments that have plagued the Kentucky Retirement Systems (KRS) nonhazardous state employee pension for the past few years.
After the recession, a limping economy and years of the state not paying its annually required pension contributions due to low investment return and budget restraints, Eager said that if returns continue to lag, the plan will be “pay as you go” in seven years or less.
“We are in a serious situation in regards to funding,” Eager said. “KRS nonhazardous, if you think of it in a medical sense, we are in triage. When I hear and you read in the national media KRS is the worst-funded system in the country at 17 percent, I bite my tongue. It’s one of five (pensions managed by KRS). We are going to have a plan. In KRS non-haz (nonhazardous plan), the investments aren’t going to get us out of this.”
Compared to the mid-1990s, the state worker population that paid into the system has dropped by 10,000 workers. Echoing what has been stated in several board meetings over the last two years, Eager said that a dwindling state worker population with continued diminished payroll contributions will strain payouts.
According to Eager, there are 38,000 active workers and 40,000 retirees. And while privatizing many state jobs may alleviate future pension payments, it’s straining the pension fund.
Eager said he couldn’t explain why younger people don’t want to work for the state. Rep. Brent Yonts, D-Muhlenberg, co-chair of the board, said it comes down to pay.
“We have about 10,000 (workers) less than 20 years ago. When the executive branch and legislative branch keep privatizing services out and pensions (money) aren’t collected but they are doing state work, you have a double whammy there,” Yonts said.
“We need a plan, we are going to have a plan and we are going to continue to work with you,” Eager said. “We have five plans … that need to be managed differently. We don’t control the markets and we don’t control the demographics.”
Rep. Derrick Graham, D-Frankfort, asked if the Legislative Research Commission could look into whether privatizing and using contract workers does in fact help the state but hurt the pension system. Eager said generally when state employees leave for other jobs, it hurts the KRS pension system.
“Whether those 10,000 positions are taken by contracting employees or whether the jobs have been eliminated, I would hope that would be part of the process (for making a plan),” Graham said. “I think that would give us some indication how much funding is missing as far as contracting employees not paying into the system.”
Eager said that the system has 16 percent of the money needed for retiree benefits and that the benefit costs increased in all pension funds by $1.5 billion in fiscal year 2016.
Republican Gov. Matt Bevin made shoring up the $38 billion in unfunded pension liabilities, which included teacher pensions, his priority for the 2016 legislative session. Bevin made 4.5 percent cuts in each fiscal year for the biennium budget to state universities and created a permanent fund for the pension systems with an additional $44.7 million annually each year above the required contribution for the KRS pension.
According to Beau Barnes, deputy executive secretary of operations and general counsel for the Kentucky Teachers Retirement System, or KTRS, the future $973 million injection from the state legislature puts the pension fund on a better track, despite fiscal year 2016 investment declines.
In fiscal year 2016, Barnes said, KTRS decreased $1.2 billion due to investment losses and sold $650 million in assets to pay retirees. Based on actuarial assumptions, Barnes said that KTRS will ask for $554 million for fiscal year 2019 and that the cash injection from the 2016 legislature was a game-changer.
KTRS had a 54.6 percent funding ratio as of June 30, with $14.5 billion in unfunded liabilities.
Barnes told The State Journal, with the additional money coming, “it’s a new day, a new dawn and a new year” for KTRS fund going forward.
Bevin has called for more transparency within the KRS system, but Sen. Joe Bowen’s, R-Owensboro, super transparency bill didn’t pass in the House. Once audit results come in, Bowen said, the legislature will see a way forward.
By Brad Bowman
Frankfort State Journal
