Kentucky’s pension crisis: A day of reckoning lies ahead
The United States isn’t the only government that’s had its credit rating lowered. Two agencies also recently downgraded Kentucky’s bond rating.
In reducing the commonwealth’s rating, Moody’s Investors Service pointed to two major problems: too much debt and underfunded public pensions.
Enter the latest news that in addition to Kentucky’s current $31 billion worth of unfunded pension liabilities for government retirees, the commonwealth’s pension-fund stocks are taking a beating on Wall Street, losing $1.7 billion since July 1.
While that may not be as much in terms of actual dollars as some other states (California’s fund lost $18 billion during the same time period), it’s a very high percentage (15 percent of Kentucky’s fund vs. California’s 7.5 percent) and should serve as yet another wake-up call for Frankfort to tackle what longtime Rep. Mike Cherry, D-Princeton, called “a tough subject” in a recent CN/2 interview.
But are lawmakers willing to make “tough” calls needed to prevent the state’s pension slide?
The only specific measure Cherry would commit to “being open to a discussion of” was withholding cost-of-living raises for current state retirees for a couple of years. But experts say the savings from this action alone would hardly amount to a dent in a $31 billion problem.
It’s politically safer to fritter around the edges of a problem by talking about limiting COLAs rather than pushing for fundamental change, including doing what private-sector companies have had to do to remain in business: moving workers to a 401(k)-style plan whereby they, rather than taxpayers, are responsible for their own retirement. Significant savings could be realized if the state would take this approach – at least with all future hires.
But Cherry calls such an idea “bad public policy.”
While there’s no magic pill here, it’s hard to see how moving from a system that obligates the state to fund pension and health-care benefits of retirees for life to one that puts younger workers in charge of their own plans with the state contributing a portion is “bad public policy.”
These costs are skyrocketing as individuals live longer and, as a result, require more health care.
Gov. Beshear’s answer, echoed by Cherry, is that the state simply needs to make its required pension payments, which will solve the problem down the road. But how much stock can we put into that approach, considering Kentucky has one of the worst records in the nation of funding its pension system?
An analysis of state reports shows that Kentucky has, in recent years, made less than half of the required contributions needed to keep its pension funds solvent. As the state contribution has gotten smaller, the unfunded liability has grown larger.
While addressing the issue right now is “tough,” it could get a lot tougher if steps are not taken beyond depending on the luck of Wall Street’s draw or contributions of employers or even employees. At current rates, Kentucky’s pension funds could require an annual contribution of nearly $6 billion out of the state’s General Fund, which currently is around $9 billion, by 2022 just to keep from going broke.
Of course, by that time, many of the current politicians will have moved off the scene. It would be tempting on the part of most incumbents to bet on any pension calamity sweeping through Kentucky on someone else’s watch in the future and not worth endangering powerful careers in the present.
Plus, how long will it be before we start hearing talk of tax increases, cuts to essential services or both?
It’s a mini version of what’s happening in Washington. Only, the day of reckoning has finally arrived in our nation’s capital. For Kentucky, it cannot be far behind.
Contributor Bio: Jim Waters is vice president of policy and communications for the Bluegrass Institute, Kentucky’s free-market think tank. Reach him at [email protected]. Read previously published columns at www.freedomkentucky.org/bluegrassbeacon.