Speaker of the House Greg Stumbo, D-Prestonsburg, is right when he said the Republican-controlled Senate left a gaping hole in its pension reform bill by delaying a decision about how to reduce the estimated $18 billion in unfunded liabilities in the Kentucky Retirement Systems.
That won’t happen in the Democratic-controlled House of Representatives, Stumbo has promised, and it shouldn’t. That being said, we have problems with both “trial balloons” Stumbo has floated as ways to address the funding problems. One promises a dwindling amount of revenue each year and may not be enough to erase the funding; the other is risky because it may not survive a court challenge. We suggest Stumbo and his colleagues in the House look for other ways to address the funding shortfall.
To its credit, Senate Bill 2, which was approved by the Senate by a bipartisan vote of 33-5, includes most of the recommendations made by a bipartisan task force on pension reform. It would repeal automatic cost-of-living adjustments in benefits and create a hybrid retirement plan for future hires that would combine elements of traditional pensions with the 401(k) approach often used in the private sector. Those changes are essential.
However, when it comes to the existing unfunded liabilities in the pension fund, the Senate bill literally kicks the can down the road for two years. The measure would require full funding of the pension plans in the Kentucky Retirement Systems by fiscal 2015 — a change expected to save money in the long run but cost an additional $300 million in the first year. Just how the state would find the money to fully fund its pension plans is not addressed in the Senate bill, but without full funding promised in the two-year budget the General Assembly will adopt in 2014, the size of the unfunded liabilities will continue to increase. That’s unacceptable, and it is shameful the Senate ignored the funding issue in its pension reform bill. That challenge must be addressed in the amended bill the House will send back to the Senate.
Stumbo first proposed raising the state tax on cigarettes from 30 cents a pack to $1 a pack, with the additional money the increase would generate going to not only begin fully funding pensions but also reducing the unfunded liabilities. However, the main “benefit” that would come from such a large tax hike would be to encourage more Kentuckians to either quit smoking or, better yet, not even take up the deadly habit. But if the higher tax results in fewer smokers in the state — and we think it would — then the amount of revenue it produces would steadily decline. Indeed, that already is happening with a cigarette tax 70 cents per pack less than what Stumbo is proposing.
It is going to take a steady, dependable source of revenue to erase $18 billion in unfunded liabilities, and revenue from a tax on cigarettes is neither steady nor dependable.
Stumbo’s other “trial balloon” is to expand the slot-like Instant Racing machines that exist at Kentucky Downs in Franklin and Ellis Park in Henderson to all racetracks in the state. That would generate about $30 million a year in new tax revenue for the state, which could be designated for the pension fund, Stumbo said.
However, the legality of the Instant Racing machines that allow individuals to wager on past horse races is being challenged in court by the Lexington-based Family Foundation, which claims it is an illegal expansion of gambling in the state. At this point, making the revenue produced by Instant Racing a way to fund the pension liabilities would be extremely risky and foolish.
Senate President Robert Stivers, R-Manchester, said Stumbo seems to be simply tossing ideas against a wall and seeing which ones might stick. Maybe so, but at least that’s better than ignoring the funding shortfall for another two years, as the Senate has done. Who knows? If enough “trial ballons” are sent up, maybe one of them will actually float.