Published: June 26, 2008 07:12 am         

Big 'if' in pension reform

Future funding gambles on political will

FRANKFORT — There’s a big “if” in the pension reform legislation being touted as a “big step forward” by lawmakers and Gov. Steve Beshear.

The bill passed 98-0 Wednesday morning in the House and is now in the Senate which is expected to pass it Friday.

The “if” is whether future sessions of the legislature will have the political will to do what this session says they must do — fund an increasing percentage of the annual amounts needed to keep the retirement systems sound until they fund 100 percent of the amount in 2025.

According to the Legislative Research Commission’s analysis, lawmakers will have to come up with an average of $52.8 million in new funding each fiscal year in order to meet that requirement. That’s $558.9 million over 10 years for a legislature which has historically under funded the systems while issuing bonds and raiding restricted funds to cobble together a two-year budget.

The legislature began this year’s budget session trying to find $400 million in new funding — just to maintain existing levels of funding in education, Medicaid, other social services, and corrections. They couldn’t do it. And they couldn’t bring themselves to raise taxes. Instead, they cut services..

Now they are about to pass a bill which requires them to begin each new budget by finding more than $105 million in new money before addressing other funding priorities.

“It has to come from somewhere,” said House Appropriations and Revenue Chairman Harry Moberly, D-Richmond. “Obviously, if we don’t raise revenues somehow we’ll have to cut back on education and health and human services and we’ve already cut those too far.”

Bottom line, the legislature is setting itself up to pick from among four hard choices. One legislature cannot bind future sessions, so a future General Assembly could suspend the statute – essentially going back on the promises of this one. It could make further changes in benefits of future employees to reduce costs of the systems. Or, as Moberly said, they could raise taxes or cut other services.

“We just have to have the will to do it,” said House Speaker Jody Richards, D-Bowling Green. Asked which alternative he favors – raising taxes, cutting future benefits or cutting other services – Richards wouldn’t say.

“You can’t anticipate that, and you just have to find the money,” Richards said. “I’m not going to say which (alternative) it will be. But this is going to be hard.”

Especially for a legislature which has not funded the system at the ARC level in the past.

Senate President David Williams, R-Burkesville, said the feature of the bill which requires the General Assembly to fund an increasing percentage of the annual required contribution “puts the state on a structured plan to address the unfunded liability and recognize the cost.”

More importantly, he said, it will force the governor and the House – which has resisted Senate efforts to move new employees to a hybrid defined contribution system more like the 401 (k) plans in the private sector – to consider such a plan.

Even if the legislature lives up to the advance payment amounts laid out by HB 1, the total contribution to retirement systems in 2018 will be $1 billion. Put in perspective, the state’s entire General Fund this year is only $9.3 billion. And those estimated costs do not include the road fund employees or employees paid from federal funds.

Beshear’s Budget Director Mary Lassiter said it can be done.

“From my point of view it is manageable and achievable,” Lassiter said. She said it’s important to realize that while the size of the pension contributions will grow, so will the general fund.

“We may or may not be taking a bigger and bigger piece of the pie,” Lassiter said. “Because the size of the pie will grow, revenues will grow.”

Beshear said it’s difficult to predict what future revenues may be until the economy turns around. But he said lawmakers must muster the political courage to make those ARC payments.

“It is a commitment that we need to work hard to keep, because more than anything else, maintaining those ARC payments will bring us to the point where this system is financially sound,” he said. “Obviously there’s going to be pressures to do different things with the money that we may have. But I’m very hopeful and I believe that the House and Senate as well as myself as governor will keep this a very high priority.”

To do that, they’ll almost certainly have to do something else they find unpleasant – cut future retirement benefits, cut services or raise taxes

“Maybe we’ll have to face up to one of those options – to generate more revenue or make future cuts,” said Rep. Bob Damron, D-Nicholasville. “I think the option we all hope happens is that our economy grows.”

If it doesn’t grow a lot, Williams said, the legislature will have to do something about the benefits for future hires. Senate Majority Leader Dan Kelly, R-Springfield, said efforts by the Senate the past two years to do just that was to force the governor and House to confront the tough choices posed by the retirement systems.

“The other chamber has not been able to muster that courage until now,” Kelly said. “But I’m optimistic that we’ve gotten to this point.”

RONNIE ELLIS writes for CNHI News Service and is based in Frankfort. Reach him at rellis@cnhi.com.

     

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