Legislators who thought they had “fixed” the state’s pension woes with the 2013 General Assembly’s approval of a reform bill intended to address the unfunded liability in the Kentucky Retirement System received a rude awakening last week when Gary Harbin, executive secretary of the Kentucky Teachers’ Retirement System, said the system will need an additional $400 million in new money from the state to remain financially sound.
Meanwhile, two more non-state agencies have petitioned to get out of other state retirement systems because of concerns they are not financially sound and may not be able to meet its obligations to future retirees.
The teachers’ system wasn’t included in the pension reform cobbled together last spring, in part because it was in better, though not ideal, financial condition. And as Harbin pointed out, teachers stepped up in 2010 by increasing their contributions to the system by 3 percent to help pay medical costs.
At the time the pension reform bill was being debated, the Republican Senate initially insisted the increased costs could be met through normal growth in state revenues. But the group that forecasts state revenues on which lawmakers base their two-year budgets made a preliminary estimate of about $259 million in new state revenue next year — or $141 million more than what Harbon says it needed to fund the teachers’ retirement system. That does not bode well for legislators being able to find money to increase funding for education and all other state programs. Among other things, that could mean two more years without funds for textbooks.
While Harbin agrees the teachers’ retirment system still is in better shape than the state employee system, the problems will grow worse if the legislature doesn’t help next year, he said.
As if that is not enough, Sen. Chris McDaniel, R-Latonia, reminded other lawmakers the new pension reform law will require an additional $122 million next year as well. In approving the bill, legislators made a promise to never again underfund its pension obligations, but in the first year under the reform law, legislators may not have the funds to keep that promise.
Pension costs aren’t the only increasing demands on the budget, either. The current budget used reserve money for some ongoing expenses and Gov. Steve Beshear has said he wants to try to restore some education cuts made over the past five years, a period in which basic school funding has held steady while enrollment haslawown.
Bill Thielen, executive director of the Kentucky Retirement System, the one which was covered by the 2013 pension reform bill, said the system has assets of $14.5 billion, pays out about $2 billion a year in benefits and faces an unfunded liability of about $17 billion. About 68 percent of KRS revenues come from investments, which have averaged about 9.5 percent return over the past 30 years, but was much lower than that in recent years. Actuarial forecasts assume a 7.75 percent return.
But the return rate took hits during the recession, losing money in 2011 and especially in 2008. That brought the 10-year return down to 6.65 percent. But returns have recovered along with the stock market and last year the system earned an 11 percent return.
The system also faces a challenge from some quasi-government agencies like mental health groups, which want out of the system and have gone to court seeking to be allowed to opt out.
Two agencies are seeking to withdraw from the state’s troubled pension system. The two quasi-government agencies are Frontier Housing in Morehead and Housing Oriented Ministries Established for Service in Whitesburg.
They have filed a request to withdraw from the system in Franklin County Circuit Court. The agencies argue in the complaint they shouldn’t have been allowed to join the County Employees’ Retirement System more than 10 years ago. The system is facing more than $6.2 billion in unfunded liabilities.
Kentucky Retirement Systems Director William Thielen said Thursday the agency would fight the matter in court. “We are concerned that other employers would have to pick up that cost if these other employers got out without paying their share of the unfunded liabilities,” he said.
We agree with those who contend the two agencies should have never been allowed in the county employees retirement system. After all, employees of the agencies are neither state nor county employees. But at the time, they joined state system, it was on solid finacial ground and joining it seemed like a great deal. But now that the system’s finances have turned sour, the agencies want out. Their exit, if allowed, will only make the system’s funding woes worse.
After the General Assembly approved its pension reform, the independent and respected Pew Charitable Trusts released a report hailing the reforms as a “major step toward making Kentucky’s retirement systems affordable and sustainable while also keeping the promises made to public employees.”
Maybe it was a major step, but it already is becoming clear the step was not big enough.