A legislative task force has reached a compromise and approved a set a recommendations designed to eventually eliminate the $12 billion in unfunded liabilities in Kentucky’s State Employment Retirement System that those on the task force agree are controversial and will be difficult to pass the state legislature.
However, a far worse alternative to the 2013 approving the bulk of the task force’s recommendations is for legislators to do nothing. Failing to aggressively address the unfunded liability during the next legislative session will mean its size will continue to grow and the state will be offering its employees retirement benefits it will be unable to afford. Other states with smaller pension liabilities than Kentucky already have taken unpopular steps to reduce the retirement benefits of state employees and it is past time Kentucky did the same.
The most important recommendation of the task force is to require the two-year state budgets beginning with the 2014-15 budget make full payments of the actuarially required amounts, or the ARC, about $300 million in the first year, to prevent the unfunded liability from continuing to grow.
“When you’re in a hole, stop digging, and that was the No. 1 step we could take to stop making the problem worse,” said Rep. Mike Cherry, D-Princeton, co-chairman of the task force. He’s right, of course. As long as the state continues to fail to meet its obligations to fulfill promises made to future state retirees, the problem not only will not be solved, it will continue to get worse.
Most of the recommendations will not affect current state retirees and employees. That’s as it should be. State employees were promised retirement benefits when they were hired and many state workers have based their future plans on those promises being fulfilled. It would be unfair for current workers — particularly those nearing retirement — to lose their benefits in midstream. That’s why the most controversial changes recommended by the task force would impact only future state employees.
However, there are two ways the retirement benefits of both current and future employees would be changed. One would eliminate the automatic cost of living increases on retirement benefits. The other would be to eliminate “double dipping” in which state employees “retire” and then almost immediately return to the old jobs drawing a full salary plus their state pension. The status quo enables some state workers to earn more than $100,000 a year by receiving a pension while they work. Under the task force’s plan, retirees would have to wait a full two years before returning to work.
(“Double dipping” also is a problem with county officials with several county leaders in this region receiving both their salaries and their pensions after “retiring” for 30 days between the time they are re-elected and when their new terms begins. That’s also wrong, but that issue must be dealt with then legislators address the unfunded liability in the county pension fund.)
The task force recommends that new state employees be placed into a “cash balance plan” which guarantees a minimum return of 4 percent. Employees would get 75 percent of any earnings above 4 percent and the state would keep 25 percent as “a cushion” against future liabilities. The new hires, upon retirement, could then take their cash balance and buy an annuity to fund annual benefits. The plan would move new legislators and judges into the cash balance plan.
Jim Carroll, a retired state employee, said he is “appalled” by the recommendation for a cash balance plan for new employees, saying it creates “two classes of employees.” He said new hires’ benefits could “be changed at the whim of the legislature.”
Well, yes, it would create two classes of state employees based on their number of years of service, but how else is the state going to cease continuing to offer retirement benefits it can not afford to fund? There is no other way. The state cannot continue to make the same retirement promises to new employees that it made to existing employees.
Cherry and Sen. Damon Thayer, R-Georgetown, co-chairman of the task force, both concede the recommendations won’t be easy to gain approval and the plan is likely to be amended as it goes through the legislature.
“We’re talking about potential insolvency for the KRS within five years if these steps aren’t taken,” Thayer said. “We recognize difficult decisions are ahead for the General Assembly.”
The task force chose not to recommend ways to increase state revenues to pay for its pension recommendations, leaving that to the legislature’s budget committees. Both Thayer and Cherry said have kept leadership in both chambers informed of their recommendations and they have been supportive.
“I think what we have got in front of us now is what both of us think has a chance of passing,” said Cherry, who is retiring when his term ends in December. “Every time somebody somewhere adds something else to that legislation, it probably decreases its chances of passage. And we must do something.”
Cherry is right. It’s too bad he won’t be around when legislators take up the task force’s recommendations in January. The General Assembly could use it his wisdom and his political skills in pushing these sound, but controversial proposals through the Democratic-controlled House. As for the Senate, well, that’s Republican Thayer’s assignment.