Daily Independent (Ashland, KY)

October 9, 2012

Lots of company

2013 legislature must address unfunded pension liability

The Independent

ASHLAND — If it is true that misery loves company, then Kentucky can find a degree of comfort in knowing it is hardly alone among the states facing severe shortfalls in funding the future retirements of state workers and, in some cases, teachers.

However, if Kentucky is unable to come up with a way to meet its promises to retired state workers, those retirees in Kentucky will find little comfort in knowing state retirees in other states are facing similar funding problems.

But lawmakers in Frankfort can’t worry about the unfunded pension liabilities in Illinois, Kansas, New Jersey, New Hampshire and California. Those are all problems for each individual state to solve. How they do it is their business, although Kentucky may learn better and more creative ways to reduce its unfunded pension liability by looking at what other states are doing.

In Kentucky, the only number that should concern legislators is $30 billion. That’s the estimated amount of Kentucky’s unfunded pension liability for state retirees, and what the Kentucky General Assembly has done to date to alleviate the problem has been woefully inadequate. Meanwhile, the size of the unfunded liability continues to grow.

In 2008, the Kentucky General Assembly raised the retirement age for new hires and raised the employee contribution from 5 percent to 6 percent of wages. Those changes were absolutely essential as a major cause of the unfunded liability in the number of state employees who are eligible to retire in their late 40s and early 50s and will likely be drawing their pensions for decades. While the changes made in 2008 eventually will reduce the state’s obligations for paying pensions, it could be three decades or longer before Kentucky enjoys the full benefits of those changes. 

Kentucky’s unfunded pension is not the highest in the nation, but it is extremely high when compared to the unfunded liability, population and the per capita income of other states with large unfunded liabilities. For example, the unfunded liability in New York is $9 billion, or less than a third of what Kentucky’s is. However, New York has a much larger population and is a more prosperous state than Kentucky.

A legislative task force is working on an extensive plan to address Kentucky’s unfunded pension liability and is expected to have its proposal ready for action by the 2013 General Assembly. Just what those proposals will entail remains to be seen, but one idea being bandied about concerns us. It would have the state issue bonds to erase the unfunded deficit.

That may eventually be necessary, but before borrowing to address the unfunded liability, the General Assembly must be sure it has corrected the problems that created the unfunded liability.

That may require a further reduction in retirement benefits for new state employees and more increases in employee contributions. But until the problems that led to the unfunded pension funds are corrected, borrowing money to erase the deficit would be foolish.

Thirty billion dollars is a lot of money for a small, relatively poor state like Kentucky. It is going to take some massive changes to reduce that number, and to date legislators have been reluctant to take the bold steps that are likely necessary.

For example, one proposal being advocated by Republican legislators is to eliminate legislators from qualifying for state pensions. The amount of money some retired legislators — including some who were “retired” by voters and not by their own choice — angers many constituents and many have questioned why “part-time” legislators should receive state pensions. Eliminating pensions for legislators would be popular with many ordinary Kentucky taxpayers but it would do little, if anything, to reduced the state’s unfunded pension liability.  The pensions received by retired legislators may not be popular but they are not why the pension fund is $30 billion in the red.

Of course, legislators know that eliminating their pensions will do little to solve the state’s pension fund deficit, but it is much more popular to do something that is popular than to do something that will actually solve the problem.

The unfunded pension liability is not a new problem, but the time to solve is now, not later. With the budget not on the agenda for the 2013 General Assembly, it is an ideal time for legislators to get serious about the erasing the unfunded pension deficit. Of course to do so, they will have to show the type of political backbone rarely seen in Frankfort.