Editor's Note -- This is the first of a two-part series.
ASHLAND The Kentucky pension crisis will shred the budgets of this region's Kentucky counties and cities in two years if profound changes aren't made to the system, according to a memo recently sent to government leaders throughout Kentucky.
On Sept. 7, the office of Kentucky State Budget Director John Chilton sent a lengthy correspondence to all Kentucky governments enrolled in the County Employees Retirement System. The memo projects staggering pension payment increases across the state along with huge cost increases for Boyd, Carter and Greenup counties — and local municipalities — over the next two years in the CERS system.
Chilton wrote in the memo that rates for pension contributions are expected to be "substantially higher" starting in the 2018-2019 fiscal year. Chilton's memo goes on to break down stagggering cost increases for just the CERS system.
In this region, the city of Ashland faces combined payment increases of nearly $2 million for just one year to pay pension obligations for hazardous and non-hazardous employees in the CERS starting in Fiscal Year 2018-2019. In Fiscal year 2017, the city's contributions to the CERS system were a combined $3.3 million. By fiscal year 2019 that number is projected to jump to a combined $5.3 million for one year.
The city of Flatwoods faces a nearly $100,000 increase, or 50 percent spike, in just one year to meet its pension obligations for non-hazardous employees. The city of Morehead is looking at nearly $300,000 in increased costs for a single year to fund its pension obligation for hazardous and non hazardous employees. In Greenup and Carter counties, public institutions are looking at the same types of numbers -- the Greenup County Board of Education faces a $400,000 increase in pension obligations in just one year. The Carter County Board of Education is looking at a $583,000 increase in just one year.
And, perhaps most importantly, those projected increased costs are just for the CERS system, meaning actual cost increases when contemplating all of Kentucky's retirement systems will be exponentially higher. In regards to school boards, for example, the CERS enrollment usually pertains to bus drivers, teachers aides, etc. It does not represent the costs associated with certified personnel, meaning the increased pension costs to school boards will likely be profoundly higher than what is represented in the CERS numbers.
"We are in a tough spot," Chilton said this week in a phone interview with the Daily Independent. "There is an enormous resistance to increasing taxes and people don't want to cut state expenditures...because its been done multiple times. We are facing a revenue shortfall of $200 million and we are probably going to deplete the rainy day fund by the end of the year."
The memo from Chilton warned local governments across the state about "substantially higher" pension costs starting in fiscal year 2018-2019.
"The increase arises primarily from revised actuarial assumptions that the Kentucky Retirement Systems Board believes are realistic...the most significant revised assumptions include the long-term average investment rate of return (6.25 percent, previously 7.5 percent) and the payroll growth rate (2 percent, previously 4 percent)," Chilton wrote.
A vote on the actual rates is expected to take place in December.
Devastating cost increases, and cuts, likely
Local government leaders are deeply concerned. If the projected cost increases come to fruition locally, it will mean cutbacks in government services so the pensions can be paid for.
"It's going to hurt and you are going to cut services somewhere else, for example, roads, building...will suffer," said Greenup County Judge Executive Robert W. Carpenter.
Carpenter would like to get out of the state-run pension system, saying Greenup County has met all its fiscal obligations but that others in the system aren't paying their share.
"We would like to stand alone and take care of our own," Carpenter said.
Greenup County Schools Superintendent Sherry Horsley said she hopes the state will find solutions that won't impose all of the cost increases at once. If it happens the way it is projected, the district will be looking at cutbacks.
"A brand new certified teacher, when you take into account all of the extras is about $50,000," Horsley said. "Somewhere we are going to have to come up with the money (for the pension cost increases) or make cuts. We don't want to start with teachers....75 percent of our budget is salary, so we are already looking at what are the scenarios where we could cut back costs. For example what we spend on professional learning for teachers and extra services before and after school ..which are very important to our children."
In the city of Ashland, Director of Finance Tony Grubb said "it is a significant issue for us."
"We are going to take a measured approach and look at all options," Grubb said.
Grubb said traditionally the rates are negotiated down. However, he expects the costs to local governments will rise significantly.
"These retirements funds, according to the PFM study and the governor — they are in bad shape," Grubb said. "I would probably anticipate these (projected cost increases) being pretty close."
"The reality is we are going to have to come up with an additional $1.92 million," he said.
Ashland Mayor Steve Gilmore said the pension crisis "is a very serious problem and a very serious issue." City leaders have been meeting regularly to develop a long-term strategy that includes cutting costs.
Steve Towler, judge executive at Boyd County Fiscal Court, said it is a little early to know exactly what the long-term cost increases will be considering the fact that the governor hasn't yet called a special session on the matter and that the exact rates haven't been locked in. However, he described the proposed fixes contained in a consultant's report to be "radical" and, if implemented, would be devastating.
"It would be prohibitive," Towler said of the proposed fixes. "If you look at any school system, (the changes proposed) just cannot happen."
State system in crisis
CNHI News Service in August reported Kentucky needs at least another $1 billion to cover current spending and meet its pension obligations, and an outside firm is recommending benefit changes for current and future employees to meet that need. Consultant PFM Group, a financial consulting firm, recommends freezing existing accrued benefits; basing employee and employer contributions on “hard dollar” calculations of payroll rather than assuming payroll growth; ending the use of unused sick days or comp time days to calculate retirement benefits; conversion of new employees to a 401-K style, defined contribution plan rather than the defined benefit plan guaranteed by the state; placing newly hired teachers on Social Security and into 401-K plans. Local school boards would pick up the employer costs of Social Security under the PFM recommendations; increasing retirement ages for all employees — most, including teachers’ to 65 years of age; offering current employees a buy-out option whereby they could roll over their accrued benefits into a 401-K plan; and eliminating cost-of-living adjustments accrued from 1996 through 2012 (the 2013 legislation froze COLAs from that point. PFM and its legal advisers contend the COLAs are not part of the so-called “inviolable contract,” a statutory promise to provide all earned benefits.
Chilton wrote in the memo if Kentucky pension plans were subject to federal standards for single employer private plans the CERS plans would be designated as having severe funding shortfalls because their funded status is less than 60 percent. As such federal law would require that all benefits be frozen and the plans terminated.
"The need for significant reform is evident to anyone looking at the health of the CERS plans within that larger context, not simply benchmarking it against the health of the KERS plans," Chilton wrote.
Jill York, Republican representative for Kentucky's 96th district, said legislators are looking for solutions that avoid "a catastrophic impact on the folks within our pension system."
"What I hear from other legislators is we feel very strongly...that we need to honor the promises we've made to everyone who has worked for the state and counties, and we need to hold the line for those people," she said. "What I expect will happen is we will use all of our very best tools and strategies for everyone who is in the system now so they can continue to expect the same level of benefits.
"For the plans moving forward for our new hires, the (system) may be very different," she said.