By underfunding pension plans during the last decade, the Kentucky General Assembly and Governor’s Office have jeopardized the state’s credit rating and its ability to pay the future benefits it is obligated to provide retirees. This is a complex and serious financial issue facing state government.
Facts about Kentucky’s pension plans
The Kentucky Retirement System manages retirement investments contributed by state employees and those paid from the General Fund as a benefit for qualified employees. Kentucky’s pensions have defined benefits. An employee receives a stipulated retirement benefit based on their age at retirement, average annual salary, years of service and other factors. The state’s consistent failure to make timely annual payments has not only obviously underfunded the pension fund but also does not provide funds to be appropriately invested over time to create investment income for the funds.
The actuarial data in the first chart (KERS Chart 1) reflects a 2014 estimate that KERS, the state’s largest pension fund, has an unfunded liability of 79 percent and has funding available to meet 21 percent of its future obligations to retirees. Based on 2012 data published by Policypedia, the state’s pension funds in Kentucky are listed in the second chart (KERS Chart 2).
A 2012 report by Ballotpedia indicated that Kentucky’s pension funds had a combined estimated total liability of $52.3 billion: a fund value of $26.0 billion, and an unfunded liability of $26.2 billion. Current data for FY15 are not yet available, but because of continued underfunding the total unfunded liability is likely greater.
The state’s FY15 General Fund revenue (money received from fees and taxpayers) is forecast at $10.2 billion, which provides a relative measure of how serious the pension funds’ $26.2 billion in unfunded liabilities are relative to annual General Fund revenue.
Moody’s Investor Services and Fitch Ratings have rated Kentucky’s pension debt in terms of unfunded liabilities as among the worst in the nation. Pension debts have been cited as a key factor in multiple downgradings of Kentucky’s bond rating. The Pew Charitable Trusts review of the KRS determined that flawed actuarial assumptions – used by the system in determining contributions – were significant factors in underfunding.
Questions surround fund practices
Concerns also have been raised about the investment practices of the KRS. Excessive fees paid to investment advisers and agents, below-average returns on investments, questionable hedge fund investments, and lack of transparency regarding investment fees are some of the issues noted by the Pew review.
In 2012, Kentucky’s pension plan was ranked 49th worst in the United States. The plans had 463,836 pension fund members, of which 215,687 were active. Kentucky Chamber of Commerce President Dave Adkisson was quoted by the Louisville Courier-Journal regarding a proposed audit of KRS: “… the chamber is seeking bipartisan support to avoid creating a ‘political football.’ We are not attacking the system. We simply want to put the system under a magnifying glass.”
The Lane Report supports the recommendations of the Kentucky Chamber and other organizations for the office of the auditor of public accounts to conduct a performance audit of the Kentucky Retirement System. When billions of Kentucky’s taxpayer dollars are at risk, now is an appropriate time for maximum transparency of the state’s pension funds. — Dave Adkisson is the Kentucky Chamber of Commerce President
“Kentucky has had one of the most unfunded pension liabilities in the country, so I decided we needed to address that. There’s no overnight solution to an unfunded liability. It takes years to get into that situation, so it takes years to get out of it. But we brought in the Pew Foundation, organized a task force and asked their experts to work with us to come up with solutions. The task force worked for about a year and came up with a number of recommendations. During a session of the General Assembly, I got the House and Senate leadership together and worked through the issues, and we enacted new pension legislation in the way that the Pew Foundation recommended and also committed to fully funding the actuarially required contributions. The first opportunity we had to fully fund the budget was in this last session when we drew up the new biennial budget. I recommended fully funding it, and the legislature went along. We’re on our way to getting the pensions back on solid ground.” — Kentucky Gov. Steve Beshear, June 2014, The Lane Report