Bluegrass Beacon: Actuarial integrity key to repairing pension bridge

20111129beacon2

Editor’s note: The Bluegrass Beacon column is a weekly syndicated statewide newspaper column posted on the Bluegrass Institute website after being released to and published by newspapers statewide.

Any retiree who worked as an engineer in building and repairing Kentucky’s buildings, highways and bridges should concur with a hearty “Amen!” for structural integrity, which indicates the ability of a structure to withstand a certain amount of intended weight without failing, fracturing or otherwise weakening.

If Kentucky is to fix its pension mess, then “actuarial integrity” must become to its defined-benefit system what structural integrity is to its physical infrastructure.

The new Abraham Lincoln Bridge connecting Louisville with Jeffersonville, Indiana, has a $1.1 billion price tag, a weight-bearing capacity of nearly 5,000 pounds per linear foot and is designed to serve that load for at least the next 75 years.

It was built only after determining the structure’s cost and reaching an agreement between the two states that its beneficiaries cover a substantial portion of the needed funding via tolls.

When the Kentucky Employees’ Retirement System was established in 1956, it was created as a linear system whereby actuaries determine each year’s benefit levels based on several factors, including anticipated investment returns, salary and payroll-growth rates, life expectancy, retirement age and attrition. When beneficiaries reached retirement, their pension payments would come from a fully funded, actuarially sound system.

However, by allowing the load placed on Kentucky’s retirement bridge to increase by raising benefits established and funded in previous years, actuaries – pension-systems’ engineers, if you will – have compromised the integrity of our entire retirement system.

If engineers want to increase the weight-bearing capacity on the Lincoln Bridge to, say, 10,000 pounds per linear foot, they would complete construction of more lanes or cable before accepting the increased weight.

Allowing the increased weight without expanding capacity would make the bridge structurally deficient and dangerous to all who dare cross it.

Similarly, retirees and current beneficiaries in the commonwealth’s pension plans increasingly rely on a structurally deficient system to provide for them the rest of their lives.

A main contributing factor to this structure’s weakness is the poor performance of actuaries who work for Kentucky’s retirement systems and have given their wink-and-nod blessing to increasing the weight on our pension bridge without a corresponding expansion of its capacity critical for handling the heavier load.

Legislators too often have enabled this to happen without the proper understanding, oversight and questioning critical to protecting their constituents who pay for such shenanigans.

Actuaries know that ensuring the long-term sustainability of the systems requires strict adherence to the original benefits that were fully funded with normal cost payroll contributions. Enriching these benefits after the fact may represent the worst assumption of all: future employers will have unlimited funding to pay the principal and interest required to fund unaffordable and retroactive benefit enrichments. But who wants to bear such bad news to the folks who sign your checks, even if not doing so ends up being a large contributing factor to an entire state’s growing pension crisis?

The impact of an outside audit by the PFM Group on addressing the pension plans’ structural weakness likely will be as limited as the scope of its review. By evaluating the systems only back to 2004, PFM’s audit simply cannot include the impact that increasing benefits and then applying those benefits retroactively in each of Kentucky’s retirement plans for years has exerted on weakening the integrity of our pension systems.

We’re still waiting on PFM’s final recommendations.

Perhaps the firm’s auditors will offer meaningful help in returning our retirement system to one based on actuarial integrity rather than debt, unfunded liabilities and unreasonable expectations by beneficiaries. To do any less would be the equivalent of giving their own wink-and-nod – consciously or not – to weakening Kentucky’s pension bridge, in which case taxpayers should demand a full refund.  Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Read previous columns at www.bipps.org. He can be reached at jwaters@freedomkentucky.com and @bipps on Twitter.