Bluegrass Beacon: Pension predicament is Kentucky’s ‘King of the Monsters’ — The Bluegrass Institute for Public Policy Solutions

Godzilla is back.

But even the $176 million spent so far by moviegoers to see the “King of the Monsters” in action is a drop in the bucket compared to what’s needed to fix Kentucky’s public-pension system and its $35 billion unfunded liability.

In less than 15 years, the commonwealth’s retirement fund for its non-hazardous state workers – the Kentucky Employees Retirement System – went from being one of nation’s healthiest state pension funds to its sickest.

In 2000, the KERS was so robust that it was more than fully funded at 113.2 percent. Now, it’s become “the nation’s most poorly-funded state pension” with only 23 percent of the assets needed to cover its $11.3 billion in retirement commitments and $8.26 billion of unfunded liabilities, according to a recent Reuters report.

“Should the 41,000 active employees, 40,000 inactive employees and 37,000 retirees in Kentucky be worried about the security of their pensions?” the report asks. “Given recent events, they probably should.”

One of those events is a recent ruling by U.S. Bankruptcy Judge Joan Lloyd that Seven Counties Services, which serves 32,000 mentally challenged Kentuckians and has filed for Chapter 11 bankruptcy, is a private, non-profit corporation and therefore cannot be forced to remain in the KERS.

The judge ruled that the state has an “inviolable contract” with the organization’s employees and will have to cover the nearly $1 billion in additional pension contributions during the next 20 years as a result of the charitable agency’s exit from the system.

The state in its desperation to keep Seven Counties’ decision from being repeated by the system’s many other similar entities has spent $1.2 million just in legal fees to keep the agency from exiting KERS.

Lloyd’s ruling rightly recognizes that the public-retirement system’s problem isn’t the fault of state workers, most of whom receive modest pensions. She ruled that while the “private, nonprofit” entity can proceed with its bankruptcy, the state still has an obligation to Seven Counties’ employees.

After all, is it the fault of employees that simply accept benefits offered by their employers?

The judge also rightly recognized that the politicians in Frankfort will have to figure out how to feed the system without taking the food from state workers’ tables.

“When the monster grows, you must feed it or risk its wrath,” said Lowell Reese, publisher of Kentucky Roll Call and author of “Future Shock,” a series of Bluegrass Institute reports on Kentucky’s public pension system.

One of the ways the state grew this “monster” is by allowing non-governmental agencies into the pension system in the first place.

Legislators created this very real quandary: they wanted the political benefit that came from obtaining taxpayer-funded pensions for their political pals in nongovernmental agencies, but now face impossible decisions as these same entities decide to leave the system because they cannot possibly pay 40 percent of their entire payrolls in pension contributions and still perform their charitable duties.

We see the dilemma in the response of Sen. Chris McDaniel, R-Latonia, who backs addressing the presence of so many nongovernmental entities in the Bluegrass State’s public pension system and yet publicly states that he supports the state fighting the exit of Seven Counties because he fears the precedent being set by the agency’s decision and ensuing court decision.

McDaniel and his colleagues know that if these nongovernmental agencies leave the system, there’s more pain spread among fewer contributors.

In fact, if all similar agencies were to leave, the remaining employers would need to pay an additional $2.4 billion over the next two decades to adequately cover costs.

Of all the policies that threaten to strangle Kentucky’s economy, the pension crisis is “King of the Monsters.”

Jim Waters is president of the Bluegrass Institute, Kentucky’s free-market think tank. Reach him at jwaters@freedomkentucky.com. Read previously published columns at www.bipps.org. Photo published by Insider Louisville.