The Bluegrass Institute for Public Policy Solutions for years has warned that failing to implement real reforms to Kentucky’s ailing retirement systems could threaten the commonwealth’s entire economy and crowd out funding for other important government services.

This is now happening.

Our commonwealth faces a $200 million budget deficit and Gov. Bevin has been forced to ask most state agencies to slash their budgets by 17 percent. Keep in mind that these cuts are occurring during a budget biennium in which an additional $1.2 billion was put into the public-pension pot to shore up the retirement systems, and $2 billion will be spent from the General Fund on the retirement systems during the current fiscal year alone.

Also, independent consultants hired by the state to make recommendations for addressing the pension crisis indicate that an additional $700 million will be needed each year – an additional $1.4 billion during each two-year budget cycle – to keep Kentucky’s retirement systems from becoming insolvent. This would result in nearly $3 billion of the General Fund’s annual $11 billion portion going toward funding retirement benefits for public workers.

The commitment to fix this problem crosses all geographical, ideological and political boundaries.

Whether you’re a taxpayer living in Pikeville or Paducah or your concern is the state’s credit rating or the availability of adequate funding for education, transportation and public safety, you should be very concerned about the fact that Kentucky’s unfunded pension liability threatens to drive up taxes, harm the state’s economy and crowd out funding for most other government services, including education, transportation, public safety and health care.

While a proposal recently introduced by Gov. Matt Bevin and legislative leaders attempts to address the pension crisis in a politically palatable way, it does not go far enough in dealing with the structural imbalance of the retirement systems’ benefit structure that has played a critical role in creating the $60 billion-plus unfunded liability.

For example, the plan fails to recognize how increasing benefits and applying those benefit enhancements retroactively disrupted the annual horizontal actuarial reserves established to ensure that benefits are properly prefunded, which led to the current unfunded liabilities that will, without meaningful reforms, drown Kentucky’s entire economy.

By implementing a soft freeze, which changes the benefit structure for new hires into the system while allowing benefits to continue to accrue at current rates for current employees until they reach 27 years of service, the recent proposal, if enacted as is, would result in the state’s unfunded-liability hole continuing to grow deeper.

The Bluegrass Institute has and will continue to advocate for a hard freeze for current beneficiaries, which would end the current unsustainable plan immediately. This approach would allow beneficiaries to receive all they have earned to that point but would also create a new defined-benefit paradigm that’s sustainable due to reset benefit factors, accrual rates and consistent levels of contribution by beneficiaries and their employees. The alternative to a sustainable, actuarially sound defined-benefit pension system that does not increase liabilities – and guards against such increases in the future – is a strict defined-contribution plan.

Other aspects of the current proposal by Bevin and legislative leaders offer reasons for concern, including placing in a defined-contribution, 401k-style plan all new teachers who, in Kentucky, are not enrolled in the federal Social Security plan. However, it’s important to note that the current proposal offered by Bevin simply acquiesces to teachers and their political and union representatives who strongly oppose placing new hires in the Social Security system.

While the Bluegrass Institute does not philosophically oppose defined-contribution plans, we offer an alternative defined-benefit plan that avoids the hard fall and hard sell of a 401k-style plan, addresses the egregious and costly abuses in the current out-of-control retirement systems and ensures a quality benefit for state workers.

For more information, please contact Jim Waters at jwaters@freedomkentucky.com, 859.444.5630 (office) or 270.320.4376 (cell).