Pension python squeezing Kentucky’s economy

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Reporter John Cheves covers the state’s retirement systems’ crisis in Tuesday’s Lexington Herald-Leader, citing inadequate funding, weak investment returns and “unrealistic assumptions” regarding public employees and their benefits as the primary contributing factors to Kentucky’s public pension plight.

Two of this stool’s three legs have received a lion’s share of the attention by policymakers.

It is, after all, more politically palatable to talk incessantly about funding and weak investment returns -- as most bureaucrats who run these systems and their political pals in the Legislature do -- than to confront the primary contributor to the water seeping out of Kentucky’s pension bathtub: costly and unsustainable benefits.

Dr. William Smith, a member of the Bluegrass Institute Pension Reform Team, explains that retroactive benefit enhancements are the primary culprit.

“The funding deficits for KRS (Kentucky Retirement Systems) and KTRS (Kentucky Teachers’ Retirement System) were created by retroactively enhancing benefits previously endowed with an actuarial reserve,” Smith said. “This creates a disparity between the value of reserves and the value of future benefit obligations, converting a relatively innocuous actuarial reserve system into a quasi-pay-as-you-go Ponzi scheme. In other words, benefits are actuarially funded when they are earned, and then arbitrarily enhanced at a later date.”

For example, a County Employees Retirement System (CERS) non-hazardous member hired in 1958 -- when the “benefit factor” was 1.25 percent -- who retired in 1991 when the benefit factor had increased almost a full percentage point to 2.2 percent, gets an unearned windfall of thousands of dollars during his lifetime in the form of retirement checks that apply the 2.2 percent benefit factor to every year of service -- going all the way back to 1958.By awarding this retiree benefits at the higher level -- not just for the years properly funded with “normal cost” payroll contributions, but for every year of service -- we have created a pension python that’s squeezing Kentucky’s entire economy using "unrealistic assumptions."

“If you think of it as a bathtub, the water is going down,” KRS interim executive director David Eager told the Public Pension Oversight Board during its monthly meeting on Monday.

“We are where we are, and we’re going to work to get our way out of it,” Eager said.

However, Kentucky will not “work our way out of it” unless the legislature deals with the politically popular -- but illegal and unconstitutional -- retroactive benefit enhancements.

Click here for more on the Bluegrass Institute’s pension reform research and ideas.