It’s a tough time for Kentucky’s public pensions. According to one recent report, Kentucky has the most poorly funded public pensions in the country. In his budget this year, first-term governor Matt Bevin moved to increase funding for the commonwealth’s public pensions, but then he picked a fight with the director of the Kentucky public pension system. Just this week, it was announced that Bevin has hired PFM Group, a consulting firm based in Pennsylvania, to do a review of Kentucky’s public pensions. There’s a lot happening in the Bluegrass State, so let’s break it down.
According to S&P Global Ratings, Kentucky’s pension funds are only funded at 37.4 percent, the lowest ratio of any state. Kentucky has languished for a long time at the bottom level of pension funding. Why is that? Because the state neglected for years to make the annual actuarially required contribution to the pension funds. According to Kentucky Public Radio, the state underfunded the pensions for 15 of the past 22 years. In August, the largest of Kentucky’s pension systems, the Kentucky Employees Retirement System (non-hazardous), reported that its assets declined by $347 million over the past fiscal year. Of that amount, the pension officials attributed $326 million to “negative cash flows associated with employer contributions”- in other words, the state didn’t pay what it owed. Pensions can’t work if you don’t fund them. It’s as simple as that.
While it was heartening to see newly-elected Governor Matt Bevin pursue increased funding for the pension systems, he then followed that up by picking a fight with the board of the Kentucky Retirement System. In June, Bevin attempted to dissolve the Board of Trustees for KRS and replace it with a Board of Directors, constituted primarily by appointees of the governor. This action is currently tied up in court, although the board appointed by Bevin is allowed to meet. Bevin does maintain member representatives from the respective pension systems on his Board of Directors; however, those member representatives are outnumbered by political appointees of the governor. Even if Bevin picks the best possible people to serve on the board, the problem is a structural one; putting control of the board in the hands of one office holder (the governor) creates the possibility of abuse in the future. Empirical data shows that member trustees on pension boards work better with investments and tax dollars than political appointees.
This week Governor Bevin announced that he has selected PFM Group of Philadelphia to complete a review of Kentucky’s public pensions. PFM is supposed to complete its review by the end of the year. According to news reports, the analysis will include:
“Overall solvency & liquidity analysis; Assessments of outstanding obligations under various actuarial assumptions; Critical review of past revenue and expenditures to identify reasons for the current financial status of the plans; and Analysis of nationwide best practices and future actions that might be considered by the Commonwealth to put the plans on path toward long-term solvency.”
If Governor Bevin is serious about putting Kentucky’s pensions on a “path toward long-term solvency,” then a list of future actions should not include moving toward a 401(k)-style defined contribution plan. As we have learned in states like Alaska, Michigan, and West Virginia, moving to a 401(k)-style plan creates enormous transition costs and does nothing to address the unfunded liability of the pension system. Kentucky’s pensions are poorly funded because of years of underfunding by the state government. The state must shore up its funding and make its annual required contributions. Abandoning the pension system altogether will only make the problem worse.