Drew Curtis Releases Plan to Fix KY Pensions
We’re all used to candidates howling about apocalypse scenarios on policy issues, but the Kentucky pension system actually is one.
If no solution to the underfunded pension system is put in place in 2016, the next governor will preside over the worst economic apocalypse the Commonwealth has ever experienced. Worse than 2008, worse than the Great Depression. It will bankrupt the state and set growth back for a generation.
The most dangerously underfunded of the six Kentucky pension funds--Kentucky Employees Retirement System Non-Hazardous--will end the 2014 fiscal year in July at under 20 percent funding. It’s the most underfunded pension plan in the country. This fund covers the vast majority of state government retirees, and it is already fiscally insolvent. It will run completely out of money in either 2018 or 2019. When this happens, it will drag Kentucky into full bankruptcy, ruining our economy for a generation or more.
Neither Jack Conway nor Matt Bevin has a workable solution to restore funding to KERS NH. Additionally, their stated “solutions” when asked about pensions imply they have yet to even look at the facts.
Here are the facts: In 2003, Kentucky’s pension system was 100 percent funded. That same year, Governor Ernie Fletcher and the state legislature stopped funding Kentucky’s annual contribution to the pension system. That contribution makes up 57 percent of the amount needed to fund pensions (the other 43 percent comes from personal and employer contributions). At the time the amount needed from the state was $100 million per year to maintain funding.
In 2007, Governor Steve Beshear and the state legislature continued to not fund Kentucky’s annual contribution to the pension system. At the time the amount needed from the state was $200 million per year to get us back to fully funded.
The situation got so bad that Kentucky’s bond rating was dropped in 2011. That means that the interest rates on Kentucky’s bonds are higher than other states’, and we’re on the hook for that extra interest. It also means that the state government has been well aware of this problem for years and has consistently chosen to do nothing.
In 2016, the amount needed to fully fund the pension system will be north of $550 million per year. The state General Assembly finally voted this year to allocate $550 million to the KERS Non-Hazardous fund in FY2016, but there’s no guarantee of what they’ll do in years to come.
I have a plan to fix Kentucky’s pension system – several in fact – but there are no silver bullet solutions here. Just like losing weight, it’s about diet and exercise – i.e., not fun, and not fast, but necessary and effective.
My plan is based on in-depth research and consultation with experts such as Chris Tobe, a public pension consultant and the author of Kentucky Fried Pensions; Scott Shapiro, who led the team that fixed Lexington’s unfunded pension problem; and Jim Carroll, the co-founder of the Kentucky Government Retirees Facebook community.
Here’s the short version of my recommended solution:
- - Kentucky’s annual state contribution must be at least 100 percent and preferably 110 percent of the necessary funding level for the next 20 years. This is between $500 million and $600 million annually.
- - For the next 20 years at least, do not tap the pension funds. Allow them to grow. Annual returns on pension fund investments average about 7.5 percent per year. In time that will help us get back to full funding.
- - Obtain a $5 billion pension bond, but structure it as a line of credit to be tapped as needed. This gives us significant savings over a bond, whose interest would need to be paid annually on 100 percent of the loan amount.
- - Partially fund Kentucky’s total annual contribution with the line of credit. I recommend around 20 percent at this time, but that number could change based on variables in the equation.
- - During bad fiscal years (when the annual return is very low), tap the line of credit as necessary to maintain annual funding levels at 100 percent and pay interest only.
- - During good fiscal years (when the annual return is above average), use the overage to pay down the line of credit.
Why this works:
- - Benefit checks always go out.
- - The $550 million has already been set aside in the upcoming year’s budget, so we just need to continue that level of funding. No further reallocation of funds should be necessary.
- - Compound interest over time gets us back to 100 percent.
- - Allows flexibility for bad financial years.
- - Locking in 7.5 percent returns guarantees the fund will eventually grow back to a 100 percent funding ratio.
- - Minimal interest payments: We only pay interest on what we use from the line of credit.
- - This plan can be easily replicated to fix the Kentucky Teachers’ Retirement System.
Things to note:
- - The proposed line of credit is not a way of creating new debt. State government since 2003 used pension underfunding as a way to rack up billions of dollars of debt off the state balance sheet. The line of credit represents debt that already exists.
- - Using a line of credit allows us to pay interest only on what we use. Should we get very lucky and not need to tap the line at all, the cost to the state of having it available is zero. The problem with getting a lump sum bond is that we would have to make annual payments on the entire amount. It’s barely better than just making full cash payments.
- - This proposed plan only fixes KERS Non-Hazardous. Kentucky Teachers’ Retirement System is also in dire shape. We have a few more years of wiggle-room on KTRS, but it also must be funded soon to prevent disaster. I would propose a modified form of the KERS NH fix.
Nobody has suggested those solutions before now because nobody likes to be the governor who makes the state pay their bills. And politicians really like having that piggy bank to raid. But we can’t afford to keep kicking the can down the road. The state made a promise to thousands of hardworking Kentuckians, and it’s time to hold up our end of the deal. Kentucky’s future depends on it.