Kentucky’s General Assembly will need to find an estimated $5.4 billion to fund the pension systems for state workers and school teachers in the next two-year state budget, officials told the Public Pension Oversight Board on Monday.
That amount would be a hefty funding increase and a painful squeeze for a state General Fund that — at about $20 billion over two years — also is expected to pay for education, prisons, social services and other state programs.
There are two reasons for the dramatic increase.
First, Gov. Matt Bevin and the legislature committed two years ago to paying the state’s full annual recommended contribution, or ARC, to the long-underfunded Kentucky Retirement Systems, which provides pension benefits for state and local government retirees.
Second, KRS recently adopted more realistic financial assumptions about its investment returns and the state’s payroll growth. Those new assumptions made KRS’ numbers look far worse literally overnight.
The legislature will pass the next state budget during its 2018 law-making session this winter.
“We realize this challenge is in front of us. That’s obviously part of the need for us to address pension reform,” said state Sen. Joe Bowen, R-Owensboro, co-chairman of the oversight board.
“In the short-term, yeah, we’re obligated to find this money,” Bowen said. “And everybody is committed to do that. We have revealed this great challenge. We have embraced this great challenge, as opposed to previous members of the legislature, perhaps.”
Bowen said he is privately working with Bevin and others on a plan to make cost-saving changes to KRS and the Teachers’ Retirement System of Kentucky in a special session of the legislature this fall. The senator said he could not commit to giving lawmakers 30 days to review the plan before they would have to vote on it, as House leaders have requested, but “they will have adequate time,” he said.
In presentations on Monday, the pension oversight board was told that total employer contributions for KRS in fiscal years 2019 and 2020 would be an estimated $2.47 billion each year, up from $1.52 billion in the current fiscal year. Nearly $995 million of that would be owed by local governments. The remaining $1.48 billion is what the state would owe.
The Teachers’ Retirement System estimated that it would need a total of $1.22 billion in fiscal year 2019 and $1.22 billion in fiscal year 2020. That would include not only an additional $1 billion to pay down the system’s unfunded liabilities but also $139 million to continue paying the debt service on a pension bond that won’t be paid off until the year 2024.
The numbers offered on Monday were estimates, officials said. The systems will be able to provide lawmakers with final numbers this winter after consulting with their actuarial advisers.
Between them, the two major pension systems face tens of billions of dollars in unfunded liabilities, due in part to inadequate funding for most of two decades by governors and lawmakers; enhanced retirement benefits approved by the state that were not fully paid for; and financial assumptions that proved to be overly optimistic.
A report by The PFM Group, consultants hired by Bevin, last month recommended an end to defined-benefits pensions for state workers and school teachers in favor of less generous defined-contributions accounts; a raise in the retirement age to 65 for most workers; and the “clawback” of a previously awarded cost-of-living adjustment to some retirees that could reduce their future benefits by 25 percent.
Hundreds of state workers have rushed to retire earlier than expected during the past two months as the controversy has grown over possible changes to their pensions.
David Eager, executive director of KRS, told the pension oversight board on Monday that an estimated 6,000 employees of state government are eligible to retire. If they all chose to do so, it would mean the loss of up to $100 million a year in contributions to KRS — which would “not be catastrophic, but it would be something we would prefer to avoid,” Eager said.