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Pension Panic
Kentucky Is Stuck Between a Rock and a Hard Place

Kentucky has the worst public pensions crisis in the country (by at least one metric), and it’s growing. The Lexington Herald Leader has the story:

Kentucky’s unfunded public pension liability has grown from $30.5 billion to $32.6 billion, a debt that threatens to undermine every other service the state provides, an oversight panel was told Monday.

The financial outlook continued to weaken in Fiscal Year 2016 for the Kentucky Retirement Systems and Kentucky Teachers’ Retirement System, from which 487,000 people combined either draw pensions or expect to in the future. […]

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

The primary KRS pension fund for state government employees has only 16 percent of the assets it’s expected to need to cover promised benefits, down from 17 percent in 2015. The chief KRS fund for local government employees has 59 percent of the assets it’s expected to need, down from 60 percent. The KRS fund for Kentucky State Police has 30 percent of the assets it’s expected to need, down from 33 percent.

The KRS fund was overexposed to market volatility, underfunded, and subject to changing actuarial assumptions that were influenced by political calculations. Meanwhile, the state’s “inviolable contract” mandates that benefits never be reduced or impaired, making it nearly impossible to reform the system.

Until recently, not much attention had been paid to the Kentucky Teachers’ Retirement System (KTRS), but it’s in nearly as bad shape as the KRS fund. In 2015, then-Governor Stephen Beshear (D) tried to reform the system to move teachers to a defined-contribution plan. But in Kentucky, teachers don’t participate in Social Security and the defined-contribution plan would only have given them half of what they had expected to get from their pensions. Meanwhile, the plan didn’t address the roughly $14 billion in outstanding liabilities.

Unsurprisingly, Beshear failed and his Republican successor, Governor Matt Bevin, has not pushed anything as comprehensive. He has, however, tried to increase transparency in the pensions system. That would be a good start because often we don’t even know how big the problems actually are. Still, the numbers don’t add up. That means Kentucky may have to raise taxes or ask the federal government for a bailout. If it’s the latter, the Senate Majority Leader Mitch McConnell, who represents Kentucky, is going to find himself in a difficult position. No matter what, Kentucky’s fiscal future looks exceedingly grim.

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  • Andrew Allison

    Only $32.6 billion? California’s unfunded liability was $241 billion in 2014!

    • Tom Chambers

      Of course you know that KY has about one-ninth the population of CA and about one-thirteenth the GDP, so on a per capita basis KY’s problems are even worse. TAI likes to give Illinois grief about that state’s pension problems, but KY’s state income tax rate is already higher than IL, though not (yet) as high as CA.

      • Andrew Allison

        Of course I do. The point which I apparently failed to make sufficiently clear was that $32.6 billion is a rounding error to Congress, but $241 billion is real money. The danger is that Congress could create a low-cost precedent leading to enormous Federal taxpayer liability.

  • FriendlyGoat

    Not ignoring the seriousness of the problem as it affects the Kentucky pensioners going forward, nothing could be better for the country than for Mitch McConnell to be forced by the circumstances of his own state to be exposed as the two-faced jerk he actually is.

    • Dale Fayda

      You just can’t help yourself, can you? Anything to push “the agenda”, ha?

      Here’s a little history lesson for you, FG.

      Kentucky governors, OVERWHELMINGLY Democrat over the last 40+ years!! In fact, the state has been Democrat-run for its entire modern history! Since 1971, when the problem of public sector union pensions first began to fester, Kentucky has had a Republican governor for only (7) of those years, including Matt Bevan, who’s only been in office a little over a year.

      Kentucky House of Representatives, where all the revenue legislation must originate is also Democrat-run and has been for literally generations:

      So, as you can see, Mitch McConnell is not the problem here. As there and everywhere, the Democrat party is the problem. Not to say that Republicans are completely blameless in this crisis, but it has always been the Democrats who are “all in” on pandering to the public sector unions and it has always been the Democrats (and their union storm troopers) who fight all attempts at reform tooth & nail.

      Liberals can’t govern. That’s all there is to it.

      • FriendlyGoat

        You blame Kentuckians for over-promising pensions they can’t deliver. I blame Kentuckians for sending a snake to the leadership of the U.S. Senate. Perhaps Kentuckians will sort this out when they notice McConnell soon screws them all.

        • Dale Fayda

          No, I blame DEMOCRATS in Kentucky state legislature for over-promising pensions to their party’s base that they can’t deliver.

          Mitch McConnell, being a US Senator, has little to nothing to do with Kentucky’s budgetary decisions, but the DEMOCRATS in the state house have had everything to do with it.

          It’s Kentucky’s DEMOCRATS that have screwing the voters there for generations and that’s beyond dispute.

          • FriendlyGoat

            The same voters elect both the legislature and the U.S. Senator.

          • Dale Fayda

            And for some unfathomable reason they’ve been electing DEMOCRATS to their state legislature. Could it be that it was the DEMOCRATS who over-promised their electorate for decades and irredeemably screwed up the state’s finances shoveling money to their pet interest group, not Mitch McConnell? Bad old habits are hard to break, but KY has a Tea Party governor now. It may “be too little, too late”, but that’s a different conversation.

  • Disappeared4x

    Kentucky’s labor participation rate is 57.9%. Another option for Kentucky in addition to “raise taxes [on current taxpayers] or ask the federal government for a bailout. …” is higher GDP growth that increases the labor participation rate that leads to higher tax revenue from new taxpayers.

  • CapitalHawk

    The “inviolable contract” provision is a statute. Statutes can be amended. Things that are unthinkable in the best of times are done in the worst of times.

    • f1b0nacc1

      Until that sort of thinking becomes prevalent (as it must), there is no way out of this mess. There isn’t enough tax revenue in the world to pay off the promises of corrupt the politicos (of all parties, I should point out)….

      • CapitalHawk

        Yes, exactly this. I do feel for the people who have structured their lives around the belief that they will get this money for the rest of their lives, but promises that can’t be kept, won’t be kept. Related to this, these types of problems are exactly why unions for government employees should be banned everywhere and forever. In a normal system, the union is limited in what it can get because if they overreach, the company will go bankrupt and anyway, the owners want to have some money left over for themselves. In state and local government, politicians care only about votes (which unions can deliver) and not a whit about other peoples money.

  • markterribile

    Maybe a requirement that a bargaining unit that bargains for a pension also manage it, with contributions made as they are earned, and no future obligations to the government employer?

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