Upcoming pension reform may contain a shift to 401(k)-type plans. Here’s what that could look like for public employees.
Mary Ann Gerth/Courier-Journal/USA TODAY Network
Kentucky’s public pension systems are in crisis. The issue is sprawling and complicated for sure, but we simply cannot afford to defer action. Do not believe those that say this is a matter of differing opinions. This is a math problem and the numbers are ominous. Our elected leaders must enact realistic solutions quickly if we are to maintain our state’s economic stability.
It is an understatement to say that Kentucky’s eight pensions systems are severely underfunded. Current estimates suggest that the commonwealth’s taxpayers must come up with an extra $1 billion each year for the next 30 years just to make up for the shortfall. To put that into perspective, Kentucky’s entire state budget is only $10.6 billion. The accumulated liabilities associated with public retirement systems affect every aspect of our state’s financial security.
If our commonwealth’s bond rating continues to plummet in the face of all of this debt, we will see less economic activity and even higher borrowing costs. Necessary spending cuts will significantly reduce funding of vital public services including K-12 schools, colleges and public safety. We cannot continue to bury our heads in the sand. We must act in 2017 to save these troubled systems, or we will find pensions consuming a greater and greater share of our budgets.
The first thing legislators must do is to pass a long-term plan to ensure the longevity of the retirement system. Other states have taken steps to pay down their unfunded pension liabilities by using a level dollar approach, similar to how most of us pay down our home mortgages. The current method of paying a percentage of payrolls is, according to the PFM report, the largest contributing factor of the unfunded liabilities.
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Another way that legislators can ensure retirement sustainability is to restructure the pension systems into defined contribution plans where legally and financially possible. Defined contribution plans give beneficiaries more autonomy over their money and their retirement, especially for those individuals who do not work their entire careers in the public sector, or move in or out of Kentucky. A defined contribution plan also reduces taxpayer risks, saves the state money by ensuring unfunded liabilities do not accrue on new government employees, and eliminates the possibility of policymakers underfunding the retirement systems in the future.
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Public retirement benefits and salaries should be modernized and mirror those available in the private sector as much as possible. Kentucky isn’t competing with other state governments for its employees, but it is competing with our own state’s private sector employers. That means Kentucky needs to offer visibly competitive market-rate compensation that helps the state recruit and retain quality teachers and other government employees. If state employees are wholly under-compensated, then let’s deal with that issue in the free market.
Kentucky must honor promises made to public retirees, as the law and ethics require, but structural changes are required to reduce unfunded liabilities. Organizations that represent beneficiaries and taxpayers alike must resist fiery, misleading rhetoric and should avoid filing costly and time-consuming legal challenges; we have neither money nor time to spare. We urgently need pension reform and it must be fair to both the beneficiaries and the taxpayers while standing up to the scrutiny of the legal system.
Acting today will allow Kentucky to keep its promises to current retirees and create a stable and sustainable system for present and future public employees. While the convenient and irresponsible thing to do is to continue to kick the can down the road, the current situation is far too grim and inaction would be inexcusable. It is time to strongly support our legislative leaders as they take bold and urgent action to solve Kentucky’s pension crisis.
Kent Oyler is president and CEO of Greater Louisville Inc.
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