Pensions

Kentucky Pension Crisis: Reform requires more than cutting benefits

Who caused Kentucky’s public employee pension crisis?

Legislators and governors, both Democrats and Republicans, who granted benefits without paying for them and assumed markets would never crash. They also decided early in this century they would rather short-change annual pension contributions than raise taxes to properly fund government, education and public services.

There also were the pension fund managers, whose miscalculations, risky strategies and lack of accountability resulted in underfunding and low returns on investment.

Who will suffer the most as legislators and Gov. Matt Bevin try to close a pension liability gap now estimated at $37 billion?

Based on recommendations made this week by a Bevin administration consultant, much of the pain would be borne by police officers, firefighters, teachers, other state and local government workers — and maybe even retirees.

The consultant, PFM Group, suggested freezing pension benefits for most current state and local workers and forcing them into a 401(k)-style investment plan like many private-sector workers were forced into years ago.

PFM also suggested raising the retirement age for most public employees in non-hazardous jobs to 65 and taking away cost-of-living adjustments retirees received between 1996 and 2012, which could substantially cut their benefits.

These are only recommendations. Any decisions will be made by the General Assembly and Bevin, who is expected to call lawmakers into special session later this year.

Previous legislatures enacted bipartisan reform in 2008 and 2013, after the financial crisis revealed some of the pension system’s weaknesses. But actuaries keep making revisions, and the numbers keep getting worse.

State employee pension benefits are better than most people in private industry now have, but there’s a reason for that: their salaries are usually lower, too. Many smart, dedicated people work in state government and public schools, and it is in taxpayers’ best interest to keep it that way.

To be sure, some state employee perks are excessive. Continuing to allow workers in non-hazardous jobs to retire in their 50s seems unsustainable in an age when people are living longer and health care costs are rising. Plus, it deprives taxpayers of valuable expertise in state government. Taxpayers also get annoyed by double-dippers and other ways people game the system.

But it would be unfair to make state employees and retirees shoulder most of the burden for problems they didn’t create. Any pension reform must be bipartisan, fact-based, involve state employee and retiree groups and take a more holistic approach than just cutting benefits.

It also should be part of a larger tax reform discussion, because fairness requires that the state make up for past under-funding. If legislators and governors had faced up to tax reform after the 1990s, when it became obvious it was needed, this and many of the foolish cuts to education and public services could have been avoided.

Expect a rush among Republicans and business groups to replace traditional defined-benefit pensions with 401(k)-style defined-contribution plans. Business executives like these because it shifts more of the burden to employees. Wall Street likes them because they generate business for investment firms.

But are they the best deal for employees, or even taxpayers? A new report by the Kentucky Center for Economic Policy says no. It notes that pushing more state workers out of the traditional pension system won’t solve underfunding problems; it will make them worse, and add new costs. It also points out that changes in 2008 and 2013 already shifted more of the burden to employees and put new state workers in hybrid pension plans.

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Any pension reform plan also must require more transparency. A history of secrecy, manager turnover, risky investments in hedge and private equity funds, high fees and low returns demand that legislators open up the books of Kentucky’s public pension system so everyone can see where all of the money goes, who is getting state business and what fees they are being paid. Transparency legislation passed this year was a good start, but only a start.

And one more thing: Kentucky legislators’ pensions are in a separate, better-funded system. At a minimum, they should be moved to a plan with large numbers of other state employees. That might make legislators more interested in proper funding.

But why do part-time citizen legislators even receive state pensions? If I were a police officer, a firefighter, an office worker or a school teacher, I would be asking that question when lawmakers come after my benefits.

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