Retirement system solvency not so easy to achieve

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July 23, 2010

By RONNIE ELLIS CNHI The Glasgow Daily Times Fri Jul 23, 2010, 10:52 AM CDT

FRANKFORT — Two years ago the General Assembly and Gov. Steve Beshear gave themselves a big collective pat on the back for a “pension reform” bill that would put the employee retirement systems on track to solvency by 2024.

On Wednesday, lawmakers learned it’s not quite that simple and they’re not yet out of the woods. In fact, the likelihood of the success of the plan is precarious at best, according to a consultant who studied the system.

“You have a large current pension plan problem,” said Jim Voytko of R.V. Kuhns and Associates, which reviewed the Kentucky Retirement Systems. “You have a large pension plan problem which is likely to grow larger over the next five to 15 years in a normal investment environment.”

Normal would mean about 7.75 percent returns on KRS investments, but in the current economic climate, that’s not what’s happening. In fact, the plan’s assets have actually declined from $16 billion in 2008 when the reform legislation was passed to around $13.8 billion today.

The problem was years in the making. The General Assembly, during high times in the 1990s, added cost of living adjustments and benefits to the plan and created an “inviolable contract” with retirees and employees, guaranteeing benefits could not be reduced except by the amount of the COLA. But for several years, lawmakers put in less money than required to fund the system’s future liabilities and now the system has $7 billion more in pension obligations than it could fund with existing assets and investment returns.

The 2008 “fix” set out a timeline for the legislature gradually to fulfill its annual required contribution payments, reaching 100 percent in 2024. (The ARC fluctuates according to investment returns and other economic factors. When investment returns are high, they reduce pressure for a higher ARC but when they fall, the ARC gets higher.) It also increased employee contributions and reduced some benefits for newly hired employees after August 2008. The plan anticipated several years of tight cash flow on the front end, however, as those ARC payments slowly increase toward 100 percent.

Voytko was careful to avoid predictions of disaster. If the stock market recovers and the General Assembly continues to meet the payments called for in the pension reform of 2008, “We’re going to be all right — eventually,” as Rep. Mike Cherry, D-Princeton, co-chairman of the Interim State Government Committee and co-sponsor of the pension reform bill put it Wednesday.

He pointed out the ARC schedule is a “floor rather than a ceiling” and lawmakers could begin funding the plan at higher rates up to 100 percent of the obligation. But that’s not likely in a time of budget cuts and state employee furloughs. Those furloughs also affect the pension plan — as an employee’s income is reduced, so is the level of his contribution to the retirement system.

Voytko said things could worsen if the market and economy fall again. In a worst-case scenario, the KRS could deplete its assets before 2024, requiring it to pay retiree benefits from that year’s contributions from employees.

Cherry said there wasn’t much else lawmakers can do other than to speed up and increase ARC payments or to eliminate the COLA benefit.

KRS Director Mike Burnside told Cherry he will discuss with the KRS board the possibility of foregoing the COLA. He said this year’s 1.5 percent increase over a 20-year or so period will ultimately cost the plan about $200 million.

Cherry’s co-chair, Sen. Damon Thayer, R-Georgetown, invited Burnside to recommend other changes to the committee, including “further benefit changes for future employees.”

Ronnie Ellis writes for CNHI News Service and is based in Frankfort. Reach him at rellis@cnhi.com. Follow CNHI News Service stories on Twitter at www.twitter.com/cnhifrankfort

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