Time to move on from blame, solve retirement funding problem together

Published 10:19 am Thursday, October 20, 2016


State Senator

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A recent “tweet” caught my attention because it involved our financially struggling Kentucky Employees Retirement Systems (KERS). The tweet read: “Solvency crisis has nothing to do with investment performance, everything to do with $4.5 billion underfunding.”

I was confused how anyone could think the investment performance of KERS has nothing to do with the problems leading up to the pension solvency crisis now facing the taxpayers of the commonwealth.

As of June 30, 2016, investment returns over the trailing one-, three-, five-, and 10-year periods have fallen well short of their assumed rates of return targets and the board overseeing KERS has reduced their assumed rate of return target from 8.25 percent to 6.75 percent for this system over essentially this same time frame. Each time the system fails to meet the assumed rate of return and each time the assumed rate of return is lowered, unfunded liabilities are created and state costs for funding the system goes up.

Let me be perfectly clear that I know underfunding by both past governors and members of the General Assembly is a significant part of the problem and has contributed to the crisis. I also have been committed to reversing this practice. During the 2016 budget process, I voted to fund the annual required contribution (ARC) and provide supplemental appropriations that results in $225 million more for KERS each year of the budget, which would finally be a step in the right direction.

But, you also need to understand that there is more to this problem than simple funding by the General Assembly and poor investment returns. Decisions and actions by the Kentucky Retirement Systems’ (KRS) Board before it was reorganized by Governor Bevin have played a significant role in creating the KERS unfunded liability.  These decisions and actions were directly or partially responsible for 64.34 percent of the problem.  How can I be so precise?  Those percentages came from reports that KRS itself has provided over time:

• 16.52 percent of the problem comes from unfavorable investment returns. The KRS Board approves all investment decisions and investment returns for KERS.

• 22.25 percent of the problem comes from changing the assumptions the KRS Board uses to project future financial liabilities and poor experience in relation to changing those assumptions.

• 25.57 percent of the problem is due primarily to negative amortization, which is in large part linked to payroll growth assumptions established by the board. The KRS Board assumed state government payroll would grow by four percent each year and it has not.

We are in one hell of a mess and there is a lot of blame to go around. We must start working together on solving this issue once and for all and stop pointing fingers. That is why the timing of the audit of all the retirement systems — organized by Governor Bevin and funded by the General Assembly — could not come at a better time.

It is time for everyone to stop playing the blame game and start working together to solve this multi-billion dollar problem. It is time for all the retirement systems to be more transparent and to have assumptions about future investment earnings and payroll growth based in reality.  It is also time for the General Assembly to commit to continuing to fully fund the ARC and to put aside partisan politics and enact the reforms necessary to stabilize all the pension systems and protect the taxpayers of the commonwealth.

I pledge to you I will continue to do what is right for both our active and retired state employees, teachers, and for you, the taxpayer.

As always, if you have any questions or comments about these issues or any other public policy issue, please call me at my home phone, (270) 692-6945, or toll-free at (800) 372-7181 or email me at Jimmy.Higdon@LRC.ky.gov.  You can also review the legislature’s work online at www.lrc.ky.gov.

Sen. Jimmy Higdon (R-Lebanon) represents the 14th District including Casey, Marion, Nelson and Spencer counties, as well as part of Jefferson County.