Will pension funding engulf entire budget?

Published 9:00 am Tuesday, January 23, 2018


Contributing writer

Your humble correspondent warned for years the day would come when public-pension funding crowded out government services Kentuckians on both sides of the political aisle care about.

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I’ve also warned repeatedly that dumping more money into the systems without stopping the bleeding will create additional pressures on an already-strained budget while failing to fix our pension woes.

Despite fervently hoping such prophecies were wrong, they now find fulfillment in Gov. Matt Bevin’s proposed two-year budget.  

Bevin recommends cutting 70 programs, including health services providing screenings for various cancers, which especially benefit low-income, disabled and poor Kentuckians, while at the same time dumping more than $3 billion into the deepening public-pension hole and nearly 15 percent of the commonwealth’s entire General Fund budget.

Even after more than $2 billion was included in the 2016 budget — including an additional $1.2 billion for the Teachers’ Retirement System — the pension plans’ funding levels have continued declining.

That’s because you can’t keep digging the hole and simultaneously expect to move closer to climbing out of it.

Many states face similar pension pressures, yet none have made significant progress by spending, taxing or borrowing their way out of holes, most of which aren’t nearly as deep as Kentucky’s.

The governor deserves credit for taking a stand in his speech against borrowing our way out, making it clear such an alternative is off the table. Doing so, he rightly states, would be like a family using the Mastercard to make payments on an American Express balance.

However, instead of going ahead and doing what that same family would if it wants to climb out of its financial hole — reducing spending — he proposes increasing it for public-retirement plans at the expense of just about everything else.

“Never once in the history of Kentucky has the (actuarially required contribution) been fully funded for all our pension systems – not one time, which is why we now find ourselves in the situation where they are all so severely underfunded,” Bevin said, sounding like many of his predecessors who found it easier to blame pension problems on funding deficiencies rather than on offering benefits at unaffordable and unsustainable levels.

“This year they will be funded in their entirety,” he boasted.

As if I should stand up and clap vigorously like I did when the governor announced something must be done about school systems’ central-office administrators making six-figure salaries while demonstrating little positive impact on student achievement in the classroom.

Bevin’s boast isn’t really that helpful, considering the ARC isn’t “fully funded” because it’s been arbitrarily decided rather than actuarially established.

The ARC is simply the cost of current benefits plus debt payments from the past.

Instead of awarding only benefits that were properly prefunded — as defined-benefit systems are supposed to do – Kentucky’s retirement plans have colluded with the politicians for years to increase benefits retroactively, thus disrupting the funding levels.

Of course, these unfunded benefit enhancements created a bigger “ARC.”

However, to blame Kentucky’s pension woes on inadequate funding by the legislature is like a couple with a $45,000 income getting evicted after purchasing a $1 million home and being unable to make the payments, then blaming their eviction on the fact they couldn’t make the payments rather than on the reality they purchased a home they couldn’t afford.

It’s unfair for politicians and these systems’ administrators to make promises to beneficiaries they can’t afford to keep.

It’s also patently unfair to leave taxpayers working in the private sector to support their families — who often don’t enjoy nearly the same level of retirement benefits — holding the ARC bag into which they must dump their hard-earned dollars to pay the principal and interest on those promises.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. He can be reached at jwaters@freedomkentucky.com and @bipps on Twitter.