Pension debate must include full discussion of funding, reasons for crisis

Published 7:25 pm Friday, May 10, 2019


State Representative

The recent editorial, “State government is shirking its responsibilities on the pension crisis,” caught my attention because of some of the claims made that nearly all of the problems associated with the present pension crisis are the result of the action or inaction of the state legislature over the years.

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Throughout my three years as our state representative, I have spent many hours trying to determine the best course forward to effectively address our unfunded pension liability. During that same time, I have determined there is no silver bullet, and there is not a solution that will garner unanimous support in its implementation from all of the various stakeholders. I freely admit that underfunding by previous governors and members of the General Assembly is a consequential element of the present financial crisis.

It’s important to note that in the 2016 budget, we in the Kentucky General Assembly appropriated additional funding that resulted in $225 million more dollars to the Kentucky Employees Retirement System (KERS) in each year of the budget. Ensuring that we are allocating adequate funding is an important action toward long-term solvency, and we have delivered on that in each of the last two state budgets. That includes the 2018 budget, which not only provided $3.3 billion in full funding for all systems except the Legislative Retirement Plan, but also fully funded the Teachers’ Retirement System for the first time in over a decade.

Due to a variety of factors, the bill for our pension systems is expensive. But we are paying it. In fact, contrary to the narrative expressed in the prior editorial, we are helping local governments with their portion of the payment. HB 362 from 2018 capped the year-to-year increase in local government contributions at 12 percent, with the state picking up the remainder of the tab.

In determining the best course of action to move us toward pension solvency, it is essential that we acknowledge the reasons for the underfunding. Since 2000, the KERS non-hazardous plan has gone from having a net positive $1.9 billion in assets to having an unfunded liability of approximately $10 billion in 2015, a negative shift of around $12 billion. What has caused the growth in liabilities for the KERS fund, which covers a majority of state employees? The retirement system’s actuary has calculated which factors have led to the growth in unfunded liabilities. Five areas have contributed to the unfunded liability growth in the system, including:

• 16.52 percent due to unfavorable investment returns;

• 13.89 percent due to providing unfunded COLAs;

• 22.24 percent due to changing assumptions or failing to meet assumptions;

• 20.68 percent due to underfunding; and

• 25.57 percent due to “other.”

The “other” includes payroll growth assumptions established by the KERS board. In other words, we finance unfunded liabilities over a 30-year period, much like a home loan. This payment shows up in the Actuarially Required Contribution (ARC), which is the retirement system’s request to the governor and the General Assembly. But instead of it being a set dollar payment over the 30-year period like we have in most home mortgages, the systems use a flawed formula known as the level percentage of pay method, as required by state law. The systems then assume payroll will grow by a set amount — 4 percent in the case of KERS. The problem with this assumption is that when payroll does not grow, the unfunded liability continues to skyrocket.

The Kentucky Retirement Systems Board (KRS), who oversees KERS, has a significant stake in the growth of the KERS unfunded liabilities. It manages the system’s investments. Unfavorable investment returns account for 16.52 percent of the liability. It sets actuarial assumptions. Those changing assumptions account for 22.24 percent of the liability. And this “other”, which is 25.57 percent of the liability, is in large part linked to payroll growth assumptions established by the KRS board. In total, the KRS board has a large stake in the unfunded liability issue, accounting for just over 64 percent .

We must start to work together on the issue. We in the General Assembly must continue our progress on fully funding the ARC. The KRS board must review and adjust their assumptions.  They must also revisit their investment strategies. Transparency is also a must in every aspect of the systems, so that the public is made keenly aware of the actions of KERS. Most importantly, it’s time to stop digging the hole deeper. The pension crisis is a serious financial issue, and all parties must not only acknowledge that fact, but work together to right the ship.

Rep. Daniel Elliott represents the 54th House district, which includes Boyle and Casey counties, in the Kentucky General Assembly. He can be reached through the toll-free message line in Frankfort at (800) 372-7181, or via e-mail at