http://mycn2.com/politics/how-scary-is-ky-s-pension-system-underfunding-it-evokes-phrases-like-bankruptcy-and-tax-increase

Publication Date: May 03, 2012

Author: Ryan Alessi

How scary is Ky.'s pension system underfunding? It evokes phrases like 'bankruptcy' and 'tax increase'

05/03/2012 09:41 AM

To dig out of the multi-billion dollar hole facing the public pension system, Kentucky lawmakers have few choices, and all of them are nasty, said pension consultant Chris Tobe.

Essentially, Kentucky’s choices would be between raising more money through tax increases to pay off the unfunded liability or try to declare bankruptcy to reduce how much they have to pay retired state workers.

Last month, the Northern Mariana Islands in the Pacific became the first territory whose pension plan tried the bankruptcy approach.

A state going that route could require changing the U.S. Constitution, Tobe said.

“The typical pensioner makes $20,000 a year out of KRS. Could they be cut to $10,000 a year? It is possible, but only after we go into bankruptcy,” Tobe said. (4:30 of the interview.)

Meanwhile, Illinois’ public employee pension system is among the least stable in the country. Illinois has raised taxes to try to fix that. Kentucky could require an extra $600 million a year, Tobe said, which would mean “doubling the sales tax or doubling the state income tax.” (6:45)

“There are no easy ways. And that’s why no lawmakers want to talk about the pension because it forces ugly, ugly remedies,” Tobe said (5:45). “It’s coming up with a couple hundred million (dollars) a year out of the budget.”

Tobe talks at the beginning of the interview about what led to the unfunded liability. Kentucky lawmakers did pass a law in 2008 to set the state back on a path to make the full payments into the pension system. But Tobe called that “like making a minimum payment on a credit card.”

“Think of it this way: If you for the last 72 months, paid half of your mortgage payment. That’s kind of what has happened” with the pension program for more than 300,000 state employees, Tobe said (5:20).

Tobe is a investment consultant who has specialized in pension systems. From 2008 until Gov. Steve Beshear opted not to re-appoint him, Tobe served on the Kentucky Retirement Systems board of trustees. And he’s a former staff member of the state auditor’s office.

About Ryan Alessi

Ryan Alessi joined cn|2 in May 2010 as senior managing editor and host of Pure Politics. He has covered politics for more than 10 years, including 7 years as a reporter for the Lexington Herald-Leader. Follow Ryan on Twitter @cn2Alessi. Ryan can be reached at 502-792-1135 or ryan.alessi@twcable.com.

Comments

  • Bruce Layne wrote on May 04, 2012 10:14 AM :

    It seems that every level of government has massive debt and unfunded liabilities – cities, counties, states, nations. Zoom out to the maximum level and this is a problem caused by confusing credit with capital. As a society, there is some zeitgeist that we can just charge it. Buy now, pay later. We obviously should have saved the money to pay future liabilities, but our legislators recklessly spent the money and now we’re coming up short.

    It’s important to note that the debt crisis is not a partisan issue. Both major political parties are equally guilty. Republicans talk about fiscal responsibility, but it’s usually just talk. Here in Kentucky, this problem happened while Republicans controlled the Senate and David Williams was Senate President. He didn’t cause the problem in its entirety, but he was certainly in a position to exercise leadership and prevent the problem and he didn’t. He was definitely part of the problem.

    Governments like to pretend that the rules are different for them. It’s bad for individuals to spend more than we make, but somehow that doesn’t apply to government. We’re told that the government needs to spend money to stimulate the economy. Or we’ll hear that there’s a temporary shortfall and our government needs to stop making the contributions needed to pay retirement benefits in 20 years. Once government redirects that money, it’s no longer a temporary budget fix. Government grows by that amount (or a little more) and it’s once again out of money, only now, it’s also building an unfunded liability debt bomb that’ll explode in 10-20 years.

    That’s what’s happened in cities across Kentucky. It’s happened with the Kentucky retirement fund. The cities and states are waiting for a federal bailout, because they’re too big to fail, but the federal government has a serious problem of their own with about a hundred trillion dollars in unfunded Social Security and Medicare.

    We can’t repeal physical laws. If they could, our legislators would probably repeal the law of gravity in some well meaning but short sighted scheme to buy votes and we’d all float off into space. Economic laws are no less immutable, but politicians have ignored them, and now the crisis is upon us. As a first step, we need to at the very least stop electing politicians who can’t stop spending our children’s money. They need to balance the budget WITHOUT issuing bonds to borrow more money that we don’t have.

  • Ed Marksberry wrote on May 04, 2012 10:34 AM :

    Russia cut their pensions 50% overnight, so don’t think it can’t happen.
    Illinois is seeing an exodus of business to Indiana because of their tax problems, especially in regards to property tax.

  • J D M wrote on May 04, 2012 12:35 PM :

    Do we really expect our elected officials, who raise and spend millions of dollars from other people during their campaigns, to suddenly stop spending money when they get to Frankfort?
    When the crisis doesn’t involve money coming out of their pockets, or out of their pension, then for them it is not a crisis at all.

What do you have to say?





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