How scary is Ky.'s pension system underfunding? It evokes phrases like 'bankruptcy' and 'tax increase'
05/03/2012 08:41 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.
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