Ky retirement system faces potentially crippling triple threat

07/08/2010 01:51 PM

A three-part problem is crippling Kentucky’s public employee retirement system, according to a study by the Kentucky Retirement System and RV Kuhn and Associates presented to legislature’s joint Program Review and Investigations Committee Thursday.

Years of under-funding, two recessions and a cycle that is seeing more state employee retirements without enough hiring to compensate has created a negative cash flow into the system — something the state legislature has dealt with as far back as 2001.

But the study showed that attempts to fix the problem haven’t succeeded, and the passing of a 2008 bill that delayed full payment costs initially is causing extremely high payouts over the next 30 years, “substantially beyond” what was the original cost, Jim Voytko, president and senior consultant of RV Kuhn told the committee.

And while there were no real solutions presented during the meeting, there was a lot of grumbling about the growing problem the retirement system faces. Facing a barrage of questions from legislators, Voytko reminded the committee that neither his firm nor the retirement board had much room to wiggle and change policies.

“We’re simply here to remind you of the consequences of saving now and paying more later,” Voytko said.

Part of the reason the legislature has delayed paying in full amounts to the fund is severe budget deficits in recent years. But before the legislature ever faced the shortfalls, it under-funded the retirement system for 17 years, said Rep. Derrick Graham, a Frankfort Democrat.

“We must remember we are in this rut because we went 17 years without funding this,” Graham said.

The idea behind under-funding the system was because it was previously full of cash, accounting for over 100 percent of the funds the system needed. When a court decision disallowed the governor or state legislature from borrowing from the system, they just cut funding.

According to the study, the contributions from state workers won’t equal the amount paid out to retirees until 2020, hampering the system’s ability to invest money and grow the fund. By causing those restrictions, the fund has little room to wiggle, Voytko said.

The reason why the contributions don’t immediately match up is because of provisions in House Bill 1, passed in 2008, that puts the amount paid in to the system on a percentage scale that rises every year. This year, only 44 percent of the total amount needed by the system is being paid. A full 100 percent paid isn’t reached until 2024, according to the law.

The study was also based on the system’s prediction that their investments would grow by 7.75 percent over the next 30 years. Rep. Rick Rand, the Democratic chairman of the House Appropriations Committee, lit into that assessment after hearing how well the system’s investments has performed in the past.

“It doesn’t seem like we’ve performed nearly as well as we predict,” Rand said.

Mike Burnside, director of the Kentucky Retirement System, called the projection “ambitious.” That led to Rand wondering if the current plan for the system was achievable.

“We’re setting up an unsustainable system,” Rand said. “Our pension system is unsustainable, it seems we have to contribute more or give up benefits.”

And the was no action taken on the study, but that didn’t stop lawmakers from continuing to grumble about the pension problem, with Rep. Graham reminding the committee about the 17 years of under-funding while Rep. Rand argued about the inability to reduce benefits being protected by state law.

“We’ve honored our contributions even in a difficult time,” Rand said. “The biggest part of this is no one advocating we reduce benefits, but to bury our head in the sand and say we can’t change benefits. This is what has us in this problem now.”

—Kenny Colston

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