Ky. Retirement Systems' new assumptions mean more dollars for state contributions
12/04/2014 06:43 PM
FRANKFORT — Less than two years after the General Assembly pledged to fully pay its share of pension costs, the Kentucky Retirement Systems’ Board of Trustees on Thursday adopted new assumptions that will likely mean higher than expected pension contributions from the state in the next budget cycle.
The changes, presented to trustees earlier this year by actuaries with Cavanaugh Macdonald Consulting based on a five-year experience study, lower assumed returns on investments, price inflation, wage growth and wage inflation.
The new assumptions, KRS Executive Director Bill Thielen said, will cost the state roughly $95 million more per year in contributions for the Kentucky Employees Retirement System for state employees in non-hazardous positions during the next biennial budget, based on current plan valuations and payroll figures. They will not take effect until next year’s year-end plan valuations, he said.
Only one of the five overall funds managed by KRS, the County Employees Retirement System for workers in hazardous positions, would have a lower employer contribution rate under the new assumptions.
“Our experience between now and then could change things,” he told reporters during a break in the board meeting. “I mean, if we continue to have double-digit investment returns, if our experience is good on the demographic side, the projected impact may be less or it could be more.”
The updated assumptions would push KRS’s unfunded liabilities to $19.5 billion, up from $17.8 billion currently, according to figures presented by Cavanaugh Macdonald Consulting.
At least one of the KRS trustees voiced concerns about approving the new guidelines at Thursday’s meeting. Personnel Cabinet Secretary Tim Longmeyer suggested delaying a vote until January so the board could meet with the governor’s office, legislators and others affected by the change.
“My concern is we don’t live in a bubble, so $95 million a year is a significant uptick,” said Longmeyer, who abstained from voting on the updated assumptions.
KRS Trustee Randy Overstreet, though, urged the board to move forward with the proposal. Nothing would change between now and January, he said.
“I’m thinking that we almost have the responsibility to follow the experts’ recommendations, and you’re right, it’s not a science, but it’s the best information we have to act on and move forward on since we have for the 20 years I’ve been on this board,” Overstreet said.
Only KRS Trustee J.T. Fulkerson voted against adopting the updated assumptions.
KRS shared the actuaries’ updated assumptions during a Public Pension Oversight Board meeting earlier this year, but based projections on last year’s valuations.
Figures presented on Thursday showed a 2.2 percent dip in the KERS non-hazardous pension plan’s funding status, with just 21 percent of the funds necessary to cover retirement obligations. The plan’s insurance funding ratio improved from 23.4 percent last year to 27.9 percent as of June 30, according to Cavanaugh Macdonald Consulting’s report.
State Sen. Joe Bowen, an Owensboro Republican and co-chairman of the pension oversight committee, said the potential price tag on future pension contributions in the next biennial budget is “somewhat” surprising. He predicted the higher cost will alarm some of his colleagues in the General Assembly.
“They’re not going to be happy with that. They’re simply not,” Bowen said.
“Of course, we’ll have to address that in the next budget cycle. You know, we’ve done what we’ve done for this budget cycle, but now when they come back to them and say, ‘Hey look, we’re going to need more money. The contribution to the (actuarially required contribution) is going to have to be greater than what we had identified earlier,’ they’re not going to be pleased with that.
But KRS Trustee Mike Cherry, a former state representative, said the legislature shouldn’t be caught off guard by the figures. The matter is a budgetary problem, not a political one with lawmakers “obligated” to pay full contributions for state pensions, he said.
“Every two years we’re going to have new assumptions, and assumptions are always liable to change,” Cherry said. “They wouldn’t be much in the way of assumptions if we didn’t use past experience, most recent experience, to continually update our assumptions, whether we like ‘em or not.”
While he called the funding of KERS non-hazardous “a critical issue,” Bowen saw some positives from Thursday’s meeting, particularly in other plans managed by the agency.
“If you look at this, the whole package, it’s not all bad news, OK?” he said. “Only 20 percent of what we’re looking at is actually bad news, and that’s the KERS component of this. The other plans are not in near as dire straits.”
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