Lowered assumptions result in billions more in pension debt with more on the horizon

05/18/2017 06:23 PM

Kentucky’s pension hole got a little deeper Thursday and will only worsen in the weeks ahead.

The Kentucky Retirement Systems board of directors approved lower assumptions on investment returns, payroll growth and inflation for pension funds for the Kentucky Employees Retirement System non-hazardous plan, which covers most state workers and retirees, and the State Police Retirement System.

Those changes immediately caused the state’s pension debt to grow by some $2.1 billion – almost entirely in the state employee pension fund — although KRS Executive Director David Eager said that number may actually be more than $3 billion according to estimates by consultants with Cavanaugh Macdonald.

Lowering assumptions for the KERS hazardous pension, County Employees Retirement System non-hazardous and hazardous pensions and the five corresponding insurance funds would ultimately result in about $4.6 billion more in unfunded liabilities, according to figures presented in Thursday’s meeting.

The KERS non-hazardous pension alone saw its funding ratio drop from 16 percent to 13.8 percent following the board’s vote. Coupled with the KERS non-hazardous insurance fund, the plan’s funded status would decrease from 18.2 percent to 15.97 percent if the KRS board adopts changes for the insurance program’s assumptions.

KERS non-hazardous and SPRS pension assumptions were lowered on investment returns from 6.75 percent to 5.25 percent, payroll growth from 4 percent to 0 percent and inflation from 3.25 percent to 2.30 percent. The other funds would have the same payroll and inflation numbers, but their investment return projections would be 6.25 percent.

Director David Harris, chairman of the KRS Investment Committee, said the state had erred on its payroll assumptions for years. Payroll has actually declined in KERS non-hazardous by 2.5 percent over the past five years and 1.1 percent over the past 10, which helped stifle payroll growth across the five KRS plans, down 0.4 percent over the past five years and up 0.6 over the past 10.

“The most important decision we have is that payroll growth to be real because that’s 80, 85 percent of the difference in these numbers,” Harris said. “… The only way to work out this deal in a 20-plus-year run is to start with the right numbers and working with the numbers, and if we don’t do that, we probably won’t be sitting around this room.”

But some directors pushed back against lowering CERS payroll growth assumptions to 0 percent, saying the change would hurt cities and counties whose pension programs are in better funding situations than those for state workers and state police.

Director J.T. Fulkerson’s motion to raise the proposal for CERS’s payroll growth to 2 percent passed on an 8-6 vote, although John Farris, chairman of the KRS board, said that vote would be revisited when directors vote on the remaining assumption changes at a later meeting.

Those against amending the proposal noted that payroll for the larger CERS retirement fund grew by 0.7 percent from fiscal year 2011 through 2016. Growth from fiscal year 2006 through 2016 was 1.7 percent, according to figures presented Thursday.

Director Vince Lang said he would like the board to reconsider the proposed CERS assumptions on payroll growth and investment returns.

“We want to give them the best numbers,” Lang said during the meeting. “We don’t want to necessarily make it so conservative that they can’t afford to stay in.”

Eager and Farris said they were surprised by the debate surrounding the proposed CERS assumptions and noted that state and local governments would face budgetary pinches thanks to the state’s pension troubles, which may be the worst in the country.

Under the proposal before the KRS board, employer contribution rates would jump by double digits for every plan when pension and insurance needs are factored together. The state would be on the hook for 77.9 percent of payroll for KERS non-hazardous, 36.1 percent for KERS hazardous and a whopping 140.9 percent for SPRS, although Eager said the latter number did not include $25 million appropriated by the General Assembly in this year’s legislative session.

Those are up from 50.4 percent, 21.8 percent and 89.7 percent, respectively.

Cities and counties would need to pay 30.8 percent of payroll for CERS non-hazardous and 51.8 percent for CERS hazardous, increases from 19.2 percent and 31.6 percent, respectively.

Renewed efforts to make full actuarially required contributions by state policymakers followed pension reform efforts in 2013, but while lawmakers have leeway in how much to budget for retirement contributions, local governments are mandated by law to pay employer shares.

Eager said the changes will “be painful” for cities and counties as they write future budgets because “contribution rates are going to go up significantly in all likelihood.”

“I think it’s pretty obvious if we’re going to make a mistake, we ought to err on the side of putting too much money in, not enough,” he told reporters after the meeting. “I mean, the risk of not putting enough money is far greater than the risk of putting too much in, so we’d rather be pleasantly surprised.”

Farris said it’s incumbent on the KRS board to provide more conservative estimates “so that the legislature understands and the Governor’s Office understands the true nature of what the actuarially required contribution rate is.”

Gov. Matt Bevin and the General Assembly will need those numbers as they prepare for next year’s budget-writing session.

“If we don’t do that, we continue to use aggressive assumptions, we’ll continue to fall behind,” Farris told reporters. “I don’t think anybody wants to fall behind. I know the Governor’s Office doesn’t want to fall behind, continue to fall behind in our funding ratio.”


Subscribe to email updates.

Subscribe and get the latest political intelligence delivered to your inbox.