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.”

Kevin Wheatley

Kevin Wheatley is a Video Journalist for Spectrum News and covers Kentucky politics and all the goings-on at the State Capitol. Kevin was born and raised in Frankfort so he grew up around politics and has always had the drive to follow the political process and hold lawmakers accountable. Before joining Spectrum News Kevin covered government and politics for The State Journal in Frankfort. You can watch Kevin’s work weeknights at 7:00 and 11:30 on Pure Politics, available exclusively on Spectrum News, HD Channels 403 and 715. You can reach him at kevin.wheatley@charter.com or 502-792-1135.

10 Comments

Comments

  • Bill Adkins wrote on May 19, 2017 05:59 AM :

    In 1999 the GOP took the Senate;
    in 2002, KERS was funded at 111%;
    In 2001, KTRS was funded at 125%;
    in December 2003 Ernest Fletcher took office;
    in December 2007, when Fletcher left office, KERS was funded at 68%, a 43% drop, and had a $10 billion shortfall;
    by the end of 2008, KTRS was funded at 52 percent of what it needed for future expenses.

    This KERS/KTRS mess is one made by the GOP – it’s doubtful they could have done this damage by design. Now we have Matt Bevin to make it worse.

  • Bill Adkins wrote on May 19, 2017 05:59 AM :

    In 1999 the GOP took the Senate;
    in 2002, KERS was funded at 111%;
    In 2001, KTRS was funded at 125%;
    in December 2003 Ernest Fletcher took office;
    in December 2007, when Fletcher left office, KERS was funded at 68%, a 43% drop, and had a $10 billion shortfall;
    by the end of 2008, KTRS was funded at 52 percent of what it needed for future expenses.

    This KERS/KTRS mess is one made by the GOP – it’s doubtful they could have done this damage by design. Now we have Matt Bevin to make it worse.

  • Bubbleup wrote on May 19, 2017 06:37 AM :

    https://insiderlouisville.com/metro/chris-tobe-pension-crisis-means-next-ky-governor-will-raise-taxes-cut-education-like-never/

  • Bubbleup wrote on May 19, 2017 06:37 AM :

    https://insiderlouisville.com/metro/chris-tobe-pension-crisis-means-next-ky-governor-will-raise-taxes-cut-education-like-never/

  • JoeB wrote on May 19, 2017 07:31 AM :

    Sorry Bill but you need to stop putting all the blame on the GOP for the under funding of the retirement systems.The problem started before Ernie Fletcher went into office.I do agree that the biggest drop of KRS funding during a 4 year period could have been under Fletcher.However overall Steve Beshear was the worst governor as far as funding the retirement systems— especially Non-Hazardous KERS due to the fact he was in office 8 years. Longtime legislators from both parties benefited during this vast period of under funding due to the fact a lot of money that should have went into the retirement system for state workers retirement was spent on pet projects in those legislators districts. Look at all those Taj Mahal judicial centers and courthouses that were built during the last several years.Hundreds of millions of dollars blown on extravagant buildings that should not have been built.Olympic type swimming pools, exposition centers, and several other huge projects were among those.Those facilities now require huge yearly maintenance cost and sit idle a lot of the time.Both state workers retirement (KRS) and teachers retirement (KTRS) system security have both been put in jeopardy due to legislators misspending of funds.

  • sally sue wrote on May 19, 2017 09:04 AM :

    “lawmakers have leeway in how much to budget for retirement contributions, local governments are mandated by law to pay employer shares”

    i.e. lawmakers can legally screw over KERS members as they did for 15 out of the last 22 years but the law prevents local governments from doing it. Nice.

  • Cumberland Gap wrote on May 19, 2017 10:06 AM :

    Adkins numbers don’t lie! Keep in mind the Republican leaders always disdain the little guy, the underprivileged, the press, and any government workers not appointed to high ranks by them. It’s just a part of their nature. At the country clubs they make fun of the ordinary people who work and elect them overwhelmingly. Been there, seen that, and regularly. They haven’t been this strong in over 100 years.

  • Wegot Besheared wrote on May 19, 2017 01:14 PM :

    So, Bill Adkins, what did the “honorable” Greg Stumbo and his Dem House majority do to fix things?

  • Honest Parley wrote on May 19, 2017 03:22 PM :

    Poor Mr. Adkins. Bless his heart. Placing blame on one party and living the delusion that the other party is not “party” to the blame here is disingenuous, willfully ignorant or an example of just wanting to say something, anything, to be heard. Mr. Adkins reminds us a bit of the so-called President, only with his Democratic party zealotry and alternative facts rather than the severe mental illness on constant full display in Trumplandia.

    In fact, the 2002 budget, the first to not include the ARC, was based on the Executive Branch budget submitted by Democratic Governor Paul Patton, his Secretary of the Cabinet Crit Luallen, and their budget director, who up until shortly before the 2002 budget was developed was none other than Dr. Jim Ramsey. Yes, THAT Dr. Jim Ramsey.

    Further, the fact of the matter is that the two-party system has failed, is failing and will continue to fail Kentucky. The two-headed monster won’t get it right because one head is always focused on the actions of the other head, rather than on selfless service to our Commonwealth. Open up our election primaries and let’s get some solution-oriented problem-solvers in office rather than blind partisans who live only to prove that their own feeble perspective is the right one. Until we do, the bad situation we face now will only worsen.

  • James P. Benassi wrote on May 19, 2017 08:37 PM :

    ARTICLE IS MISLEADING AND IGNORES THE MOST IMPORTANT MISTAKE

    CN2 is very misleading when it argues: “ . . . lower assumptions . . . immediately caused the state’s pension debt to grow by some $2.1 billion . . . .” The shortage at the Kentucky Retirement Systems in reality is not any smaller by using grossly inflated and inaccurate projections. And reporter Wheatley certainly knows better.

    Since FY 2000:

    • the effective compounded return on investments by the Kentucky Retirement Systems has been 4.6%;
    • they projected ROI of 8.25% and 7.75% for nearly all that time; and,
    • the pension funds managed by the Kentucky Retirement Systems went from surpluses (assets to promised benefits) in the 140% and 150% range to the grossly inadequate surpluses (actually deficits) they now have.
      Mr. Wheatley, pension debt is increased by inaccurate higher assumptions and not lower accurate assumptions as you argue.

    The far more important mistake is reflected in the growth in the payroll assumed by the Trustees. The Trustees are using THE CONTRIBUTIONS BY CURRENT EMPLOYEES and by their employers for them to PAY FOR the retirement benefits of CURRENT RETIREES. This hurts everyone involved.

    The current employees and their accounts should be placed in a separate fund. From there the projected ROI, contribution rates, and their benefit formula including a COLA should be recalculated with no spiking or gaming of benefits. For the retirees, a projected ROI (which should be the same as for the employees) and a contribution amount to be paid by the governments should be set. This way the current employees get a workable pension which will pay a COLA. The retirees no longer have more and more retirees each year with unfunded benefits joining their ranks. And, everyone gets a contribution amount the governments can pay year in and year out.

    The key is that HARD NUMBERS and not FUNNY NUMBERS be used. Also, no RED RUBBER BALL where projected ROI, contribution rates, and benefit formula are bounced up and down at every political whim or slight up-tick in the stock market. Members are often in a pension program for FIVE OR SIX DECADES or possibly more. HARD NUMBERS have be set for the long haul.

    But hey, all this does not lend itself to a click bait headline. It only addresses the gross mismanagement at the Kentucky Retirement Systems and does so better than the Trustees and the politicians have.

What do you have to say?





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