Pensions will be "front-burner issue" in 2016 session, Sen. Joe Bowen says
07/15/2015 01:18 PM
As accounting rules change and unfunded liabilities mount, Kentucky lawmakers will again have to address the state of the Kentucky Teachers’ Retirement System and the Kentucky Retirement Systems, said state Sen. Joe Bowen.
In essence, Bowen said the state is fighting a two-front battle as problems face KTRS and KRS.
“We’ve got two big issues that we are confronting at one time,” he said.
Bowen, an Owensboro Republican who serves as the co-chair of the Public Pension Oversight Board, said lawmakers will have to consider cash infusions for the plans and consider structural changes.
The challenges for both plans are great both in size and complexity.
The KTRS plan faces ballooning unfunded pension liabilities from $14 billion to $21.6 billion, because of new government accounting standards which took effect July 1.
Gary Harbin, KTRS executive secretary, told lawmakers in June that the system has liquidated $2.1 billion in investment assets to meet retiree payroll since 2006, with another $3.4 billion in similar sales expected within the next four years.
The problem with KTRS compounds as more baby boomers reach retirement age, and teachers in Kentucky are not covered under Social Security benefits — making their pensions their sole source of retirement income.
Bowen said KTRS, in his view, should be tackled via a two-pronged approach.
“I think most people agree that, at a bare minimum, we are going to have to make the ARC payments. The actuarial required contributions,” Bowen said.
“But with KTRS we also have to identify what structural changes are going to be necessary to sustain the plan, because … the structure we have now won’t sustain itself. We have to look at these major changes for new hires coming in to sustain the system.”
Gov. Steve Beshear created, via executive order, a work group tasked with exploring how other states grant pension benefits, various funding options and draft a plan to improve KTRS’s financial standing. The group’s recommendations are due by Dec. 1.
In the 2015 legislative session House Democrats led by House Speaker Greg Stumbo, D-Prestonsburg, called for a $3.3 billion bond sale which would be used to phase in full ARC payments to KTRS over an eight-year period.
Senate Republicans balked at the proposal during the session.
“I’m not there quite yet, on bonding to identify that cash infusion,” Bowen said. “The reason why is because I think there is an inherit risk in borrowing money to pay a debt.”
Still, the state may need to create the revenue, and bonding could be one of the options that Bowen and others agree with — just don’t expect a $3.3 billion bond sale.
“I realize full well that at some point in time maybe a more reasonable amount of money may have to be bonded to shore up either or KTRS or KRS plan,” he said.
State and county retirement plans
With all the struggles facing KTRS the Kentucky Retirement Systems plans are not yet on solid financial footing either. In specific, the KERS non-hazardous plan is the most poorly-funded pension plan in the country with 22 percent of assets needed to cover liabilities, a $9 billion shortfall.
Lawmakers in the 2013 session passed legislation changing the structure for new employees under KRS and agreed to fully fund the ARC. Still, the dwindling assets on-hand poses a serious problem in meeting their returns on investments.
“The challenge that KERS has is that with the level of funds that they have available — the assets that they have available in their account they have to be careful with the investments they make,” he said. “They don’t have the capacity to roll the dice so to speak on high yields.”
The problems between KERS and KTRS are “similar but different,” Bowen said.
A major challenge for KERS is “cash flow” which poses an “immediate cash challenge” for the pension system, as the marketplace makes dips and investors are making small safe bets. A long-term plan is in place under the 2013 reforms, Bowen said.
KRS director stepping down
William Thielen, the executive director of the Kentucky Retirement Systems, announced his retirement by the end of 2015, which Bowen said presents “great opportunity for KRS.”
Thielen’s departure provides KRS a chance to “go out and find a real expert on these financial matters,” Bowen said.
A topic pick for Bowen would include someone who understands the investment issues KRS faces.
Watch the interview below for the full discussion which includes ways Bowen options the General Assembly has to create revenue needed to pay into the pension funds.
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