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Kentucky’s public pensions: Where we are now

Editor’s note: Over the past 15 years the problems with public pensions, in general, and Kentucky’s public pensions systems, specifically, have become widely known. This is the second in a three-part series that attempts to help everyday Kentuckians better understand how we got here, where we are and, finally, what may be ahead and why it matters.

By BRIAN J. CRALL
Guest columnist

Kentucky’s state pension plans are very unhealthy. The most unhealthy of Kentucky’s plans is KERS, which is currently 87.1% underfunded. The least unhealthy of Kentucky’s plans is KTRS, which is currently 44% underfunded.

The total unfunded liabilities (the amount of benefits promised to employees in the future for which there are not enough projected funds to cover) for all public pension systems was estimated, conservatively, at between $30 billion and $40 billion at the end of 2018. This despite the current governor and legislature being the first to fully fund the state’s annually required contribution to the pension plans in more than two decades.

Kentucky’s public pension plans have exceptional benefits when compared to almost every private sector pension in the commonwealth. Public employees can retire younger, receive a greater percentage of their final salary as retirement income and a higher portion of their retiree health insurance paid for than almost any private sector retirees in the commonwealth. In the beginning this seemed justifiable because public sector employees historically made lower wages than their private sector counterparts. In the last two decades, however, those disparities have largely disappeared.

Surprisingly, a 2007 analysis by the Kentucky’s Personnel Cabinet revealed that public sector employees had a similar to higher average wage than the private sector average in almost every Kentucky labor market. This is not to say that all public positions are paid the same or more than their private sector counterparts nor that all are paid well. Teachers and social workers, for example, continue to make wages arguably below the difficulty and importance of their role.

Especially noteworthy is that public pensions and the benefits they promise are believed by many to be protected by an “inviolable contract,” which essentially means that once an employee is promised a benefit, that benefit may never be reduced. Significant numbers of policymakers, however, question the broad application of the “inviolable contract” to all promised benefits. All agree that the legislature can change pension benefits for future employees and has done so on at least five occasions over the past 15 years. The results of these changes should begin to materialize in 2031 and the impact of all of them will increase and compound every year thereafter.

The greatest challenge, then, is the next 12 years. Can the plans survive until previous legislative fixes start positively impacting the “unfunded liability”? If so, how? These questions will be the focus of Part 3 of this series.

Coming next: What may be ahead and why it matters

Brian J. Crall, of Nicholasville, represented the 13th District in the Kentucky House of Representatives from 1995-2004. He was deputy secretary of the Governor’s Executive Cabinet from 2004-2006, secretary of personnel, Kentucky Personnel Cabinet from 2006-2007, a board member of Kentucky Retirement Systems and the Kentucky Deferred Compensation Board in 2006-2007, and chairman of the Governor’s Blue Ribbon Commission on Public Employee Pensions in 2007.