Has Kentucky Lost its Pension Mind?
After months of planning and closed-door negotiations, Gov. Matt Bevin and GOP legislative leaders on Wednesday released a plan they say begins to tackle Kentucky’s multibillion-dollar pension debt while honoring promises to retirees and public employees.In late August, I warned my readers, Kentucky's pensions are finished, and now I see they're proposing the dumbest policy to "fix" their pension crisis, namely, shifting new teachers and those with 27 years of service into a 401(k) plan.
As expected the plan calls for transitioning most public employees from traditional pension plans to 401(k)-like plans – but it does so in a much more gradual way than recommended by the Bevin administration’s pension consultant.
New workers and teachers will go into 401(k)-like plans, but instead of immediately shifting current state and local government workers to 401(k)s, those workers would be able to remain in their current pension plans for 27 years.
Current teachers with 27 years of service also would be moved to the 401(k)-style savings plans. But their plans will be more generous than those of other public employees to compensate for the fact that teachers do not draw Social Security benefits.
To avoid a rush of teacher retirements, those teachers will be given an option of remaining in their current traditional pension plans for three additional years.
And both current and future workers in “hazardous duty” jobs like law enforcement would not go into the 401(k)-type plans. They would retain their current pension benefits instead.
The plan also would bring legislators, who have more generous benefits, into the retirement system of other state employees. And it would end the ability of teachers to use accumulated sick days to boost their pension benefits – but not until July 1, 2023.
And the plan would begin to pay for pensions under a new approach “that mandates hundreds of millions more into every retirement plan, making them healthier and solvent sooner,” a summary of the plan said.
“If you are a retiree, if you are working to be a retiree at some point, you should be rejoicing,” Bevin said. “... It guarantees by law that your pension is going to be funded. There will be no more kicking of the can down the road.”
Some immediate response to the plan questioned Bevin's statement that all promises have been kept.
"I think the plan includes some very harsh cuts to benefits," said Jason Bailey, executive director of the Kentucky Center for Economic Policy. Bailey said the handouts summarizing the plan say cost-of-living increases for teacher retirement benefits would be suspended for five years and that teachers and other public employees will have to pay more for health care benefits.
The governor released the framework for the reforms at a news conference in the Capitol with the top leaders of the General Assembly’s Republican majorities – House Speaker Jeff Hoover, of Jamestown, and Senate President Robert Stivers, of Manchester.
Bevin has said all year that he would call a special legislative session in 2017 for lawmakers to pass a reform plan to set the state on course to pay off pension debts. Those debts are officially listed at more than $40 billion, but Bevin estimates them at more than $64 billion.
The plan released Wednesday is only an outline of the bill to be considered. And Bevin did not say when that session will begin.
“As soon as we are ready,” he said when asked when he will call the session. “There’s still a little ‘I’ dotting and ‘T’ crossing” before that announcement, Bevin said.
The plan is much friendlier to employees and retirees than many of the highly controversial recommendations offered in August in a report by the administration’s Philadelphia-based consultant – PFM Group. It does not, for instance, call for raising the retirement age for public employees or the clawing back of any benefits earned by current retirees.
“Nothing is changing for retirees," Bevin said. "They’re going to be getting everything they’re getting now.”
And Bevin also said he believes that the terms of the 401(k) plans that will be offered to employees and teachers are generous. “It will be a very good plan.”
Jim Carroll, president of the advocacy group Kentucky Government Retirees, said he appreciated the effort to respect the contractual rights of current state workers but said he believes it would be illegal to “arbitrarily” reduce an employee’s pension benefits after 27 years.
Carroll also said that the toughest decisions now must be made during the 2018 regular legislative session, when lawmakers must find the money for the new approach to funding pensions.
“We’re going to need to hear from leadership how they’re going to come up with the money,” Carroll said.
In that comment, I stated:
[...] scraping a defined-benefit plan to replace it with a defined-contribution plan is a really horrible idea. It shifts retirement risk entirely onto workers and leaves them all exposed to pension poverty down the road. That's the brutal truth on DC pensions, they're far, far inferior to large, well-governed DB plans.Let me ask you a question, would you rather have Kentucky teachers' pension plan or Ontario Teachers' Pension Plan which is professionally managed and fully funded? There's a reason why we pay Canada's pension overlords millions in compensation, to avoid pension blowups like the one in Kentucky and other states like Illinois.
The public-sector unions and retirees should fight tooth and nail to maintain DB plans but they will need to share some of the risks attached to these plans in order to see them regain fully-funded status.
The biggest problem is lack of governance. You can almagate all these plans at the state level, increase the retirement age for some and even introduce some form of shared-risk but if you don't get the governance right, Kentucky's defined-benefit plans won't survive and this will impact the state in a very negative way (both in terms of attracting qualified people to the public sector and in terms of economic activity).
Hurricane Harvey devastated Houston and other cities in Texas but they will rebuild that great state. Kentucky's pension hurricane has been going on for years and very few were paying attention, let alone sounding the alarm.
And now, I'm afraid to say, Kentucky's pensions are finished, irrevocably changed and the future of public defined-benefit plans in that state is grim at best. Welcome to America's new pension normal.
Shifting new teachers to a 401(k) plan is a politically expedient and asinine proposal that will cost Kentucky's education system and economy dearly in the long run.
In fact, earlier this week, John Cheeves of the Herarld Leader reported, Report says Kentucky’s proposed pension ‘reforms’ could make everything worse:
Sweeping changes recommended for Kentucky’s public pension systems would cost taxpayers and public employees more money while making public employment far less attractive to future generations, according to a report released Monday.Defined-benefit pensions are the only true pensions and they work just fine provided:
PTA was hired to examine the PFM Group’s recommendations by two groups critical of those proposals, the Kentucky Public Pension Coalition and the Kentucky Retired Teachers Association.
Although the Bevin administration paid the PFM Group nearly $1.2 million for its advice, Republican lawmakers meeting privately with Bevin to draw up a bill for a special legislative session on pensions have said that not everything the PFM Group suggested will be included.
A spokesperson for Bevin did not respond Monday to a request for comment about the report by Pension Trustee Advisors.
The crux of the PFM Group’s proposals — that it would be cheaper to provide public employees with largely self-financed defined-contribution accounts — isn’t accurate, Fornia wrote.
For one thing, he said, either the state of Kentucky will have to spend millions of dollars every year to cover the new costs of Social Security for school teachers or else it will have to force that burden onto local school districts. At present, teachers get pensions, and they are excluded by law from Social Security withholding.
Changing to 401(k) accounts would also cost the state more than maintaining the model it has used since January 2014, which is known as a hybrid cash-balance plan, Fornia wrote. Under the PFM Group’s proposals, Kentucky simultaneously would have to pay down tens of billions of dollars in unfunded pension liability from past years as well as the higher administrative costs and investment fees associated with defined-contribution plans, Fornia wrote.
“The proposed plan for future employees quite simply is more expensive,” Fornia wrote. “There is no savings to Kentucky or its public workers from the proposed changes.”
From the viewpoint of public employees, the loss of pensions means an end to financially secure retirements, Fornia wrote. Even if state workers and school teachers contribute the maximum sums allowed to their 401(k) account every pay period and enjoy an unbroken string of good fortune in their stock market investments, which seems doubtful, they are likely to run out of money if they survive into their 80s, he wrote.
The change also would end the disability pensions that thousands of injured or sickened public employees in Kentucky have used to retire early when medically necessary, Fornia said. Under the model proposed by the PFM Group, future workers would be left with no such safety net.
Finally, Fornia challenged the idea that defined-benefits pensions don’t work. They work fine when you pay the bills on time, he wrote. Fiscally prudent states that properly funded their retirement systems, such as South Dakota, Oregon, Wisconsin, North Carolina, Tennessee and New York, aren’t struggling today. But Kentucky governors and legislators failed for most of the last two decades to adequately fund the state’s two major pension systems, leading to the massive shortfalls the state faces now, Fornia wrote.
“It is disingenuous to simply conclude that defined-benefit programs are inherently not sustainable,” he wrote.
- States top them up regularly and contribution holidays are made illegal
- They get their investment assumptions right to discount future liabilities properly
- They get the governance right to manage more assets internally and lower costs
- They adopt a shared-risk model which forces the plan's sponsors to share the risk equally, meaning if they run into trouble and there's a deficit, they need to raise contributions or cut benefits (typically lower cost-of-living adjustments) or both to make up for the shortfall and get back to fully-funded status
Anyway, it looks like Kentucky has lost its pension mind and this is just the beginning. I foresee the same thing going on in other states as US pension storms from nowhere gather steam.
I know, the Dow Jones smashed through 23,000 on Wednesday led by IBM and this is great news for 401(k)s but be careful, when the mother of all bear markets hits us, you will all be singing a very different tune.
Below, a quick look at the figures behind Kentucky's pension shortfall. And Kentucky Governor Matt Bevin says he doesn't support legalizing recreational marijuana in Kentucky as a way to raise revenue to aid the state's ailing pension system.
Maybe not but he and his consultants are smoking some good pot if they think shifting teachers to 401(k)s is the solution.
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