Pension System's Woes Could Be Worse Than Previously Thought

Originally published on February 17, 2017 5:21 pm

Kentucky’s public pension system, which officially faces an $18.1 billion unfunded liability, might be in worse shape than previously thought.

The bigger potential problem for Kentucky Retirement Systems means taxpayers could be on the hook for much more money to honor pension commitments to about 365,000 public employees, the Lexington Herald-Leader reported.

KRS board chairman John Farris told fellow trustees Thursday that KRS made math errors in recent years. The state pension agency relied on overly optimistic assumptions about its investment returns, the growth of state and local government payrolls and the inflation rate, he said.

For example, KRS assumed it would earn an average of 6.75 percent to 7.5 percent on money it invested, but it earned an average of 4.75 percent, Farris said. KRS assumed that public payroll would grow by 4 percent a year through pay raises or more government hiring — a larger payroll means larger pension contributions by employees — but public payroll has dropped overall because of repeated budget cuts, he said.

By giving inaccurate numbers to its actuarial advisers, KRS got back inaccurate numbers concerning its liabilities and how much the state and local governments needed to contribute, Farris said. He called for a new analysis of KRS’ financial health so the next state budget, covering fiscal years 2019 and 2020, reflects the pensions’ true needs.

“It doesn’t make any sense,” said Farris, a Lexington economist whom Gov. Matt Bevin appointed to the KRS board last year. “We wonder why the plans are underfunded. It’s not all the legislature’s fault. It’s the board’s responsibility to give the correct numbers.”

Some of the other KRS trustees said they had thought the assumed numbers were correct because the agency’s actuarial adviser did not balk when it received them.

“I rely on the actuaries to, on some level, verify our assumptions,” trustee Joseph Hardesty said. “I’ve never heard our actuaries say that our assumptions were unrealistic.”

“Payroll growth was negative and you assumed 4 percent (growth)?” Farris asked. “Were any of you paying attention?”

In coming weeks, KRS will select a company to perform a more accurate assessment of its financial health so the board can decide by December what contribution rates to recommend to state and local governments. The next two-year state budget is scheduled to be adopted next spring.

The state and local governments paid $950 million to KRS last year for their contributions as employers; public employees matched that with $307 million from their paychecks. Those contributions will need to grow if KRS acknowledges that it used overly optimistic assumptions, KRS executive director David Eager told the board.

“It’s going to be an immediate impact on costs,” Eager said. “A big one. And the board shouldn’t shy away from this, in my opinion.”

In a statement Thursday, Bevin praised the KRS board for discarding the “alternative data” it previously used. Bevin rebuilt the board last year by removing its chairman and adding four more gubernatorial appointees. Several of the agency’s top employees since have been replaced.

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