Slowly but surely it is becoming increasingly clear to public
workers in states with massively underfunded pensions that they've been lied to
for the past several decades as their states can't possibly afford to pay for
the retirement they've all been promised. As a local radio station in
Bowling Green points out today, fears over potential pension
changes in Kentucky have resulted in a surge of early retirements as workers
move to lock in payouts before any potential cuts go into effect.
More state workers retired last
month than the year before amid concerns that the legislature and Gov. Matt
Bevin will make changes to state retirement plans.
David Smith, executive director for
the Kentucky Association of State Employees, said state workers have been
retiring after consultants hired by the state recommended drastic changes to
the pension systems.
“There are folks that are
saying you know what, I don’t care, I’m going to lock in my retirement now and
get out while I can and fight it as a retiree if they go and change the retiree
benefits,” he said.
The
Lexington Herald-Leader reports that there was a 20 percent jump in state worker retirements last month.
“Who are they going to replace them
with if they truly offer up what they’re proposing or what was proposed? Who is
going to want to work for state government? I wouldn’t,” Smith said.
As we pointed out last week,
Kentucky's public pensions face a daunting funding hole of $33-$84 billion,
depending on your discount rate assumptions, according to a recent analysis
conducted by PFM Group.
The problem is that the
aggregate underfunded liability of pensions in states like Kentucky have become
so incredibly large that massive increases in annual contributions, courtesy of
taxpayers, can't possibly offset liability growth and annual
payouts. All the while, the funding for these ever increasing annual
contributions comes out of budgets for things like public schools even though
the incremental funding has no shot of fixing a system that is hopelessly "too
big to bail."
So what can Kentucky do to
solve their pension crisis? Well, as it turns out they hired a pension consultant,
PFM Group, in May of last year to answer that exact question.
Unfortunately, PFM's conclusions, which include freezing current pension
plans, slashing benefit payments for current retirees and converting future
employees to a 401(k), are somewhat less than 'perfectly acceptable' for both
pensioners and elected officials who depend upon votes from public employee
unions in order to keep their jobs...it's a nice little circular
ref that ensures that taxpayers will always lose in the fight to fix America's
broken pension system.
Be that as it may, here is a
recap of PFM's suggestions to Kentucky's Public Pension Oversight Board
courtesy of the Lexington Herald Leader:
An
independent consultant recommended sweeping changes Monday to the pension
systems that cover most of Kentucky’s public workers, creating the possibility
that lawmakers will cut
payments to existing retirees and force most current and future hires into
401(k)-style retirement plans.
If the
legislature accepts the recommendations, it would effectively end the promise
of a pension check for most of Kentucky’s future state and local government
workers and freeze
the pension benefits of most current state and local workers. All
of those workers would then be shifted to a 401(k)-style investment plan that
offers defined employer contributions rather than a defined retirement benefit.
PFM also
recommended increasing
the retirement age to 65 for most workers.
The 401 (k)-style plans would
require a mandatory employee contribution of 3 percent of their salary and a
guaranteed employer contribution of 2 percent of their salary. The state also
would provide a 50 percent match on the next 6 percent of income contributed by
the employee, bringing the state’s maximum contribution to 5 percent. The
maximum total contribution from the employer and the employee would be 14
percent.
For those
already retired, the consultant recommended taking away all cost of living benefits that
state and local government retirees received between 1996 and 2012, a move that
could significantly reduce the monthly checks that many retirees receive. For
example, a government worker who retired
in 2001 or before could see their benefit rolled back by 25 percent or more,
PFM calculated.
The
consultant also recommended eliminating
the use of unused sick days and compensatory leave to increase pension
benefits.
Even if all of that is accomplished, State Budget Director John
Chilton said Kentucky would still need to find an extra $1 billion a year just
to keep its frozen pension systems afloat. Moreover, absent tax hikes the state
will ultimately be forced to cut funding for K-12 schools by $510 million and
slash spending at most other agencies by nearly 17% to make up the difference.
Meanwhile, PFM warned that the typical "kick the can down the
road approach" would not work in Kentucky and that current retiree
benefits would have to be cut.
“This is the
time to act,” said Michael Nadol of PFM. “This is not the time to craft a solution that kicks the can down
the road.”
“All of the unfunded liability
that the commonwealth now faces is associated with folks that are already on
board or already retired,” he said. “Modifying benefits for future hires only
helps you stop the hole from getting deeper, it doesn’t help you climb up and
out on to more solid footing going forward.”
Of course, no amount of math and logic will ever be sufficient to
convince a bunch of retired public employees that they have been sold a lie
that will inevitably fail now or fail later (take your pick) if drastic
measures aren't taken in the very near future.
Nicolai Jilek, the legislative
representative for the Kentucky Fraternal Order of Police, said expecting first
responders to work until they are 60 is problematic given the physical
requirements of the job.
“We’re very
grateful that PFM is just offering recommendations … that they are not lawmakers because his
plan would be horrible for first responders,” Jilek said.
Stephanie Winkler, president of the
Kentucky Education Association, shared a similar sentiment.
“The PFM had
some pretty drastic recommendations that we think are not what’s in the best interest of public school
employees and public school students,” Winkler said.
Jim Carroll, president of Kentucky
Government Retirees, said his group would likely sue if the legislature
proceeds with PFM’s recommendation to roll back the cost of living adjustment
that retirees received between 1996 and 2012.
“We think its very clear that
the cost of living adjustments that were granted to us are ours as long as we
are retirees in the system,” Carroll said.
As such, no matter the long-term consequences, we suspect the
"kick the can down the road" approach to pension reform will continue
to win right up until the plans actually run out of money...then we'll all lose
together.
