FRANKFORT, Ky. (3/28/17) — While most of the recent discussion regarding public-pension reform has focused on funding levels and investment returns, Bluegrass Institute Pension Reform Team member Aaron Ammerman told the state’s Public Pension Oversight Board today that the retirement systems’ benefit structure is “the most significant contributing factor to our crises today.”
The commonwealth faces more than $38 billion in pension debt with the state employee nonhazardous fund – the Kentucky Retirement System’s largest plan – sliding toward insolvency with a current funding level of only 16 percent.
“Retroactive benefit enhancements always wreak havoc on a defined benefit plan, and that is what happened in Kentucky,” Ammerman, a financial advisor and member of the Bluegrass Institute Board of Directors, said in prepared comments.
The team’s testimony focused on two practices that have contributed significantly to Kentucky’s pension hole becoming deeper over time: the practice of awarding benefits retroactively and a failure by legislators to obtain a cost analysis prior to enhancing benefits.
Such practices reflect repeated violations of the Kentucky Constitution and state statute.
“The Bluegrass Institute has reviewed dozens of benefit enhancements granted to employees back to the 1980s and found only one such cost analysis,” Ammerman said. “Legislators were enhancing benefits without even the slightest idea about the increased costs that would be incurred to the system and, therefore, the taxpayers of Kentucky.”
He offered an example of a currently employed 20-year state employee who has faithfully contributed his required share into the system for a promised future benefit and which, as long as the state fulfills its funding obligation and assumed investment returns are met, this employee’s pension will be fully funded in retirement.
“If, however, this employee’s promised benefits were increased just before retirement, all of the contributions and calculations over the previous 20 years would be inadequate to fund that higher retirement benefit,” Ammerman said.
BIPRT member Dr. William Smith, a Madisonville dermatologist who served on Gov. Matt Bevin’s pension reform transition team, called on lawmakers to practice “actuarial integrity” when making future decisions regarding benefits by ensuring that “the benefits defined by the legislature and actuarially prefunded with normal cost payroll contributions are the same benefits received by plan members upon retirement.”
Along with offering specific recommendations for both the Kentucky Retirement Systems and the Teachers’ Retirement System, Smith offered four proposals for all systems:
• Enact a constitutional amendment prohibiting retroactive benefit enhancements.
• Provide complete transparency for all benefits received by every retiree and how these benefits were determined.
• Ensure the governance and board representation of each plan reflects the risk assumed by each stakeholder, noting that “taxpayers need to properly and proportionately be represented in each plan.”
• If legitimate reform efforts prove unsuccessful, impose a “hard freeze” on current benefits and establish a new system.
To reach Bluegrass Institute Pension Reform Team members for comment, contact Bluegrass Institute president Jim Waters at (270) 320-4376.
Information provided by Jim Waters
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