Less funding for schools. No employee pay raises. Service cutbacks for people in need. Construction projects cancelled. Job-creating programs put on hold. Still higher college tuition.
These and other stark developments could become Kentucky’s future if the state fails to take decisive action to address a huge unfunded liability in its public employee pension plans.
This massive financial black hole is not unique to Kentucky, but the problem is particularly acute here. A recent report from the Pew Center on the States noted that Kentucky is one of only three states whose pensions were less than 55 percent funded in 2010; a sustainable system should be funded at 80 percent.
A recent Barron’s report ranked Kentucky’s financial condition 47th nationally because of our massive state debt and unfunded pension liabilities (we’ve promised more than we have money to pay for) in relation to the size of the state’s economy. And the country’s two major bond rating agencies have taken notice and downgraded Kentucky’s bond ratings, which means it is going to cost taxpayers more for public building projects.
The situation is grim, but it can be tackled successfully through the work of the legislative Task Force on Kentucky Public Pensions and the general assembly. Clearly, the need for quick corrective action is critical.
The task force is working now to develop recommendations for the 2013 legislative session. The Pew Center on the States, which is assisting the task force, has provided a series of options for the task force members to consider to 1) pay down the current debt in the pension systems and 2) change the system for newly hired employees to ensure its long-term sustainability.
None of the choices are painless. To pay down the debt, the options include:
• Accelerating the rate at which the state makes its payments, known as the Actuarially Required Contributions, or ARC, to reduce the unfunded liability. This would be challenging in times of limited state resources.
• Suspending cost-of-living adjustments for retirees until the system is 100 percent funded.
• Issuing bonds to get much-needed cash into the system. This would increase Kentucky’s already hefty level of bonded indebtedness.
• Increasing the amount employees contribute to their retirement funds.