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State Budget Director warns of huge increases in employer contribution to pension system

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By Tom Latek
Kentucky Today

State Budget Director John E. Chilton warned there will be huge increases in employer contributions to public pension systems unless lawmakers enact reform.
 
Chilton said out a letter Friday to employers whose workers are covered by the Kentucky Employees’ Retirement System that hikes will range from 66 to 88 percent without pension reform.


Last week he warned of 50 to 60 percent rises to those employer contributions for employees under the County Employee Retirement System.


In the latest letter, Chilton told the employers that for fiscal year 2019, KERS contributions for non-hazardous employees will increase 66.68 percent and 88.45 percent for hazardous duty employees.  The jump will be 71.85 percent for those in the State Police Retirement System.

John Chilton


“It is well known that all of the Commonwealth’s pension plans are in a crisis. Using the same investment rates of return that corporate plans are required to use – the Corporate Bond Index rate – the aggregate underfunding for all of Kentucky’s eight plans goes from $33 billion to $64 billion,” he wrote in the letter.


“Furthermore, if Kentucky plans were subject to federal standards for single-employer private plans, six of the plans would be designated as having severe funding shortfalls because their funded status is less than 60 percent. As such, federal law would require that all benefits be frozen and the plans terminated. This is true even using the old 2016 actuarial assumptions, rather than the more realistic discount rates and other assumptions required of private plansx


“The need for significant reform is evident to anyone looking at the health of the Commonwealth’s plans within that larger context.”


Chilton said to address the predicament, Gov. Matt Bevin and legislators believe it is appropriate to do two things:


1. Assess the status of all the plans, using conservative and realistic actuarial assumptions.  No more pretending that everything is just fine. Everyone needs to understand the severity of the situation. To do otherwise will lead to solutions that fall short of solving the problem.


2. Examine the benefit structures with a view to lowering future costs without jeopardizing employee and retiree retirement security. To address budgetary implications to the Commonwealth and to all employers, priorities must be set and choices must be made. Unfortunately, the choices are not happy choices – make structural changes to the pension plans and/or reduce other spending.

Governor Bevin and the members of the General Assembly are considering, but have not decided upon, changes to each of the plans. The PFM report [the state’s pension consultant] identified changes to benefit structures that would reduce the cost of each of the eight plans. These need to be considered and some of the suggested options should be implemented. I urge you to consider options that will put the financial condition of the plans and employer organizations on a sustainable path forward.


The letter said total employer contributions for Fiscal Year 2017, which ended June 30, were $857,311,370. 

If there is no legislative action, that rises to an estimated $872,677,346 in FY 2018, the current fiscal year, and $1,483,863,927 in FY 2019, an increase of over $611 million, from this fiscal year.


Bevin said on Friday that he still plans to call a special session of the General Assembly to address the public pension crisis, sometime this fall. However, he won’t issue the call until a framework is in place to shore up the systems. 

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