A publication of the Kentucky Center for Public Service Journalism

Thomas Noland: No good solutions to the Kentucky pension crisis, leaving Gov. Bevin with a mess

As the legislature approaches a special session to solve the pension crisis, the first thing to agree on is that no solution will be considered “fair” by everyone. When an additional $800M-$1B a year is needed, no good solutions exist.

Non-state employees do not want their taxes raised while individuals who contributed to the funds want their full pension.

One of the points often made by state employees is that the two prior administrations and past legislatures did not fully contribute the full matching portion of the funds. True – but the question not answered is what state programs should have been cut or what percentage tax increase should have occurred to raise the additional funds?

For those advocating only a tax increase to fund the plan, non-state employees ask is it fair for state workers to retire at age 49 or earlier while non-state workers in a 401K plan cannot retire until age 59½ without taking a tax penalty?

One of the proposed solutions for the current situation is to freeze all KRS pensions at the current level, move everyone to a 401K type plan, and to put all new teachers into Social Security. If current teachers were moved into Social Security they would be subject to the windfall elimination provision. While this plan may solve any pension issues 50 years from now – it doesn’t solve how you pay for the current earned pension obligations.

Several different measures can be taken to fund the pension shortfalls. Some will likely be litigated. The first is requiring individuals to work longer. Using the assumptions provided in the table, this will allow approximately $132M to be retained in the KERS-NH&TRS funds (this analysis only considers those two funds) for each additional year retirement eligible employees work.

In order to prevent a mass exodus to retirement, this plan can be phased instead of an immediate increase to a specific age. Another option to retain retirement eligible employees would be to allow them to freeze their retirement benefit at the current level and continue working but not be required to make any additional retirement contributions until they decide to retire. This would be a net gain for the pension fund for each employee who delays retirement.

The second source of funding is for current employees to increase their retirement contributions and for some retirees to take a pension cut. The individuals benefiting the most should have additional skin in the game. Current employees will have to contribute a larger percent of their pay (2%) to the pension plan. Retirees should be classified into two pools. Those over a certain age – say age 65 and those under. Retirees under the age of 65 would have to take a cut ($1,000) to their retirement check that would be restored upon reaching age 65. Retirees under the age of 65, unless disabled, often are either working or have the ability to continue working.

But as shown in the table, only requiring additional pension contributions and having some retirees take a pension cut does not get close to solving the problem. A tax increase will have to occur to get to $800M. The last source of additional funding is a 1% sales and use tax increase (tax consumption not hard work). Adding 1/6 to the FY 2017 sales tax collections should generate around $580M.

The solutions listed here provide about $840M a year. Other possible solutions include lowering the tax exemption on retirees’ pensions, requiring local school boards to contribute to the TRS fund as many states do or making significant cuts to other government programs.

Thomas Noland

Past administrations and legislatures have left Governor Bevin a mess. No good solutions are left.

Thomas G. Noland Ph.D., CPA, CMA, and CDFM is a Professor at the College of Charleston and a native of Irvine, Ky.

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