The state House approved bipartisan legislation last month to allow the issuance of $3.3 billion in bonds to buoy the financially troubled Kentucky Teachers’ Retirement System, as current funding for teachers’ pensions meets less than half of the obligation — the lowest among any teachers’ pension plan in the country.
But the Senate State and Local Government Committee on Monday stripped out all bonding language from House Bill 4, inserting instead a recommendation to create a task force to study the pension plan later this year. And the full Senate passed the bill with its new language Tuesday afternoon.
With the bill’s future in the House now uncertain, teachers fear the task force proposal will lead to benefit cuts and further damage to the already beleaguered pension fund.
Republican senators argued that issuing bonds would be too risky and jeopardize the state’s ability to borrow for future projects, insisting that a task force — similar to the one in 2012 that led to the next year’s pension reform plan for the Kentucky Retirement Systems — should come up with a way forward for next year’s session of the General Assembly.
With KTRS bonding legislation all but dead for the session, the bill’s proponents — which include KTRS staff, Democrats and the Kentucky Education Association representing state teachers — say the state is missing an opportunity to take advantage of historically low interest rates and borrow money that could have stabilized the troubled pension plan for 140,000 active and retired teachers.
“We are disappointed in the decision of the Senate State and Local Government Committee to simply ‘study’ KTRS,” said Stephanie Winkler, president of the Kentucky Education Association, in a statement to Insider Louisville. “The system needs to be funded as promised for our teachers. Our system cannot wait.”
The amended language of HB 4 calls for a 12-member task force of Senate and House members to study KTRS later this year and complete recommendations to improve the plan before next year’s session. However, House Speaker Greg Stumbo, the lead sponsor of the bill, told reporters on Tuesday that the House is hesitant to concur with the Senate’s call for a study without the inclusion of bonding.
Teacher advocates fear a task force would recommend reforms that could cut benefits, change new hires from a defined benefit plan to a defined contribution plan, or add piecemeal funding that does not address the immediate need to tackle plan’s unfunded liability — all criticisms that were leveled at the 2013 pension reform of the General Assembly that followed the recommendations of the KRS task force.
The 2013 KRS reforms led to new state hires being placed in separate hybrid plans. They also prompted the General Assembly to fully fund the plan’s actuarially recommended contribution (ARC), which Frankfort had failed to do over the previous decade. Despite those reforms, the most troubled plan within KRS — the Kentucky Employee Retirement System, which supports 123,000 state workers and retirees — continues to decline, with a 21 percent funding ratio of assets to liabilities that makes it the worst of any public pension plan in the country.
Jim Carroll — founder of the Kentucky Government Retirees Facebook page, which has more than 4,600 followers — tells IL that despite the boasting from leaders in Frankfort that their 2012 task force and subsequent reforms had solved the problems at KRS, the KERS plan remains in peril. He says teachers should be wary of task forces bearing studies and recommendations of reform that do not include the funding their plans require.
“Teachers better be careful, because this task force undoubtedly will try their best to put them into a cash balance plan, which doesn’t really address the funding issue,” says Carroll. “Whatever design changes they make, the only way they’re going to fix the funding issue is to put more money in.”
While the KTRS bonding plan appears to be dead for now, Carroll says teachers should at least take solace in the fact that their pension’s representatives made a full lobbying push for the legislation.
As IL reported two weeks ago, the KRS board recently asked their actuary to present projections for what a $5 billion bond would do to prop up the KERS plan, though they have chosen not to lobby for a bond that high in Frankfort. Carroll says that while he’s disappointed they did not do so this session, he hopes they follow the lead of KTRS officials before next year.
“(KRS) says they don’t lobby out of principle,” says Carroll. “But (the KERS unfunded liability) is an existential threat, and they have a fiduciary duty. Wouldn’t that duty extend to defending the fund from being bled to death? I would think it would.”
David Peden, chief investment officer for KRS, recently noted that should the assets of the KERS plan decline to from its current $2.4 billion to $1.4 billion, they would be forced to cash out all long-term investments and adopt a cash-only investment portfolio that produces negligible investment income to pay benefits. Despite a 15.5 percent return on their investments last year, the plan lost $166 million in assets over the last six months. KRS executive director Bill Thielen recently told IL that if there is a large downturn in the market — without bonding or employer payments above 100 percent of the ARC — “then this fund can’t last very long.”
“The notion that merely starting to begin to pay the ARC solves the problem just flies in the face of reason,” says Carroll. “(Frankfort) dug this hole with a shovel, and they’re refilling it with a hand trowel … whether it’s a bond issue or a tax increase, something has to happen.”
Asked about the bleak projections from the KRS actuary on the KERS plan going forward without bonding — in which its funding ratio does not rise above 20 percent until 2030 — Gov. Steve Beshear told IL he’s confident the 2013 pension reform will work, though it will take “significant time” to raise its funding levels.
“We are not saying that current projections are wrong, we are saying that a plan has been put in place and it should be given time to work,” said Beshear in an emailed statement. “Obviously, if there is an unanticipated significant economic downturn in the future that jeopardizes the ability of the system to meet its obligations, other measures may be warranted at that time.”
Carroll says waiting until a crisis point will be too late.
“If we do get to a crisis point, someone’s going to have to be running around to find money to pay current benefits, and at that point, how do you do that?” Carroll says. “Do you raise taxes? Whatever you do is going to have to take time to scramble together and make a solution for that. So at the worst possible time, if you have a downturn, you’re looking for money you don’t have, you have to come up with a political solution on the run.”
Though Stumbo has championed bonding legislation for KTRS, he is cold on such a plan for KRS, citing investment returns that are not as robust as the teachers’ plan. He says the 2013 reform has put KERS on the right track. Responding to Carroll’s concerns about KERS on KET’s Kentucky Tonight in January, Stumbo called Carroll “Chicken Little.”
With no bonds coming the way of KTRS or KRS in the coming year, pension funding will likely fall into the hands of the General Assembly — as well as a new governor — next year.