While Democrat Jack Conway and Republican Matt Bevin have grabbed most of the attention in Kentucky’s race for governor over the past month, independent candidate Drew Curtis is trying to enter the conversation with a sweeping plan to save the state’s — and the country’s — most underfunded public pension plan.
Curtis, the central Kentucky founder of Fark.com, recently unveiled his strategy to right the ship of the Kentucky Employees Retirement System, the public pension plan for more than 90,000 active and retired state workers. KERS currently has a shortfall of more than $9 billion and is only 21 percent funded, with recent studies projecting this funding ratio will fall even further over the next decade, if not collapse entirely.
Like some who have sounded the alarm in recent years, Curtis says ignoring Kentucky public pension crisis will mean “the next governor will preside over the worst economic apocalypse the commonwealth has ever experienced. Worse than 2008, worse than the Great Depression. It will bankrupt the state and set growth back for a generation.”
KERS fell from being fully funded into its current dilemma after Frankfort lawmakers failed for a decade to provide the full actuarially required contribution (ARC) to the plan every year. Curtis says that while Frankfort is finally paying the full amount, that alone is not enough for KERS to avoid a death spiral that would require an unbearable amount of state funding to prop up.
While an actuary hired by the Kentucky Retirement Systems — which administers KERS and other public pension plans — recently estimated that a hypothetical $5 billion bond would make the plan solvent, KRS has not endorsed such a bond, considering it too risky and rightly assuming it would not have political support. However, Curtis tells Insider Louisville that instead of a bond, Kentucky should seek out a $5 billion line of credit from hedge funds, an unprecedented strategy for any public pension plan.
“It’s not an unknown structure, because corporations do this all the time,” says Curtis. “They can do a line of credit at this level, provided they have confidence that you’ll pay it back. So I haven’t seen a government do it, and honestly, I think they just haven’t thought about it like this before, because most legislators don’t understand how business works.”
If Kentucky could find such a lender — which is far from a sure thing — here’s how Curtis says it would work: Frankfort would continue paying its full ARC to KERS, but the state would also add money from the line of credit while the plan’s low funding ratio makes it vulnerable. Whereas a pension obligations bond requires interest payments on the full amount — especially risky if there’s a market downturn with underperforming investment returns — the line of credit would only require interest payments on the amount of money taken out. When returns are higher than expected, the overage would be used to pay down the line of credit.
Curtis says if his strategy is viable, it could be expanded to the Kentucky Teachers’ Retirement System, which is currently among the worst-funded teacher pension plans in the country. Whatever one thinks of the viability of his plan, though, it is certainly not the status quo, which Curtis says may be the safe position for politicians to take — but is also a recipe for financial disaster in Kentucky.
Conway, the Democratic nominee, has said very little during the campaign on the subject of solving the pension crisis. Responding to a questionnaire from the Kentucky Chamber of Commerce during the primary, he said the best answer is to “grow our economy and create good-paying jobs,” in addition to rooting out unnamed “waste, fraud and abuse.” Conway also called for paying the full ARC, but multiple studies have shown that this alone will not stop the downward spiral of KERS for the next 10 years, at least.
The Republican nominee Bevin has called for dramatic pension reform, including moving all new state workers to private 401(k)-style plans and examining options to move existing workers into such plans. He has also said state workers should increase their contributions to the plan. Critics have called both options legally, politically and physically impossible.
“(Bevin’s) answer is so confusing, and I think it indicates that he doesn’t even understand the problem,” says Curtis. “I think they both don’t understand how serious this problem is. Or, they’re hoping it will just go away because they don’t know how to fix this problem.”
Curtis is currently gathering the signatures needed to ensure his name is on the ballot this fall, telling IL Thursday that he has more than 3,500 of the 5,000 needed before the Aug. 11 deadline. A survey from Public Policy Polling conducted last weekend found that while Bevin holds a slight 38 to 35 percent lead over Conway, Curtis netted a significant 6 percent, which he says is a sign that his candidacy will be a factor in the race that can’t be ignored. Win or lose, Curtis says Kentucky’s leaders can’t overlook the peril of the state’s public pension crisis.
“Without a plan, your options are raising the sales tax from 6 to 9 percent or raising the income tax, and you have no good money for roads or education or anything else … it just goes to stopping a problem that everybody’s known about for the last 12 years,” says Curtis. “I’m not sure what governor wants to tell people that, but I don’t mind saying this because that’s exactly what’s going to happen … If there is no plan, that is very dangerous for Kentucky’s economy, and all the wishful thinking in the world is not going to wish it away.”