LMPD :: Louisville Metro Police Department

State Pensions Facing Crisis Retirement System is $4.5 Billion Short

As if Gov. Ernie Fletcher and the legislature won't face enough demands for more money this winter, as they prepare the next budget, the state retirement fund is estimated to be underfunded to the tune of $4.5 billion -- more than twice the annual state payroll.

Like a healthy young man who prefers not to think of old age, governors and lawmakers spent on more immediate concerns for much of the past decade, and they knowingly put too little money into the Kentucky Retirement Systems.

That can't continue, warns William Hanes, executive director of the retirement system.

State government has about 51,000 eligible employees, with an average age of 42 and a wave of retirements expected to crest in 2009. Unlike struggling companies, Kentucky can't file for bankruptcy and dump its retirement obligations. By law, it must honor its relatively generous pensions and insurance for retirees.

So if the money runs out, it won't be retirees who suffer. Instead, all other state spending -- on Medicaid, schools, prisons, roads and parks -- will be cut to cover the difference, Hanes said.

Hanes wants an additional $350 million this winter. That puts him in line with everyone, from nursing home patients to Lee Todd, president of the University of Kentucky, asking Fletcher and the legislature to dig deeper.

"I understand their dilemma," Hanes said recently. "But they had to know this problem was coming. Where is their long-term strategy to deal with it?"

Hanes said he felt a flicker of hope Aug. 30. Fletcher briefly mentioned the retirement system in the fiery televised speech he gave announcing his pardons for nine aides indicted in the state hiring investigation.

"At a time when we are facing a multibillion-dollar unfunded liability in our public employee retirement system, (Attorney General) Greg Stumbo is wasting your tax dollars on an unprecedented investigation resulting in a handful of charges that are tantamount to noodling out of season," Fletcher roared to a crowd in the Capitol.

But Hanes said he heard nothing from the governor after the speech.

Asked about the retirement system last week, the governor's office replied in writing that it "is aware of the situation."

"We consider it an important matter in consideration of a new budget, and we will give serious attention to funding issues related to the Kentucky Retirement Systems. However, no decisions have been made as we are still examining funding requests for all programs and agencies."

Generous benefits

The state's retirement plan is hard to beat.

A state employee on a $50,000 salary can retire after 27 years for a $29,700 pension and free health insurance coverage. That continues until he dies. The small group of employees in hazardous jobs, such as police officers, can retire even sooner. The state cannot reduce those benefits.

Few private employers still offer such deals. Pensions largely have been replaced by self-managed investment accounts that can run dry long before the retiree dies. And retiree insurance coverage is one of the first expenses to be dropped in lean financial times.

"The best benefit state employees have is their retirement plan. If you can endure the low wages and make it through 27 years, you have a good pension waiting for you," said Charles Wells, executive director of the Kentucky Association of State Employees.

It isn't cheap.

During the current two-year budget, the state is expected to contribute about $220 million for pensions and retirees' insurance. State employees should contribute about $289 million for pensions. Overall, about $7.1 billion sat in the retirement system's various accounts as of the 2004 audit.

Insurance costs a factor

Unfortunately, that's not enough, Hanes said. The system's assets cover only 48 percent of its liabilities, he said. Among the problems:

• Insurance rates are exploding, up 91 percent since 2000, he said. The retirement system does not charge premiums, so it absorbs all of that cost.

• Wall Street has slumped over the same period. The retirement system invests in stocks and bonds, and it counts on an 8.25 percent annual return. In reality, it tends to get far less.

• Kentucky's work force is aging. Nearly 30,000 state retirees tapping the system are joined by thousands more every year. In 2000, there were 2.2 state employees for every retiree; this year, it's 1.5 employees per retiree.

The year 2009 could be when the sky falls, Hanes said. Not only will baby boomer bureaucrats have started to enter their 60s, but under technical rules passed by the legislature in flusher times, state employees will get even sweeter deals if they can retire by the end of that year.

Underlying all of this is chronic underfunding, Hanes said. Since the early 1990s, except for a few years of economic prosperity, governors and lawmakers have given the retirement system less than recommended. It was short-changed $213 million in the current budget, he said.

Speaking in early 2004, Fletcher said he would try to make up the difference later.

"During tough times, we felt like it was not in our ability to meet all our retirement obligations," the governor said. "In the future, we are going to have to increase that contribution."

'Ticking time bomb'

The politicians seem to be waiting until they have a huge surplus and nothing else to spend it on, which will never happen, said Wells, of the state employees group.

"This is a ticking time bomb that, if not resolved in the next few years, is going to blow up in the taxpayer's face," Wells said.

Chairmen of the legislature's budget committees say they realize it's time to put more aside for retirement.

Rep. Harry Moberly, D-Richmond, said he wants an independent review of the retirement system by the governor's budget office.

"I tend to think there is a deficiency, and we need to make more effort to compensate for it this year," Moberly said. "Obviously, we're not going to have hundreds of millions of dollars to do that."

Complicating matters, similar problems now afflict the Kentucky Teacher Retirement System, which covers 38,000 retirees.

For the current budget, the teachers' system needed $91 million a year to pay for the rising cost of health insurance. Instead, it was given permission to take the money from its pension fund, with a promise to compensate the pension fund over the next decade, said Gary Harbin, the system's executive secretary.

Harbin said the teachers' system has one advantage -- if that's the right word -- over the state employees' system: It's entitled to reduce insurance coverage for retirees, although Harbin does not want to do that.

"We're at a critical spot in terms of funding our retirees' health insurance, and I think the governor and legislature understand that," Harbin said.

Sen. Charlie Borders, R-Russell, said the state's three biggest financial challenges are Medicaid, a booming prison population and its retirees. There might not be enough revenue to resolve one of those problems, much less all of them, he said.

"Maybe this is something we should have seen coming at us," Borders said.

"We'll have to deal with it this coming session," he added. "I don't think it's something we can continue to put off."