Wednesday, August 30, 2017

Are Kentucky's Pensions Finished?

Daniel Desrochers of the Lexington Herald Leader reports, ‘It affects everything.’ What’s at stake as Kentucky’s pension war begins:
Trenches have been dug, heels are firmly planted, fingers are locked and loaded, ready to point at the most convenient scapegoat — the war over Kentucky’s public pensions has begun.

The first strike came Monday, when a state-paid consulting group, PFM, issued a report recommending drastic changes to the pension plans that cover most of Kentucky’s public employees — retired, active and future.

Read more here: http://www.kentucky.com/news/politics-government/article170086847.html#storylink=cpy

Lawmakers were quick to point out that the recommendation was just that — a recommendation.

“There’s good ideas in there. I will say there’s a lot of good ideas, some of them may be implemented, some of them may not be,” Gov. Matt Bevin said in a Facebook Live video hours after the report. “There’s some that, quite frankly, I don’t think there will be an appetite for, even though they may be financially appropriate for us to pursue.”

Legislators, the people who will vote on any pension overhaul, have expressed similar reservations about the report, which contained proposals that outraged every subset of government employees in the state.

“The PFM report should be, and I think to a large degree was, not political and now you’re going to introduce politics in the process,” said state Rep. James Kay, D-Versailles. “And there are going to be winners and losers.”

So far, government workers have largely been kept in the dark about what action the legislature might take.

Members of the House of Representatives held a closed-door meeting Tuesday afternoon to discuss the PFM report, shutting the public out of their first discussion about potential changes that might directly affect the pocketbooks of about 500,000 Kentuckians.

Lawmakers said the meeting largely consisted of asking the consultants and state budget director John Chilton questions about the report. Among other things, it recommended raising retirement ages, freezing the pensions of most state and local government workers and pushing them into 401(k)-style retirement plans.

Going forward, a variety of interest groups are poised to battle for the votes of lawmakers.

“I think we’re all hearing from folks,” said House Speaker Jeff Hoover, R-Jamestown. “Look, we’re all concerned about it, it affects every Kentuckian. I said yesterday that this issue is not just about retired workers or retirees, it’s not just about current state workers or current teachers. It affects everything with regard to the state budget and it affects every Kentuckian.”

Facebook pages for state government workers and retirees lit up with reaction Monday night to the consultant’s report and Bevin’s video chat. All of the groups have asked members to make their presence felt in Frankfort.

“We are currently in a fight to preserve the retirement benefits so many have been promised and spent a lifetime of service earning,” the Kentucky Fraternal Order of Police said on Facebook. “Please tell your state legislators to protect our pensions.”

The Kentucky Government Retirees group posted a request Tuesday for lawyers to offer suggestions about “how to proceed with evaluating and securing suitable legal counsel.” The group has pledged to fight a recommendation that would take away cost-of-living adjustments given to retirees from 1996 to 2012, a change that would reduce the monthly checks for many in the state (click on image).


Read more here: http://www.kentucky.com/news/politics-government/article170086847.html#storylink=cpy
Meaghan Killroy of Pensions & Investments also reports, Kentucky hires PFM Group to analyze state pension plans:
Kentucky's finance and administration cabinet, Frankfort, hired PFM Group to provide a performance and best practices analysis of the state's retirement plans.

PFM will analyze the plans’ overall solvency and liquidity, outstanding obligations, reasons for the plans’ current financial status, and best practices and future actions to shore up the plans, said a news release from the governor’s office on Monday.

The firm’s final report is due Dec. 31, said a spokeswoman in the finance and administration cabinet in an e-mail.

An RFP was issued in May.

PFM Group will provide the state with financial and other information relating to the current and projected financial situation on its retirement plans and advising the state on various paths forward. “Reforming the state’s ailing pension systems is one of this administration’s top priorities,” said Gov. Matt Bevin in the release. “The findings that will come from this pension fund audit will accurately identify our actual pension liabilities. It is our intention to shine the antiseptic light of transparency on the country’s worst funded pension system and financially secure the pension system for generations to come. Kentucky taxpayers, retirees and current employees deserve nothing less.”

The $18 billion Kentucky Teachers' Retirement System, $15 billion Kentucky Retirement Systems and $94 million Kentucky Judicial Form Retirement System, all based in Frankfort, face roughly $35 billion in unfunded liabilities combined.
Lastly, Tom Loftus of the Courier Journal looks at 7 controversial recommendations to solve Kentucky's pension crisis:
The PFM Consulting Group says that the many changes in recommended Monday for Kentucky's pension systems would eventually save the state more than $1 billion a year.

That's if all of them are adopted.

And some of the recommendations have been controversial.

Of course, it remains to be seen what the final result will be when a special legislative session — which Gov. Matt Bevin has said he will call this fall — convenes. The governor insisted on Facebook Live Monday night that any plan would be done in consultation with state workers and would protect benefits they have accrued thus far.

Of course, PFM's recommendations address other issues besides benefits (assumptions used by the retirement plans, investment practices of retirement systems, the basic approach the state takes to funding the plans, etc.)

But here are some of its more controversial recommendations:

1. Repeal retirees' cost of living adjustments


PFM recommends state and local government retirees give up the portion of their future benefit payments resulting from cost of living increases granted to Kentucky Retirement Systems members between 1996 and 2012. That would mean a reduction in benefit checks for anyone who retired before 2012, with some reductions of 25 percent or more.

2. Suspend teachers' cost of living adjustments

Recommends suspending future cost of living adjustments for teachers until the Teachers’ Retirement System is 90 percent funded, which is certain not to happen for many years. Teachers currently get cost of living increases, partly because — unlike most other public employee retirees — they do not get Social Security benefits, which do include an annual cost of living adjustment.

3. Create new 401(k) plans for most state and local government workers

Recommends freezing benefits earned so far and moving current workers into a 401(k)-style defined contribution plan for the rest of their careers. This proposal includes an optional “buyout” provision to encourage workers to move fully into the 401(k)-style plan. The new 401(k)-type plan would require an employee contribution of 3 percent of salary and a guaranteed base employer contribution of 2 percent of salary. Employers would also match 50 percent of additional employee contributions up to 6 percent of salary. Employees in hazardous duty jobs, such as police and firefighters, would not be shifted to the new 401(k) plans.

4. Increase retirement age for current workers

The consultant recommends increasing the age for retirement with non-reduced benefits to 65 for non-hazardous workers and teachers and to 60 for hazardous duty employees.

5. Drop some teacher benefits

Recommends ending certain benefits of teachers, including one that lets teachers use accumulated unused sick days to enhance their benefits.

6. Move new teachers into 401(k) plan

Recommends moving new teachers into a 401(k)-type plan with Social Security. This move into Social Security would increase the cost to employers. PFM says school boards could pick up this new Social Security cost.

7. Don't separate County Employees Retirement System

Does not recommend separating the County Employee Retirement System plans from the Kentucky Retirement Systems. CERS funds pensions for county and city employees as well as non-teaching school district employees, from the Kentucky Retirement Systems.

The Kentucky League of Cities and Kentucky Association of Counties want to pull CERS from the KRS umbrella, which includes other pension plans that aren't as well-funded.
I predicted this mess five years ago when I wrote all about Kentucky fried pensions. Chris Tobe took my blog title to make a book out of the corruption and cover-up going on at Kentucky's pensions.

One by one, the dominoes are falling on US public pensions and those with the weakest governance are being exposed. There is no place to hide, the situation is so grim that officials have to face the music and relay the terrible news to the plans' beneficiaries.

Some of the recommendations make sense but others are definitely a step in the wrong direction, one that will make everyone worse off, including the state of Kentucky.

In particular, scraping a defined-benefit plan to replace it with a defined-contribution plan is a really horrible idea. It shifts retirement risk entirely onto workers and leaves them all exposed to pension poverty down the road. That's the brutal truth on DC pensions, they're far, far inferior to large, well-governed DB plans.

The public-sector unions and retirees should fight tooth and nail to maintain DB plans but they will need to share some of the risks attached to these plans in order to see them regain fully-funded status.

The biggest problem is lack of governance. You can almagate all these plans at the state level, increase the retirement age for some and even introduce some form of shared-risk but if you don't get the governance right, Kentucky's defined-benefit plans won't survive and this will impact the state in a very negative way (both in terms of attracting qualified people to the public sector and in terms of economic activity).

Hurricane Harvey devastated Houston and other cities in Texas but they will rebuild that great state. Kentucky's pension hurricane has been going on for years and very few were paying attention, let alone sounding the alarm.

And now, I'm afraid to say, Kentucky's pensions are finished, irrevocably changed and the future of public defined-benefit plans in that state is grim at best. Welcome to America's new pension normal.

Below, a quick look at the figures behind Kentucky's pension shortfall. Like I said, the situation is grim, there's nothing much they can do to bring these pensions back from the abyss and everyone will lose as they crumble. Unfortunately, there are many other state pensions which will suffer the same fate.

Update: Tom Loftus of courier-journal reports, Kentucky pension crisis: Are 401(k) plans the solution?. I note the following passage:
Keith Brainard, research director for the National Association of State Retirement Administrators, said risk doesn't disappear under a 401(k) plan.

"These proposals shift that risk from the state and its public employers and taxpayers and put it all on the workers. In fact, there’s going to be more risk because they are no longer in a group that can manage the risk much better," he said.

Whether the moves actually will save the state money is a question being hotly debated.

Jason Bailey, executive director of the Kentucky Center for Economic Policy, of Berea, said, “Moving employees into 401(k)-type plans is actually more expensive … and harms retirees while making it much more difficult to attract and retain a skilled workforce.”
I will keep hammering the point that moving public sector employees to a 401(k) plan shifts retirement risk entirely onto employees, leaves them exposed to the vagaries of public markets, and ultimately many of them will succumb to pension poverty just like private sector employees with DC plans. Moreover, the long-term effects to the state of Kentucky are not good, they will raise social welfare costs and cut economic growth as more people retire with little to no savings.

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