Pension 101. Prepared by Kentucky Government Retirees, a Facebook community. Updated Sept. 30, 2014 HOW ARE KENTUCKY GOVERNMENT PENSIONS FUNDED? Kentucky Retirement Systems (KRS) pensions are funded by deductions from employee paychecks, contributions from employers (state, city or county government) and investment income. Investment income is the main source of pension benefits. For more details, go to Kentucky Government Retirees on Facebook: Photos/Albums/Follow the Money. WHO IS COVERED BY KRS? Kentucky Retirement Systems administers retirement benefits for 334,000 state and local government employees under five systems: the Kentucky Employee Retirement System (KERS) nonhazardous and hazardous; County Employees Retirement System (CERS) hazardous and nonhazardous; and the State Police Retirement System (SPRS). Note: Government retirements systems outside the KRS umbrella are the Teachers’ Retirement System, the Judicial Retirement Plan and the Legislators’ Retirement Plan. WHO MANAGES OUR PENSIONS? Kentucky Retirement Systems, based in Frankfort, is a quasi-government agency administered by a 13-member Board of Trustees. The board was expanded by four members as a result of Senate Bill 2. With the expansion, six trustees are appointed by the governor, including one each nominated by the Kentucky Association of Counties, the Kentucky League of Cities and the Kentucky School Boards Association. Three board members are elected by CERS members; two are elected by KERS members; one is elected by SPRS; and the state Personnel Cabinet secretary is an ex-officio member with voting privileges. The Board of Trustees appoints the KRS executive director. Consequently, appointed board members outnumber elected members chosen by stakeholders by a 7-6 margin. This represents a shift from past board composition, when elected members outnumbered appointees. WHAT KIND OF PENSIONS DO KRS RETIREES RECEIVE? KRS pensions for participants hired before Jan. 1, 2014 are under a defined benefit plan that is protected by an inviolable (unbreakable) contract. A defined benefit plan, also known as a traditional pension plan, promises the participant a specified monthly benefit at retirement. Because of so-called pension reform passed during the 2013 legislative session, state employees who started work on or after Jan. 1, 2014, are enrolled in a so-called hybrid cash balance plan that resembles a 401(k) plan in that it abandons the concept of guaranteed future benefits. (More about this later). WHAT IS THE PENSION CRISIS? All of the systems under KRS are, to a greater or lesser degree, facing unfunded liabilities. The funding ratios for all the pensions under the Kentucky Retirement Systems’ umbrella fail to reach 80 percent, the level that is considered “healthy.” An AARP fact sheet explains a funding ratio this way: an 80 percent funding ratio means for every $1 in obligations, there is 80 cents in hand. (For more information on terms “funding ration” and “unfunded liability” see assets.aarp.org/aarp.org_/articles/work/pension-funding-gap.pdf) From the KRS Transparency page, here are the funding ratios for our pensions: * Kentucky Employee Retirement System (KERS) nonhazardous, 23.2 percent funded. KERS hazardous, 64.5 percent funded. * State Police Retirement System (SPRS), 37.1 percent funded. *County Employees Retirement System (CERS) nonhazardous, 60.1 percent funded. CERS hazardous, 57.7 percent funded. HOW DID THIS IMBALANCE BETWEEN INCOME AND OUT-GO OCCUR? A Kentucky government employee’s contribution to his or her pension is set by state law and is automatically deducted from each paycheck. Workers have no choice but to pay their full contribution. Unfortunately, the lawmakers do have flexibility regarding paying the employer’s contribution into the Kentucky Employee Retirement System and the State Police Retirement System. Employer contributions to the KERS and SPRS are subject to approval by the Kentucky General Assembly under the biennial budget. (County Employee Retirement System employer contributions are set by the Kentucky Retirement Systems Board of Trustees.) Kentucky legislators will have failed to pay the full actuarially recommended contribution (ARC) into KERS and SPRS for 15 of the past 22 years. There have been six reasons cited for the pension crisis (see on Kentucky Government Retirees on Facebook: Photos/Albums/How the hole was dug and who dug it). But any way you look at it, the legislators’ failure to fully fund KERS and SPRS is at the top of the list. Another important factor was the legislature’s decision in the mid-1990s to provide for cost-of-living adjustments (COLAs) on pension benefits, while failing to allocate the money for those raises. The legislature stuck KRS with the bill. Some politicians like to deflect attention from their own financial neglect by pointing to stock market losses. It’s true that this has contributed to the KRS unfunded liability. But the simple fact is that other states’ pension funds also suffered market losses, but most are financially stable, because their legislatures were more responsible with money. The average funding ratio (assets to long-term liabilities) is 75.3 percent. The KERS non-hazardous fund is a dangerously low 23.2 percent. WHAT HAS BEEN DONE TO ADDRESS THE PENSION CRISIS? In 2008, a bill passed to make changes in the pension plan for new hires. While the changes have helped slow the decline, they weren’t enough. In 2012, the legislature’s Task Force on Public Pensions produced several recommendations for addressing the pension crisis. (To read the recommendations, go to Kentucky Government Retirees on Facebook: Photos/Albums/Plan adopted by 2012 Task Force.) The most important was to recommend that the state begin paying its full ARC (actuarially required contribution) to the KERS non-hazardous fund in 2014-16. Unfortunately, while ways to raise necessary revenue were discussed, none was adopted. The task force was advised by two consultants who have been active around the country in advising states and cities to move away from defined benefit plans. Consequently, these consultants recommended and the task force adopted a proposal for a hybrid cash balance plan starting for new hires. Adopting an inferior pension plan for new hires does nothing to address the existing funding crisis. The task force also proposed removing COLAs from state law. SENATE BILL 2 Under the guise of pension reform, the General Assembly passed a bill that made substantial changes to the pension system. SB 2: * Created a new less-generous pension plan for new hires that does nothing to address the unfunded liability. * Eliminated the COLA provision for retirees except under extraordinary financial circumstances. Stakeholders should not count on COLAs in the near future. * Packed the Kentucky Retirement Systems Board of Trustees with three special-interest appointees. (A third elected CERS position also was created.) Appointees, accountable to the governor, now outnumber trustees elected by and accountable to retirees. *Stated that all agencies will begin paying the full employer contribution. (This requirement can of course be ignored, just as the legislature ignored this obligation previously.) WHAT ABOUT THE UNFUNDED LIABILITY? In a last-minute deal regarding a bill that had little examination, the legislature passed House Bill 440, which made tax changes that will create about $110 million for the General Fund. The biennium that started July 1, 2014, contains the full required employer contribution for the first time in more than a decade. WHAT ABOUT THE CASH POSITION OF KERS NON-HAZARDOUS? This plan that covers most state employees is in terrible shape. In 2008, the fund held assets totaling $5 billion. As of the end of fiscal year 2014, that balance had plummeted to $2.57 billion. It paid out $915 million in benefits/expenses during the fiscal year. We know of no state pension plan anywhere in this position. Over the past three years, KERS non-hazardous has lost more than $950 million in assets even though it exceeded its assumed rate of investment return. DOES THE FULL ARC HELP? The full employer contribution included in the 2014-16 biennial budget adds about $210 million in new dollars per year to the fund. But it appears unlikely that the full ARC is sufficient in the next several years to reverse the losses. After all, the fund lost $183 million in FY 14 alone even as it DOUBLED its projected investment rate of 7.75 percent. If the full ARC had been paid last year, the fund would have gained about $50 million. But that amount doesn’t materially improve the situation. And, keep in mind that a 15.5 percent rate of return is unsustainable over time. WHY SHOULD ACTIVE EMPLOYEES CARE ABOUT PENSIONS? It’s obvious that public employees in Kentucky aren’t paying much attention to what’s going on in Frankfort regarding pension reform. We can relate to that. When we were active employees, we were far more interested in family matters and our jobs than our pension plan. But if you’re an active employee, you SHOULD pay attention to your pension. Why? Because your pension benefits may be forever changed by what is happening now. The unfunded liability grows year by year because of past legislative neglect. The KERS non-hazardous fund has one of the lowest funding ratios in the country. We as stakeholders need to seek some sort of funding solution over and above the full ARC to stabilize the KERS non-hazardous fund. Moreover, we should closely watch how the new makeup of the KRS board affects members. We must be vigilant as we see whether this new board lineup potentially adversely affects our interests. As always, we must “pay attention to our pension.”
Posted on: Tue, 30 Sep 2014 20:49:51 +0000
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