Retirement planning and underfunded pensions are a government concern. The following is an editorial article focused on the topic of retirement planning...
Like a family that only pays the interest on its credit cards each month, Kentucky has seen the debt for its pension system mushroom to an almost unmanageable level during the past decade.
And as state and local governments work to dig out of the debt hole, less money -- much less money -- will be available for other programs.
But Kentucky isn't alone.
In a February report, the Pew Center on the States found that "there is a $1 trillion benefit divide between what states have promised workers and what they can actually afford."
Kentucky, the report said, "is one of eight states where more than a third of the total liability is unfunded."
"Kentucky's six pension systems had a combined funding level of 63.8 percent, and a total liability of $34 billion in fiscal year 2008," the report said.
And, the Pew report said, "This problem was compounded by unfunded, automatic cost-of-living adjustments for retirees' pensions and incentives that were offered for early retirement."
In the past decade, the pension fund has gone from a surplus to an "unfunded liability of $12.3 billion," the report said.
In 2008, the Kentucky General Assembly began addressing the problem by raising the amount paid into the system each year.But this year, only 44 percent of what's needed is being paid.It will be 2024 -- 14 years from now -- before the program is fully funded again under current plans.And catching up will mean sacrifices for taxpayers.This year, with the state having to cut hundreds of millions of dollars and furlough workers, the budget includes $245 million -- up from $178 million last year -- for the retirement systems administered by the Kentucky Retirement System, John Hicks, deputy state budget director, said in an e-mail.That doesn't include money for teachers' retirement.Next year, the state's contribution to its pension fund is scheduled to grow by $40 million -- to $285 million, Hicks said.Local governments hurtingLocal governments are also suffering.This year, they pay into the fund at a rate of 16.93 percent of the salaries of workers in nonhazardous jobs and 33.25 percent of the salaries of those in hazardous jobs.By 2019, those figures will mushroom to 24.8 percent and 51.6.But those percentages aren't guaranteed, Mike Burnside, executive director of Kentucky Retirement Systems, said recently."If markets do extremely well, the rates could go down," he said. "If we have another recession or the number of (government) employees drops, they could rise even more. We recalculate every year."
The projections are based on several assumptions, Burnside said, including that investment returns will average 7.75 percent each year, which they are currently not doing."Even the most generous 401 (k) matches in the private system aren't more than 8 to 10 percent of a worker's income," David Adkisson, president of the Kentucky Chamber of Commerce, said recently.Owensboro is paying $4.04 million into the pension plan this year -- $990,135 for nonhazardous workers and $3.05 million for those in hazardous work.By 2016-17 -- six years from now -- city Finance Director J.T. Fulkerson estimates that payments will jump 72 percent to $6.94 million.That breaks down as $1.68 million for nonhazardous workers and $5.27 million for those in hazardous occupations."That's probably the greatest threat we have to the financial stability of this community," said Mayor Ron Payne. "It's a serious, serious threat."Daviess County paid $1.86 million into the fund for the year that ended June 30 -- $824,000 for nonhazardous and $1.03 million for those in hazardous work.County bill going up 187 percentCounty Treasurer Jim Hendrix said that will jump 187 percent to $2.96 million by 2019 -- $1.3 million for non-hazardous occupations and $1.63 million for hazardous work.
"It calls out more than ever for the legislature to look into what needs to be done to fix the problem," said Daviess Judge-Executive Reid Haire. "But they keep putting it off and the problem keeps getting worse. The challenge is that the state has not kept up with the burden of funding retirement plans and it's being pushed off on local governments."Earlier this month, Robert F. Sexton, executive director of the Pritchard Committee for Academic Excellence, wrote that "spiraling health insurance and retirement took 97 percent of all new, inflation-adjusted, education dollars" spent in Kentucky in the past 20 years."Everything else available to improve Kentucky schools increased 3 percent," he wrote.And Adkisson said businesses are worried that that will happen to the rest of state and local government."With the rising costs of retirement plans, the cities will be left with very little to maintain parks and assist nonprofits," the former Owensboro mayor said. "Those groups will be victims."Adkisson said many businesses are concerned that they're being asked to provide much better pension programs for state and local government workers than they can offer their own employees."The common belief is that private workers make more than those in the public sector, but that's not true," he said. "Very few workers outside government today enjoy a defined pension plan."
Today, Adkisson said, the average Kentucky state employee earns $40,900 a year.The average private worker in the state earns $34,950 a year, he said.And private workers are taxed to pay the higher salaries for state workers, Adkisson said.And, he said, they're beginning to resent it.Burnside said, "A lot of the problem was caused by the two major recessions in the past 10 years. The markets have declined and it's hard to recover in a short time."Other factors in the local government retirement program, he said, "include the rising cost of health care, annual unfunded cost-of-living allowances for retirees and benefit enhancements over the years."State law, Burnside said, requires local governments to "pay their full contribution each year, so their funding problems cannot be attributed to intentional underfunding by employers."But, for state employees, he said, "the contributing factors include all of the above, plus a long history of employers (state agencies) contributing less than the full actuarial amount requested by the board."Solution painfulIt will be painful, Haire said, but larger counties like Daviess and larger cities like Owensboro have the tax base and growth to pay the rising costs of the retirement system."But smaller rural counties may not be able to sustain an almost 50 percent increase," he said. "It may force some local governments to contract out services rather than hiring people. And that undercuts the retirement system because fewer people will be paying into the system."
"That's a valid concern," Burnside said. "If there are fewer employees, there will be less money going into the program and the rates will have to rise."By 2014 -- just four years from now -- KRS estimates that there will be more retirees drawing benefits from the state plan than workers paying into it.Burnside said a study of local government plans isn't complete. But it is expected to show a similar trend at some point.KRS administers the retirement programs for state and local governments as well as the Kentucky State Police. It does not administer the teachers' retirement program.As of June 30, the three KRS retirement systems had 144,821 active workers paying into the system, 101,552 who are no longer working but not drawing benefits and 87,779 retirees.KRS records show that it paid out $68.7 million a month in retirement benefits in 2003-04.By 2008-09, that amount had jumped 72 percent to $118.4 million a month."Added to that amount is over $26 million per month in health care expenses for fiscal year 2008-09," Burnside said.Retirement benefits are based on a formula that includes the average of the highest five years of pay (three years for those in hazardous jobs) multiplied by a benefit factor of between 2.2 and 2.5 multiplied by the worker's years of service.
Currently, the average monthly benefit, Burnside said, is $1,717.10 for nonhazardous state workers; $1,143.08 for state hazardous workers; $890.24 for local nonhazardous workers; $1,934.42 for local hazardous workers; and $2,933.57 for state police.'It's not going away'"The General Assembly has to fix this and soon," Payne said. "I'll be talking to the governor and our legislators about this. It's not going away. "He added, "We work hard to have a balanced budget and cut costs and it can all be taken away in an instant by something like this."In 2008, the General Assembly passed legislation that changed the benefit calculation for new state and county employees as well as new teachers and school employees.It also increased the retirement age for new state employees.But until 2008, government workers could retire after 20 years in hazardous jobs and 27 in nonhazardous.That meant, in many cases, they were retiring in their 40s."When I was 41, I had a high school classmate retire from the Owensboro Police Department," Adkisson said."We have a difficult funding situation," Burnside said. "We need to address this sooner rather than later. Every year you don't pay the full amount, it's going to get more expensive -- like a credit card when you only pay the interest."
He said, "The financial picture has changed since the pension reform of 2008. State revenues are down and they're struggling to make payments."Haire said the rising costs of pension plans comes at a bad time for government.Not only is the economy struggling, but governments will be losing tax revenue as a wave of baby boomers qualifies for reductions in property taxes through the Homestead Exemption Act."It's going to require bipartisan leadership with a combination of tax increases and the realization that some programs can't be sustained at their current level," Haire said."We're going to keep the issue on the front burner," Adkisson said. 7 Key Retirement Milestones
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