Published in todays State Journal A public response to Kentucky’s pension problems Betty Pendergrass During the June 16 “Kentucky Tonight” discussion of Kentucky’s pension funding problems, there were a number of points that were presented by the legislators that deserve a public response. As a former trustee of the Kentucky Retirement System and a CPA who has worked in governmental financial management for nearly 40 years, I have some experience with managing pension and public tax dollars. I speak with the balanced perspective of a financial manager, taxpayer, employee and retiree. Pension management is a complex project and many individuals and governmental entities will hire professionals to help them wade through the complexities of investment management, financial planning and benefits administration. There are, however, a few simple elements that apply to saving for the future, whether you are using a piggy bank or a complex investment portfolio. Available balances for future withdrawals will depend on contributions and investment earnings. You cannot earn interest if you don’t add money to the savings account. You cannot withdraw what was not deposited. You cannot increase withdrawals if you did not save enough for those increases. Long-term investments earn more than short-term investments. Both the General Assembly and the administration have steadfastly maintained that they sent contributions, at some level. Then the politics take over and they both try to justify sending less than the actuarially required contributions. But here are the facts (from the KRS audited financial statements): In 1998 through 2002, the employer paid all of the KERS ARC and the system was funded over 100 percent; from 2003 through 2013, the employer has paid substantially less (from 38.2% to 75.2%) and funding has fallen to 23.2 percent; for just KERS nonhazardous pension, the shortfalls total $1.4 billion in that time frame. Shortfalls in contributions have caused problems on all five points listed above. Yes, the great recession had a serious impact on investment earnings, but so did the lack of contributions. You cannot earn interest on what is not added to the savings account. In the KERS fund, investments are held in shorter-term investments because of the significant cash flow needs to mail benefit checks each month. Those investments earn substantially less than would be possible with long-term investments. Even with the shortfalls and economic setbacks, the KRS fund has earned 9.4% since inception, slightly below the benchmark. However in 2003, when the system held more than 100 percent than the liability, earnings exceeded the benchmarks. Yes, the CERS fund is in better shape than KERS, but no, contributions have not met the actuarial required amounts. The General Assembly enacted a provision to scale back contributions and gradually increase back to the ARC over a 10-year period. For many years, employer contribution rates were declining as healthcare costs were increasing at double-digit inflation. In order to strengthen insurance reserves and limit the burden on employers to affordable levels, contributions have been split between pension and insurance reserves. As a result, both segments are only 60-plus percent funded. Yes, the COLA (cost of living adjustment) has drained significant resources from all funds. The COLAs were not prefunded (point four) so it did not take long to drain any surplus in the funds. I disagree with the actuarial approach for providing information about how the COLA affected the system’s reserve from the first year COLAs were awarded. It was never possible to award COLAs without a serious negative impact on reserves, and retirees should never have been promised a benefit that was not sustainable. Now we have a $2 billion segment of the Kentucky economy that will stagnate with no possibilities of increase in the foreseeable future. Ask the economic professionals how that lack of growth multiplies throughout the Kentucky economy and which segment they think should be carved out for zero growth to keep Kentucky moving forward. There is no single factor that caused the problem in the current funding status. But it is way past time for the politicians to stop blaming the hard-working retirees for the funding shortfalls. They paid 100 percent of the employee contributions and worked hard to deliver public services. It is time for the politicians to take responsibility for a significant factor — you cannot take money out of the piggy bank if you don’t make deposits. Certified public accountant Betty Pendergrass, Bardstown, Ky.
Posted on: Sun, 29 Jun 2014 17:37:10 +0000
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