With Kentucky Retirement Systems set for a more than $270 million increase in contributions in the next biennium, officials with the Kentucky Teachers Retirement System told lawmakers Thursday the agency will seek an additional $790 million from the state in the next two-year budget.
The proposed 10.4 percent annual increase would nearly double the state’s current contribution rate of 13.1 percent, said Gary Harbin, executive secretary of KTRS.
Harbin made his case for the $16.1 billion KTRS before the Budget Review Subcommittee on General Government, Finance and Public Protection.
The pension system for some 187,000 active and retired teachers, which pays about $157 million monthly in pension and health benefits, has seen an increase in retirement numbers in recent years, a trend that will likely continue as more baby boomers reach retirement age, Harbin said.
If the state doesn’t increase its annual contribution $400 million, the system’s funding shortfall will only compound, Harbin said. KTRS has 54 percent of the assets needed to cover accrued pension costs.
“That’s what we’re here imploring you for today is the $400 million, the 10.42 percent of pay that we need in order to keep teachers’ pension actuarially sound and before it becomes a problem this commonwealth realistically can’t handle,” Harbin said.
“If we don’t handle it this biennium, it’s going to grow tremendously the next biennium.”
Harbin said teachers and retirees have paid an additional 3 percent of their pay to shore up the system’s health insurance funding, a move that shaved $5 billion from the plan’s unfunded liability that’s currently $15 billion.
While Harbin said the state has not increased its contribution to KTRS since 1992 — except for a brief period, in the 2006-2008 biennium, that was not renewed — the system received more than $886 million in
pension obligation bonds as of February, according to Harbin’s presentation to lawmakers. The bond sales helped repay money in the pension system that had been used to cover retiree medical costs.
Harbin believes the system will find a funding solution with the state as lawmakers write the next biennial budget during the 2014 session.
Seeking additional pension obligation bond sales could be an option, he said.
“There’s a liability the state has, and the liability is growing at 7.5 percent,” Harbin said after the meeting. “If they bonded now at … anything below 7.5 percent, that’s a smart move for the state.”
But lawmakers probably won’t be eager to bond an additional $790 million for KTRS in the upcoming biennial budget, said Sen. Chris McDaniel, a Taylor Mill Republican and co-chair of the subcommittee.
“I really can’t imagine issuing more bonds, especially pension obligation bonds,” he said, noting pension obligation bonds are taxable because they finance operational debt.
Agencies abandoning KRS
The subcommittee also heard testimony from KRS Executive Director William Thielen, who said external agencies are seeking an exit from the pension system as employer obligations rise under a pension reform package passed earlier this year.
Recently, House Oriented Ministries Established for Service of Whitesburg and Morehead-based Frontier Housing sued the $14.5 billion pension system in Franklin Circuit Court, saying they should have never qualified to enter the County Employees Retirement System, said Jennifer Jones, general counsel for KRS.
Seven Counties Services in Louisville is looking to leave KRS in bankruptcy court, and some of Kentucky’s 14 mental health boards have begun hiring employees using non-profits outside KRS to exit the system, which faces $17.1 billion in unfunded liabilities, The Lexington Herald-Leader reported last year.
Thielen said the pension system is concerned about the external entities leaving KRS, but he downplayed the possibility that the exits could cripple the system financially.
“In both systems we have significant unfunded liability they own a share of, and in other states, there is a mechanism for them to get out, but they have to pay the actuarial cost of their liabilities in order to do that,” Thielen said after the meeting.
“We’re concerned that other employers would have to pick up that cost if those entities got out without paying their share of the unfunded liability.”