The solution to Kentucky’s pension woes won’t come easy, a researcher with the Pew Center on the States says, but proposals will be discussed during next month’s joint pension task force meeting.
Task force co-chairman Rep. Mike Cherry, D-Princeton, said the Pew Center, the Laura and John Arnold Foundation and the Legislative Research Commission will develop possible options for the state’s retirement plans and present them at the panel’s Oct. 29 meeting.
With the Kentucky Retirement Systems facing $19.2 billion in unfunded liabilities as of July 2011, the two outside organizations touched on four pension models and potential cost-saving options during a task force meeting Tuesday.
David Draine, a senior researcher at the Pew Center, said the state offers “modest” benefits to new employees and, as such, lawmakers shouldn’t expect to see substantial savings with a new plan.
“Instead, we want to show how the different plans vary substantially in how workers earn benefits and the risks being borne by taxpayers and public employees,” Draine told the panel, which will recommend changes to the state’s pension system for the 2013 legislative session.
“This should clarify the real decisions that need to be made by this task force in coming up with their recommendation.”
Draine, who did not recommend a particular approach, touched on the state’s current defined benefit retirement plan, which shifts risk to taxpayers, and a 401k-style defined contribution plan, which shifts risk to employees.
But he further explained two plans that balance the risk – a cash-balance option and a hybrid plan.
In an example cash-balance option presented Tuesday, Draine said employees would receive an individual retirement account into which they contribute 5 percent while the state adds 4 percent.
The state would provide a minimum guarantee on investments, he said, and keep about 25 percent of returns over the minimum. Workers could use the money in their accounts to buy an annuity.
“In this way, cash-balance plans offer employees two of the key protections commonly associated with a defined-benefit plan: a guarantee against investment risk and protection against outliving one’s retirement assets,” Draine said.
Hybrid plans combine elements of defined-benefit and defined-contribution systems. Workers would get a small traditional pension coupled with an individual retirement account, Draine said.
He showed how each retirement plan would react in different investment return scenarios. The defined-benefit plan held steady while the others were influenced by gains or losses on the market.
The stock market would also impact the state’s share of retirement contributions expected in the defined-contribution plan.
Before discussing potential new plans, Draine looked at ways the state could bridge the funding gap in its current pension systems, particularly that of non-hazardous state employees.
Draine said lawmakers could possibly increase employee contributions, undertake a $1.38 billion bond issue for the non-hazardous Kentucky Employees Retirement System or tax retirement benefits to improve KRS funding.
“Kentucky has racked up a sizable pension debt, and ultimately more money will need to be put into the system, whether from raising taxes, cutting services or reducing tax expenditures,” he told the task force.