The Kentucky Retirement Systems, which invests contributions from public workers and government to cover the pension checks sent out to retirees, hasn’t had much good news to report lately. At last week’s meeting, trustees learned their net assets declined $680 million in the first nine months of the current fiscal year. The total unfunded liability – money KRS owes future pensioners but doesn’t have – was $19.2 billion as of last July 31.
Accounting Director Todd Moore told the board its pension fund gained $79 million from investment income through March 31 but the insurance fund lost more than $34 million. He expressed hope that things would improve by the end of the fiscal year.
The immediate prospects are not encouraging. The stock markets, which had been on a winning streak earlier in the year, have since drifted back into the doldrums, partly because of worries over the European debt crisis. Interim Executive Director William Thielen warned KRS assets are likely to diminish further if the market doesn’t turn around. Returns on investments were 2.69 percent in the pension fund and just 0.03 percent in the insurance fund. Even though millions of dollars have gone to “placement agents” who are supposed to give the retirement systems an inside track on special opportunities individual investors don’t often see, the results fall short of what’s needed to replace the money sent out every month to retirees.
Pension payments of $1.5 billion, plus $33 million in expenses, exceeded the $900 million in contributions and investment income during the first nine months of the fiscal year. Over the past two years, KRS has had to liquidate almost $1 billion in assets to meet its commitment to retirees. While the state legislature agreed in 2008 to step up its contributions with the goal of attaining full funding of the pension accounts by 2025, the monetary commitment is inadequate. The recent legislative session saw cost-of-living increases for retirees suspended for the next two years, just as they were for active workers.
Enhancement of retirement benefits was part of the state’s strategy to reduce its payroll and thus ease pressure on the general fund budget. The early-retirement incentives offered four years ago had the intended effect but now KRS needs more money, commensurate with the higher benefits that were authorized. Pensions are up $64 million and insurance payments have risen $4 million this fiscal year over the corresponding period last year.
Public workers and retirees can take comfort in the knowledge that KRS is legally bound to keep the pension checks coming. Government is virtually the last stand of old-fashioned “defined-benefit” pensions, as the private sector has mostly moved to “defined-contribution” plans which transfer the risks to individual workers.
Proposals to move public workers into 401(k) accounts have not prevailed in Kentucky, partly because state law protects existing personnel from having the pension rug yanked out from under them. Even if future hires were denied traditional pensions, state and local government would have to keep their promises to everyone now on the payroll, including part-time legislators whose separate plan is better funded than the accounts set aside for rank-and-file employees. Parallel pension and 401(k) systems would be costly.
Workers and lawmakers still seem to regard guaranteed pensions as the better deal – provided managers are competent and ethical enough to ensure adequate funding.