The latest idea for bailing out Kentucky’s underfunded public pension system is actually an old trick, familiar to the financially embarrassed. Anyone ever forced to rob Peter to pay Paul knows all about borrowing money to repay borrowed money. It’s a financial shell game.
And yet, The Courier-Journal reported a legislative task force on pension reform is about to consider a bond issue to reduce the $19 billion shortfall facing the Kentucky Retirement Systems’ accounts for state and county employees and the state police.
The tactic is not unlike those over-extended consumers resort to when they use one credit card to pay off another, or take out “consolidation” loans to minimize the number of their bills if not the amount owed. They’re inspired by Uncle Sam himself, who routinely needs loans just to keep the government operating. That’s why Congress comes to blows every year over raising the national debt ceiling. Our Chinese creditors are willing, so far, to accept American IOUs.
Public pension obligations are a debt, too. They represent money government owes to its own workers and retirees. Even though KRS isn’t writing cold checks, there’s reason to wonder how much longer business as usual can continue without putting more money in the accounts. The problem is that while workers have faithfully (or unavoidably) upheld their end of the bargain, having pension contributions withheld from their paychecks throughout their careers, the legislature failed to do its part. Politicians had other places they wanted to spend that money.
The state is honor bound – and legally bound – to pay its debt. But legislators should dissolve the promise they made themselves to raise their own pensions to obscene levels by taking state jobs topping off their legislative careers. They ought concentrate on setting aside the money for working people who’ve counted on it, and who’ve done what they could to make sure it was there.
The most direct way for lawmakers to settle up is to recognize the inadequacy of pension reform measures enacted four years ago and get serious about catching up on the contributions it skipped for too long. The legislature should take the money from its own budget just as the state has taken public workers’ share from their paychecks. Diverting the state portion into other projects amounted to an interest-free loan which must be paid.
Raising cash through a bond issue would turn the obligation into a loan with interest – interest the taxpayers would have to cover. Granted, there may be some benefits to that approach. David Draine, a researcher for the Pew Center on the States, which is helping the task force review its options, acknowledged some states have misused pension bonds but said they can be a legitimate way of refinancing public debt.
Not surprisingly, the American Federation of State, County and Municipal Employees supports a strategy that could buttress its members’ retirement security with borrowed money. The newspaper quoted Dan Doonan, a labor economist for AFSCME, as saying a $4.3 billion bond issue at 4 or 4.5 percent over 30 years could earn 7.75 percent if invested wisely by KRS. That’s a big if. Borrowing money in hopes of making more money is oftentimes an act of desperation.
“Easy” money should have taught this nation a lesson in the economic collapse of 2007. But the U.S. is still promoting low interest rates, good for borrowers though not for savers, while its own debts relentlessly pile up. The state’s pension obligations should be paid with honest cash, not the imaginary kind.