A report from financial planner and consultant PFM Group has painted a bleak picture of Kentucky’s pension plans, saying they “are among the worst funded in the nation,” and that “a status quo approach is simply untenable.”
The report said that without corrective action, the plans’ growing unfunded liabilities “not only threaten the retirement security of plan participants, but they are also eroding the fiscal stability of the state— recently ranked among the bottom five in the nation.”
PFM said that if Kentucky plans were subject to federal standards for single-employer private sector plans, all but the judicial and legislative plans would be defined as having a severe funding shortfall based on funded status of less than 60%. As a result, they would be required to freeze benefit accruals—even as the state plans use significantly less conservative discount rate and amortization period assumptions than used by private-sector plans.
“This latest report from PFM further confirms the need for urgency as we resolve Kentucky’s pension crisis,” said Kentucky Gov. Matt Bevin in a statement. “Change is necessary. Time is not our ally—we must act now to get our financial house in order. There is no other viable option.”
PFM said that the largest factors in the growth of Kentucky’s unfunded liability have been linked to the retirement systems’ actuarial assumptions and approach. It said the state’s practice of paying down existing unfunded liabilities on a basis set as a “level percentage of payroll” has had the most significant overall adverse dollar impact.
With the level percentage of payroll approach, payments to amortize unfunded liabilities are expected to increase over time, which effectively backloads the pay down of pension debts. This is done based on the idea that future payrolls will be higher, and have a greater capacity to help address the liabilities, according to PFM.
“In practice, this results in actuarially recommended employer contributions that are not sufficient to offset interest on the unfunded liability in the near-to-intermediate term, even if all other plan actuarial assumptions are met,” said the report. “For Kentucky’s systems, these actuarial shortfalls were compounded by actual payroll growth that was lower than assumed over the period, and actually negative for KERS-NH [Kentucky Employees Retirement System: Non-Hazardous employees].”
As a result, said PFM, contributions based on payroll fell far short of projections, which, in turn, produced additional unfunded amounts that were continually re-amortized out further into the future on the back-loaded schedule.
The report also blamed the funding shortfalls on the fact that the employer contributions for the KERS-NH, the Kentucky Employees Retirement System Hazardous employees plan (KERS-H), and State Police Retirement System (SPRS) plans are made every two years, when actuarially determined funding requirements increase annually.
“The continued severity of the Commonwealth’s remaining challenge requires further strong, corrective action. Kentucky’s remaining underfunding is acute and growing, threatening the solvency of the most underfunded plans, and incremental steps will not suffice to restore stability. The most-stressed plans have limited assets to withstand downturns and, under previous actuarial assumptions and funding schedules, would not have improved their funded status for over a decade.”