Ky. legislature must fund pensions; Weak revenue no excuse for dodging obligation

Ky. legislature must fund pensions; Weak revenue no excuse for dodging obligation, again
January 19, 2014

Ky. legislature must fund pensions; Weak revenue no excuse for dodging obligation, again
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On the closing day of the 2013 General Assembly, state lawmakers passed a “pension reform” bill and a companion measure expected to generate about $100 million annually in new revenue.

Ostensibly, the extra money will allow legislators to fulfill the commitment made in the reform part of the package to fully fund the state’s share of the actuarially recommended contribution (ARC) to the beleaguered Kentucky Retirement Systems starting with the fiscal year that begins July 1, 2014.

Unfortunately, this reform and revenue package contained no direct linkage between the commitment and the money.

Instead of creating a dedicated revenue stream for the pension fund, lawmakers chose to let the new tax dollars go into the General Fund and rely on their (and their successors’) integrity to live up to the commitment to fully fund the ARC.

The integrity of current legislators, the ones who made the commitment not so many months ago, will be challenged as they get to work on the budget Gov. Steve Beshear will propose in an address to a joint session of the House and Senate Tuesday night.

And more than 20 years of history suggests they may try to avoid fulfilling their commitment to fund the ARC.

The “defined benefits” pension plan of the past wasn’t the main culprit in creating billions of dollars in unfunded liabilities for the state’s retirement systems (more than $8 billion for the main plan covering state workers and retirees). And the reform’s hybrid mix of “defined benefits” and “defined contributions” (heavy on the contributions side) covering state and local government employees hired after Jan. 1, 2014 will not make the systems whole again.

Kentucky’s pension plans are in the hole they are in today largely because lawmakers, beginning more than 20 years ago, failed to fully fund the ARC year after year after year, by a collective total of $3 billion. That’s $3 billion in lost investment potential and years of lost earnings from those investments.

Lawmakers got addicted to this habit in good economic years, when shorting pension plans by small increments so they could put the money to “more important uses” didn’t cause many problems.

But they couldn’t shake the addiction in lean times, when balancing the budget without increasing taxes prompted them to underfund the ARC by hundreds of millions of dollars annually and create huge unfunded liability problems.

Times remain lean. The biennial budget lawmakers will take up won’t have a whole lot more money than the budget the state is living with now. And the demands, including Beshear’s vow to restore some previously cut education funding, will be great.

So, the temptation for lawmakers to abandon their 2013 commitment and once again succumb to their decades-old habit of robbing state pension plans to pay for other programs and services will also be great. They must not do so. They must shake their addiction and fully fund the ARC, in the next biennial budget and all the budgets to come.

If they do not, if they break another promise and shirk another responsibility with another exercise in fiscal insanity, they all need to be sent home in November.

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