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August 31, 2010

Another report warns state pension fund on shaky ground

Anonymous The Independent The Daily Independent Tue Aug 31, 2010, 06:00 AM EDT

ASHLAND — Another independent report shows the Kentucky Employees Retirement System that guarantees benefits to some 84,000 current and retired state employees is on shaky financial ground but still able to meet its financial obligations. The report by the Washington-based Center for State and Local Government Excellence gives yet another reason for legislators to take a closer look at shoring up the retirement fund, including making more changes in the retirement benefits offered future state workers, while still keeping the promises made to current state workers and retiree.

The report found the state’s largest retirement fund faces a $6 billion shortfall. In addition, administrators currently cash out investments each month to pay benefits. Josh Franzel, vice president of research at the nonprofit center, told The Courier-Journal that the system faces one of the most difficult funding situations in the nation, with about 40 percent of the assets it needs to cover benefits.

Kentucky Retirement Systems director Mike Burnside says the report wasn’t a surprise. Nor should it surprise legislators. For years, they have known that the pensions and health care insurance promised state retirees were too costly to sustain as more state workers retired — many of them in their early 50s or younger — and retirees lived longer. But only recently have legislators begun to address the problem by reducing the retirement benefits of new state workers.

To be sure, many of the current problems with the retirement fund are a result of a sharp decrease in the amount of income from investments, and that income surely will begin to increase as the nation’s economy improves. But to assume that the funding shortfall can be solved by simply improving the fund’s return on investments would be naive.

There is another, more disturbing problem that has led to the current woes. Since 2004, full contributions to the fund recommended by actuaries have not been made.

Burnside said a 2008 pension reform bill, which reduced benefits for new hires, set up a funding schedule that should prevent the system from going broke. Projections show that in another decade, the system should begin making its way toward full funding.

“Fifteen years from now, they will have reached the level where they are fully funding the program (each year),” Burnside said. “The bad news is that it is going to take 15 years to get there.”

That assumes that future governors and lawmakers can increase the funding while struggling with the effects of a weak economy. There’s no guarantee of that. With legislators struggling to balance the state budget, they have developed a habit of reducing payments to the retirement fund for the simple reason that there is no current shartage of funds to pay out benefits.

The funding schedule likely will require at least a 2 percent annual increase in the state’s contribution, the consultant’s report said. Budget Director Mary Lassiter said that would be difficult, but not impossible to meet.

“I think we’ll do it because I think we realize we’ll have to do it,” said Rep. Mike Cherry, a Princeton Democrat and chairman of the House State Government Committee. “It’s going to be painful.”

Cherry may be right, but we will have to see it to believe it.

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