Bluegrass Beacon: Will there be a great pension freeze?

BluegrassBeaconLogoEditor’s note: The Bluegrass Beacon column is a weekly syndicated statewide newspaper column posted on the Bluegrass Institute website after being released to and published by newspapers statewide.

The famous Great Freeze occurred when some of the worst cold winter weather in America’s history befell the South at the end of the 19th century, destroying much of Florida’s citrus crop and the economic survival of entire communities along with it.

An interesting phenomenon occurred, however, during that winter, which stretched from late 1894 and into 1895 that may offer a hidden warning about the need to impose a freeze on benefit-accrual rates in Kentucky’s pension systems.

Florida’s Great Freeze actually was two freezes.

The first freeze in December 1894 failed to kill many mature trees and deceptively created conditions for new growth of produce during the warm months that followed, resulting in greater devastation when a harder freeze attacked months later in February 1895.

The effects were so devastating that fruit froze on trees, reducing Florida’s entire citrus production from 6 million boxes to 100,000 boxes annually.

It took five years for production to again break even the 1 million box mark.

Could it be that the $1.1 billion in additional pension funding in the current state budget – intended to stabilize Kentucky’s public-retirement plans pending an independent audit – could simply have provided a temporary warming period before the nation’s worst pension crisis deepens?

When independent consultants recently released a second report on the audit of the commonwealth’s pension plans, they claimed an additional $700 million annually – on top of the $2 billion being spent on the retirement systems this year – is needed to keep them from going belly-up.

Will such additional gobs of spending follow the frequent pattern of taxing, spending and pension-benefit increases which never come to pass but always come to stay?

For too long, Kentucky’s public-pension beneficiaries have been led to believe a higher benefit for any year of service must be applied to every year of service.

However, a defined benefit system – as Kentucky has and its government workers and retirees fight to keep – only works when there’s a direct relationship between benefits, funding and investment returns.

The current practice of keeping each of those isolated in silos has created an economic disaster in Kentucky.

Beneficiaries and their political soulmates in Frankfort must understand: healthy defined-benefit systems result in the size of accrued benefits fluctuating each year because benefits are directly connected to a host of other factors, including investment returns and payroll contributions.

It’s not realistic in such a system for benefits to always increase but never decrease, and for those increases to be applied retroactively and prospectively.

Yet this has been the scenario in Frankfort.

Benefits have been handed out arbitrarily by legislators while retirement systems’ boards are relegated to dealing with investments.

In the late 20th and early 21st century, sky-high returns on investments masked the problem. Flush with cash, politicians maintained this scheme with few consequences.

But then the economic weather turned bad, leaving taxpayers out in the cold.

The fact is, if Kentucky had abided by the rules of a defined-benefit system by funding pensions based on normal payroll costs and conservative investment assumptions, the resulting greater-than-assumed rates of return on investment funds during those fat years would have created surpluses for use in leaner times.

The only way Kentucky will survive this fiscal storm is by freezing benefit-accrual rates for all members of every system, and resetting the pension plans so that beginning January 1, benefits are awarded based on their relationship with investment returns and payroll contributions rather than the warm, but deceptive, weather of political palatability.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Read previous columns at He can be reached at and @bipps on Twitter.

Pension crisis on Louisville’s 970 WGTK

BIPPS Logo_pickMembers of the Bluegrass Institute Pension Reform Team Dr. William Smith and Bluegrass Institute president and CEO Jim Waters appeared on “The Rest of the News” with host Dr. Frank Simon. The Saturday interview on Louisville’s 970 WGTK addressed the looming pension crisis in the Commonwealth.

The pension crisis “threatens every aspect of our economy,” according to Waters, which is why the Bluegrass Institute has spent five years working on this issue. It is both a math problem and a policy problem.

Figuring out the cause of the $38 billion deficit is necessary to find a solution. As Waters pointed out, “For years, the politicians have used the pension system to curry political favor. And this has resulted in serious problems.” Ignoring the facts has lead policy makers to promise more benefit than the state can afford.

Dr. Smith expounded on the reason why the pension system has escalated this far: “Employees and employers fund their own benefits. All these systems have a full set of actuarially pre-funded benefits, but those benefits change over time.” Because of retroactively enhanced benefits, the pre-funded account is exhausted.

While the state did perform an audit on the pension system, they only went back to 2004. Dr. Smith for the Bluegrass Institute went back to the beginning of the system, 1958, in order to assess the situation.

Though the unfunded liability is daunting, the Bluegrass Institute believes Kentucky can turn its pension system around. Dr. Smith made it clear that the state cannot, and even should not, roll back the enhanced benefits, but should “stop the bleeding.” Moving forward, “assumptions need to be based on empirical data.” Benefits calculations must be grounded in reality.

Additionally, as the Bluegrass Institute has said for years, the system needs more transparency. While many Kentuckians receive a modest pension, there is corruption in the system. Some private entities crept onto the public pension payroll, such as the Commonwealth Credit Union.

Some of the solutions the Bluegrass Institute proposes include making the pension boards accountable for their behavior. The state needs to set up independent actuarial analyses to assess the system. Crucially, the benefit factors must be set at a level the state can actually fund.

More from #kyga17: Pension transparency bills book-ended busy session

Back-pledge-iconto-back pension transparency bills – Senate Bills 2 and 3 – provided strong bookends for a busy 2017 session of the Kentucky General Assembly.

Along with passage during the session’s historic first week of Sen. Chris McDaniel’s SB 3, which makes legislators’ pension benefits subject to open-records requests – an issue pushed by the Bluegrass Institute’s Legislative Pension Transparency Pledge during last year’s election – Sen. Joe Bowen’s SB 2 reorganizes the Kentucky Retirement Systems Board and imposes stricter guidelines for financial disclosures and requires greater investment experience to serve on the retirement systems’ boards.

The bill also requires Senate confirmation for board appointments to the commonwealth’s three retirement systems – the Kentucky Retirement System (KRS), Kentucky Teachers’ Retirement System (KTRS) and the Judicial Retirement System (which includes legislators’ pensions) – as well mandating uniform methods of reporting and disclosing investment fees and requiring the chair or vice chair of the House budget committee to join the Public Pension Oversight Board.

Bowen indicated in comments to reporters that an outgrowth of SB 2 will be rejecting “this notion that a fiscal impact of any board action is undefinable” while emphasizing “there are fiscal impacts on every decision made.”

The fact that both Senate Bills 2 and 3 received overwhelming support in the Kentucky House of Representative by votes of 95-1 and 99-0, respectively, indicates that lawmakers and their constituents have an appetite to know – and do – more about what’s happening with taxpayer dollars that previously disappeared into the deep dark hole of the state’s secretive and costly public-pension system.

Bluegrass Beacon: Giving unaffordable pension benefits an economically fatal practice

BluegrassBeaconLogoLike Bernie Sanders refuses to acknowledge socialism’s devastating impact on previously prosperous Venezuela, supporters of Kentucky’s pension status quo – who seem largely illiterate about how defined-benefit systems work – refuse to concede that inadequate funding is not the primary cause of the commonwealth’s pension woes.

If it was, then why is the County Employees’ Retirement System (CERS) only around 60-percent funded despite making 100 percent of its actuarially required contributions through the years?

It’s because CERS hasn’t escaped suffering the same malady – awarding and enhancing benefits in ways neither taxpayers can afford nor the system was designed to support – now infecting all state retirement plans, and which cannot be ignored by any policymaker wanting to claim the mantle of serious pension reform.

CERS through the years not only raised the benefit factor – which, along with assumed rates of return on investments and contributions of employees and their government-employer agencies, determine the amount beneficiaries receive when they retire – but also has applied those raises to previous years.

While such benefit increases make recipients feel good about voting for the good-ole-boy politician who brought home that bacon, it’s a fatal tactic if Kentucky wants to continue providing its employees with defined-benefit plans.

For example, a plan member who entered the CERS on July 1, 1958, when it was established by the legislature, was awarded an initial benefit factor of 1.25 percent.

Far from being an arbitrary figure, that benefit factor, which is the percentage of final average salary beneficiaries will receive for that year of service, was based on certain conservative assumptions regarding what the system’s investments would earn and the employees and employers would contribute.

Flash forward to 1990, when the benefit factor for CERS members, which had risen through the years, reached 2.2 percent.

Such a benefit factor in and of itself would not have been a problem if it had been applied just for that year when investment returns had risen and the plan could cover it.

However, system bureaucrats applied that benefit retroactively, so that a beneficiary who entered the plan in 1958 and retired in 1990 was awarded a pension amount based on a 2.2 percent benefit factor for all those years, even though the amount received by beneficiaries is horizontal and not vertical in a defined-benefit plan.

Huge unfunded pension liabilities, anyone?

If, in fact, the state’s retirement systems would have followed the rules by awarding benefits for each year based on the assumptions and contributions for that year and not forced higher benefits retroactively, the commonwealth would have a surplus rather than a $40 billion (at least) unfunded liability.

I have no doubt about the happiness experienced by the beneficiary who retired in 1990 with a pension check that was 42-percent higher than the one the system was designed and funded to support.

But I seriously doubt taxpayers, who carry most of the risk but have the least say of all stakeholders, enjoy anywhere near the same level of bliss in knowing that the pension check received by that retiree is nearly 73 percent of his final average salary even though the system was designed and funded to support a 51-percent benefit.

While higher-than-expected returns on investments masked for years such incompetency or shenanigans – you pick – the consequences are catching up with CERS and the other public pension plans.

Separating CERS from the Kentucky Retirement Systems (KRS) – about which there has been much buzz – is functionally the right move. But doing so will not come close to abating our pension crisis.

In fact, before being allowed to leave the KRS, policymakers must demand that CERS also end this practice of retroactively awarding enhanced benefits.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Read previous columns at He can be reached at and @bipps on Twitter.

News Release: Bluegrass Institute Pension Reform Team responds to PFM pension report

BIPPS Logo_pick

For Immediate Release: Tuesday, May 23, 2017                                                                                         

(FRANKFORT, Ky.) – The Bluegrass Institute Pension Reform Team (BIPRT) attended the Public Pension Oversight Board (PPOB) meeting on Monday to hear comments from PFM, the consultant evaluating the state’s retirement systems, regarding its latest report on the audit of Kentucky’s public benefits plans.

It is the belief of the BIPRT that the primary cause of Kentucky’s pension crisis is the benefit structure for employees and retirees. Specifically, retroactive benefit enhancements and unfunded benefits were granted to employees without the use of an actuarial analysis to determine the costs.

For this reason, we were disappointed to learn that PFM was asked to only analyze pension data back to 2005. This limited view of the data precluded PFM from incorporating the impact of large unfunded benefit enhancements granted to employees in the 1980s and 1990s, as we have well documented.

Sen. Jimmy Higdon, R- Lebanon, a member of the PPOB, correctly asked the actuarial representative from PFM about the work of the Bluegrass Institute and the absence of the impact of the benefit enhancements in their report. The response from PFM was that at least 20 years of data would have been needed to fully account for those costs.

If the commonwealth is going to enact real reform, we need to correctly identify the causes of our current dilemma. If we blame lack of portfolio performance, fees paid to external asset managers and lack of funding from Frankfort, we will be missing the true cause of the crisis.

We did find interesting the data presented by PFM comparing the benefits received by Kentucky teachers and public employees to comparable public and private sector employees in surrounding states. As one might expect, Kentucky employees receive, on average, much higher benefits.

The BIPRT is not against defined benefit retirement plans. If a defined benefit plan is to be implemented, however, certain rules must be followed. For decades, Kentucky broke these rules repeatedly leading to our crises today.

Download this detailed list of recommendations offered by the Bluegrass Institute to address this crisis and return our state to economic health and vitality.

For more information, please contact the  Bluegrass Institute Pension Reform Team at or Jim Waters at, 859.444.5630 ext. 102 (office) or 270.320.4376 (cell).


BIPPS’ pension testimony: It’s the benefit structure that’s the problem

BIPRT TESTIFIES @ MARCH PPOB MEETINGThe Bluegrass Institute Pension Reform Team offered its presentation “Sound Solutions for Kentucky’s Pension Crisis” at a recent meeting of the state’s Public Pension Oversight Board.

Dr.  William Smith told board members that addressing Kentucky’s public-retirement crisis is key to understanding and confronting the structural imbalance of the benefits system.


Bluegrass Institute Board member Aaron Ammerman, an investment adviser in Lexington, testified that while addressing pension benefits is a difficult topic fraught with emotion, it must be done in order to pursue true reform “with real teeth to it.”

He also told board members that while the Bluegrass Institute is not opposed to keeping a defined benefit system for state retirees, the rules for maintaining a properly funded pension system have not been followed in Kentucky like they have in other states.

Ammerman focused on a couple of the most-important rules.


The Bluegrass Pension Reform Team made a presentation on Kentucky’s troubled pension system at a recent meeting of Take Back Kentucky in Elizabethtown. Click here to download PowerPoint slides from that presentation.


News Release: Confronting pension crisis calls for reforming benefits structure

For Immediate Release: Monday, March 27, 2017  BIPPS LOGO

(FRANKFORT, Ky) – While most of the recent discussion regarding public-pension reform has focused on funding levels and investment returns, Bluegrass Institute Pension Reform Team (BIPRT) member Aaron Ammerman told the state’s Public Pension Oversight Board today that the retirement systems’ benefit structure is “the most significant contributing factor to our crises today.”

The commonwealth faces more than $38 billion in pension debt with the state employee nonhazardous fund – the Kentucky Retirement System’s largest plan – sliding toward insolvency with a current funding level of only 16 percent.

“Retroactive benefit enhancements always wreak havoc on a defined benefit plan, and that is what happened in Kentucky,” Ammerman, a financial advisor and member of the Bluegrass Institute Board of Directors, said in prepared comments.

The team’s testimony focused on two practices that have contributed significantly to Kentucky’s pension hole becoming deeper over time: the practice of awarding benefits retroactively and a failure by legislators to obtain a cost analysis prior to enhancing benefits.

Such practices reflect repeated violations of the Kentucky Constitution and state statute.

“The Bluegrass Institute has reviewed dozens of benefit enhancements granted to employees back to the 1980s and found only one such cost analysis,” Ammerman said. “Legislators were enhancing benefits without even the slightest idea about the increased costs that would be incurred to the system and, therefore, the taxpayers of Kentucky.”

He offered an example of a currently employed 20-year state employee who has faithfully contributed his required share into the system for a promised future benefit and which, as long as the state fulfills its funding obligation and assumed investment returns are met, this employee’s pension will be fully funded in retirement.

“If, however, this employee’s promised benefits were increased just before retirement, all of the contributions and calculations over the previous 20 years would be inadequate to fund that higher retirement benefit,” Ammerman said.

BIPRT member Dr. William Smith, a Madisonville dermatologist who served on Gov. Matt Bevin’s pension reform transition team, called on lawmakers to practice “actuarial integrity” when making future decisions regarding benefits by ensuring that “the benefits defined by the legislature and actuarially prefunded with normal cost payroll contributions are the same benefits received by plan members upon retirement.”

Along with offering specific recommendations for both the Kentucky Retirement Systems and the Teachers’ Retirement System, Smith offered four proposals for all systems:

  • Enact a constitutional amendment prohibiting retroactive benefit enhancements.
  • Provide complete transparency for all benefits received by every retiree and how these benefits were determined.
  • Ensure the governance and board representation of each plan reflects the risk assumed by each stakeholder, noting that “taxpayers need to properly and proportionately be represented in each plan.”
  • If legitimate reform efforts prove unsuccessful, impose a “hard freeze” on current benefits and establish a new system.

To reach Bluegrass Institute Pension Reform Team members for comment, contact Bluegrass Institute president Jim Waters @ 270.320.4376.

News Release – Pension transparency: Elected officials who kept their word

For Immediate Release: Friday, January 13, 2017

Contact: Jim Waters @ 859.444-5630 (office) 270.320.4376 (cell) 

(FRANKFORT, Ky.) — Less than a week into this year’s legislative session, Kentucky’s representatives delivered an enormous win for open and transparent government. Backed by the support of an overwhelming bipartisan coalition, the state House of Representatives voted 95-1 to pass the Legislative Pension Transparency Bill (Senate Bill 3).

The bill gives voters access to details about their elected representatives’ pension plans, adding a crucial layer of accountability to a taxpayer-funded public-pension system taken advantage of in the past.

Spearheading the effort to pass this legislation was Sen. Chris McDaniel, R-Taylor Mill, the bill’s primary sponsor and public accountability advocate. For more than five years, Sen. McDaniel has worked tirelessly to make this reform a reality, despite being stymied year after year by obstructionists in the House.

“I am thankful that legislative pension transparency is, after more than five years of fighting, a reality in Kentucky,” concluded Sen. McDaniel. “The public deserves to know the potential financial motivations of those they elect and this law ensures that they will have that knowledge.”

This important reform would not have been possible without the support of the public servants who followed through on their commitments to making their own pension benefits open and accessible to those they serve.

“Thank you to all the signers of our Legislative Pension System Transparency Pledge from both sides of the political aisle who kept their word by voting for SB 3,” added Bluegrass Institute President Jim Waters. “Their commitment to transparency is an important step toward the kind of accountability needed to address a public-pension crisis which threatens Kentucky’s entire economy.”

Senate pledge signers who voted for SB 3:

Danny Carroll Stephen Meredith C.B. Embry, Jr
Joe Bowen David P. Givens Jimmy Higdon
Damon Thayer Larry West Tom Buford
Chris McDaniel Ernie Harris Mike Wilson


House pledge signers who voted for SB 3:

Steven Rudy Alan Gentry Richard Heath
Ken Fleming James Tipton Lynn Bechler
Daniel Elliott Kenny Imes Kim King
Walker Thomas Joseph M. Fischer Dean Schamore
David Osborne Sal Santoro Robert “Robby” Mills
Brian Linder D. J. Johnson Phillip Pratt
Melinda Gibbons Prunty Adam Koenig Tim Moore
Michael Meredith Donna Mayfield Jody Richards
Bart Rowland Mark Hart Steve Riley
C. Wesley Morgan William Reed Robert J. Benvenuti III
Jim DuPlessis Tim Couch Russell Webber
Gary “Toby” Herald Phil Moffett John C. Blanton
Jason Nemes Jerry T. Miller Larry D. Brown
William Wells Danny R. Bentley Stan Lee
Kevin D. Bratcher Diane St. Onge

For more information, please contact Jim Waters at, 859.444.5630 (office) or 270.320.4376 (cell).

Pension python squeezing Kentucky’s economy

futureshocksquareReporter John Cheves covers the state’s retirement systems’ crisis in Tuesday’s Lexington Herald-Leader, citing inadequate funding, weak investment returns and “unrealistic assumptions” regarding public employees and their benefits as the primary contributing factors to Kentucky’s public pension plight.

Two of this stool’s three legs have received a lion’s share of the attention by policymakers.

It is, after all, more politically palatable to talk incessantly about funding and weak investment returns — as most bureaucrats who run these systems and their political pals in the Legislature do — than to confront the primary contributor to the water seeping out of Kentucky’s pension bathtub: costly and unsustainable benefits.

Dr. William Smith, a member of the Bluegrass Institute Pension Reform Team, explains that retroactive benefit enhancements are the primary culprit.

“The funding deficits for KRS (Kentucky Retirement Systems) and KTRS (Kentucky Teachers’ Retirement System) were created by retroactively enhancing benefits previously endowed with an actuarial reserve,” Smith said. “This creates a disparity between the value of reserves and the value of future benefit obligations, converting a relatively innocuous actuarial reserve system into a quasi-pay-as-you-go Ponzi scheme. In other words, benefits are actuarially funded when they are earned, and then arbitrarily enhanced at a later date.”

For example, a County Employees Retirement System (CERS) non-hazardous member hired in 1958 — when the “benefit factor” was 1.25 percent — who retired in 1991 when the benefit factor had increased almost a full percentage point to 2.2 percent, gets an unearned windfall of thousands of dollars during his lifetime in the form of retirement checks that apply the 2.2 percent benefit factor to every year of service — going all the way back to 1958.

By awarding this retiree benefits at the higher level — not just for the years properly funded with “normal cost” payroll contributions, but for every year of service — we have created a pension python that’s squeezing Kentucky’s entire economy using “unrealistic assumptions.”

“If you think of it as a bathtub, the water is going down,” KRS interim executive director David Eager told the Public Pension Oversight Board during its monthly meeting on Monday.

“We are where we are, and we’re going to work to get our way out of it,” Eager said.

However, Kentucky will not “work our way out of it” unless the legislature deals with the politically popular — but illegal and unconstitutional — retroactive benefit enhancements.

Click here for more on the Bluegrass Institute’s pension reform research and ideas.

Bluegrass Beacon: Now is not the time for timidity

BluegrassBeaconLogoHardworking Americans labeled “deplorables” by Hillary Clinton, Donald J. Trump’s corrupt and elitist opponent, stormed the Establishment’s Bastille on Tuesday and handed the populist real-estate mogul the keys to the White House in an improbable finish to an election that strained our political system, causing it to creak and groan but ultimately hold.

Voters both in Kentucky and nationally also took a reprieve from divided government, which, when conducted in good faith, serves taxpayers well by placing imbedded checks and balances against increasing government’s size and cost.

However, divided government as defined and demonstrated by Kentucky House Speaker Greg Stumbo, D-Prestonsburg, who was defeated in his re-election bid in the 95th District, means using political power to obstruct any kind of meaningful legislative process and debate – much less movement – on vital economic, education and transparency reforms.

Stumbo, who first came to the legislature in 1980 and was Kentucky Attorney General from 2003 to 2007, gives new meaning to the term “self-serving politician.”

In terms of policy obstruction, it may indeed be “good riddance” as Gov. Matt Bevin wished the double-dipping Prestonsburg Democrat during a victory lap filled with radio interviews the day after the election.

However, taxpayers will be forced to send Stumbo hundreds of thousands, even millions, of dollars in pension payments for years to come.

The longtime eastern Kentucky representative will ride off into retirement sunset with an estimated $1.24 million pension bonus –not including cost-of-living increases – as the result of House Bill 299 in 2005, which spikes lawmakers’ pensions by allowing the three highest years of salary in any government position to determine the size of legislative retirement checks.

Instead of Stumbo’s legislative retirement being based on his “high three” salary while occupying a General Assembly seat, for which he was compensated around $40,000 annually, it will be determined using his nearly six-figure salary as attorney general.

Also, the fact that he “maxed out” his legislative pension at 24 years and two months “made him eligible to draw 100 percent of his $98,824 AG salary” and “triggered the 1998 law that automatically enrolled him in the Kentucky Employees’ Retirement System to begin a second legislative pension,” the late Lowell Reese wrote in a Bluegrass Institute report entitled Future Shock: Kentucky Politicians’ Opulent Pensions Have Become a Modern-Day Gold Rush.

Still, Stumbo’s exit from Frankfort and the Republicans’ takeover of the South’s only remaining state House of Representatives under Democratic control, is a positively consequential political victory.

It sets up the very real possibility that the Kentucky General Assembly will become the nation’s most conservative state legislature.

Yet while Republicans won this battle, they must not be timid and halting, as some establishment-type politicos started advising even before the lights were turned off at the polls on Tuesday.

Instead, this new legislature must immediately push forward and take new ground.

There certainly was nothing timid about either Trump’s election or Kentucky voters’ decision to give Republicans a historic 17-seat swing in the state House, which amounts not just to a majority – which would have pleased GOP leaders heading into Tuesday’s election – but to a 64-36 supermajority.

Evidence eludes me of any similar previous developments in favor of Republicans in Kentucky General Assembly history.

If Washington can be considering a special session of Congress to deal with the despised Obamacare fiasco, then there’s no reason why we shouldn’t expect to see bills filed in Frankfort posthaste to bring long-awaited increased transparency, right-to-work, school choice and pension, tax, regulatory and Medicaid reforms to the Bluegrass State.

What should not elude the new House majority is that Trump’s election shows a growing impatience among voters, who don’t at all seem timid about making wholesale changes when their interests aren’t acted upon prudently and promptly.

Jim Waters is president of the Bluegrass Institute; Kentucky’s free-market think tank. Reach him at Read previously published columns at