Bluegrass Beacon: Legislators boost, judge busts liberty

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.


This edition of “Liberty Boosters and Busters” is brought to you by reasonable Kentuckians who reject racism, bigotry and censorship with every fiber of their freedom-loving beings.

Liberty Booster: The attorney general’s office decided in favor of the Bluegrass Institute Center for Open Government in its appeal challenging a Jefferson County school board meeting at a private law firm on the 28th floor of an office building in downtown Louisville on a Sunday afternoon in April.

Assistant Attorney General James Herrick ruled the meeting – held to discuss applicants for the district’s then-vacant interim superintendent’s position – violated the law requiring public agencies to conduct meetings “at specified times and places convenient to the public.”

It’s also likely the building was locked that day as it was on a subsequent Sunday when some of my colleagues at the institute tried to enter – an experience Herrick referenced in his ruling.

Liberty Buster: U.S. District Judge Danny Reeves allowed Eric Conn, the eastern Kentucky lawyer who pleaded guilty to engineering one of history’s largest Social Security fraud campaigns, to remain free on home incarceration – despite warnings against doing so by an FBI agent and witnesses claiming Conn had crossed 140 borders in eight years and had vowed to run before going to jail.

Conn ran, and likely is now sipping martinis and hanging out on the beach of some country with women for whom he previously claimed to have provided “English lessons,” and with whom the U.S. has no extradition treaty.

Yet Reeves, the judge, forced Sam Girod, an Amish farmer from rural Bath County, to remain in jail for months without bond while awaiting trial before handing him a harsh six-year prison sentence for the “crime” of mislabeling homemade herbal skin salves containing such dangerous (sarcasm dripping here) ingredients as chickweed and peppermint and not acquiescing to the Food and Drug Administration’s ideological thuggery.

Prosecutors, gung-ho though they were to destroy this man and ridicule his way of life, failed to produce a single victim harmed by Girod’s concoctions.

Yet Reeves permitted Conn, a wealthy white-collar criminal whose fraud resulted in 1,500 people losing their benefits and at least one person committing suicide, to remain out of jail.

He also handed a weak six-month sentence to Charlie Andrus, a former chief regional Social Security judge who pleaded guilty to conspiring with Conn to retaliate against the whistleblower in the campaign defrauding the program of $550 million.

Reeves in an unrelated case allowed a former University of Kentucky employee who swindled the school out of $200,000 to avoid prison altogether with a sentence of probation, calling it “sufficient punishment.”

Yet farmer Girod, who’s harmed no one and had no criminal record when his nightmare began, languishes in a Pennsylvania prison more than 400 miles away from his home.

An appeals-court reversal or presidential pardon would go a long way toward highlighting the insufficiency of this judge’s contemptible inconsistency.

Liberty Boosters: Gov. Bevin and Frankfort’s Republican legislative leaders for planning to tackle pension and tax reforms separately.

Claims that tax reform is critical to generating revenue wrongly blame Kentucky’s public pension woes on insufficient support from taxpayers or poor returns on investments or, at the very least, station the cart before the horse.

The retirement systems’ funding levels continue to fall even though the commonwealth’s current budget poured an additional $1.2 billion into them.

Also, investment returns for the past 30 years have, on average, exceeded more than 9 percent in the Kentucky Retirement Systems and 8 percent in the Teachers’ Retirement Systems.

At the core of the pension crisis is a structural weakness rather than lack of dollars.

Stop the digging by fixing the systems’ benefit structures.

Then, looking for more dirt to fill the hole becomes an exercise in productivity rather than futility.

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: Pension audit goes beyond the ‘politically palatable’


BIPPS LOGOFor Immediate Release: Tuesday, August 29, 2017

(FRANKFORT, Ky.) — The presentation of the final phase of an audit of Kentucky’s public pension plans at Monday’s meeting of the Public Pension Oversight Board confirms what the Bluegrass Institute has said all along: changes in the way benefits are awarded must occur immediately.

“For years and even decades, Frankfort has distracted citizens and taxpayers from the real problem of an imbalanced system with unsustainable, arbitrary benefits with charges of inadequate funding and insufficient returns on invested funds,” Bluegrass Institute president and CEO Jim Waters said today in a statement responding to the much-anticipated release of the final phase of PFM’s audit.

“Any responsible evaluation of funding and returns must acknowledge that funding has been far beyond expectations and investment returns have been healthy and exceeded assumed rates in many of the past 30 years, which is the only proper way to view these issues in a defined benefit pension system like Kentucky’s,” Waters said.

He commended Gov. Matt Bevin and legislative leaders for being willing to open the door to a serious discussion about retirement benefits, which often has been considered the third rail of politics.

“It appears that with today’s presentation, we at least are moving beyond a limited view of what’s simply politically palatable in discussions about the commonwealth’s pension crisis – arguably the nation’s most severe – toward meaningful changes that consider how the state can provide benefits to its workers without threatening Kentucky’s entire economy,” Waters said.

The Bluegrass Institute Pension Reform Team has been presenting “Sound Solutions for Kentucky’s Pension Crisis,” its description of – and solution to – this fiscal nightmare to groups and policymakers statewide.

While the Bluegrass Institute will review PFM’s recommendations in the days ahead, rest assured that big-government types will try and take advantage of this opportunity to target hard-working Kentuckians with tax increases while fighting any proposal for change.

“The status quo is simply unacceptable, unsustainable and unfair to future generations of Kentucky who will bear the brunt of debt and lack of opportunity if we fail to reform the structure of benefits and start to make real progress in reducing our unfunded liability,” Waters said.

The Bluegrass Institute stands ready to work with any and all policymakers who want to bring substantial and meaningful reform to Kentucky’s pension system.

For more information or comment, please contact Jim Waters at jwaters@freedomkentucky.com859.444.5630 ext. 102 (office) or 270.320.4376 (cell).



Kentucky’s pension crisis: The wrong question

20111129beacon2Editor’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.

It’s apparent from KET’s Kentucky Tonight forum on the public-pension crisis last night and legislators’ comments about the issue in Sunday’s Madisonville Messenger that substantially addressing the systems’ combined $40 billion shortfall will require overcoming hurdles related a general lack of knowledge about how defined benefit pension systems work and the lack of resolve to address future benefit accrual rates for current beneficiaries.

Unfortunately, Kentucky’s pension beneficiaries have been misled to believe that the highest benefit they receive for any year of service applies to any and every year they work. However, the level of benefits in a defined benefit system like Kentucky’s are established annually based on assumptions made by the actuaries for each year.

These actuarial assumptions – including investment returns, payroll growth, inflation, longevity, retirement age and attrition rates – are considered annually to both determine the level of benefits for that year and to create the reserve needed to ensure the funds are available to award that year’s benefit to beneficiaries when they retire. (The actual amount of beneficiaries’ pension checks are determined by adding the benefit factor – the percentage of final average salary each year – usually between 1.5 percent and 3 percent – for all years of service.)

Benefits in such a system are synchronized and therefore must, in a properly run defined benefit system, fluctuate according to what the system can properly pre-fund – a determination made by the actuarial assumptions.

The problem here is that the benefits in Kentucky’s retirement plans have always increased but never decreased, which is not the way a defined benefit pension system works but it is the way you can create huge shortfalls.

So, the wrong question here is: Are you going to cut future pension benefits for current employees?

It’s the wrong question because no future benefits have yet been established since, in a defined-benefit system like Kentucky’s, the level of benefits are determined annually based on each year’s assumptions.

The right question is: If a defined benefit system like Kentucky’s is designed to avoid unfunded liabilities, why do we have a $40 billion unfunded liability and what must we do about it?

Glad you asked!

We must first stop the digging, which involves understanding how this liability was created and avoiding such practices in the future.

Quite simply, the liability in each of Kentucky’s major retirement plans exists because after the actuaries determined what the annual benefit levels should be – and after an actuarial reserve was created to ensure benefits would be funded at those levels – some politician in some future year decided to increase the benefit and apply those increases to previous years.

This disrupted the actuarial reserve already created for those previous years to ensure funding for benefits at the proper, actuarially determined level would be adequate and available. Such retroactive benefit enhancements are why the County Employees Retirement System (CERS), which has always paid 100 percent of their actuarially required contribution (ARC) is only 60 percent funded.

Putting the system back on track by ending the practice of both retroactive (past) and prospective (future) benefit enhancements and ensuring that benefits are properly awarded and not spiked in future years is not “cutting” benefits, even if the actuarially determined benefit winds up being lower because of actuarial assumptions.

Rather, it’s the responsible thing to do – if we want to have sustainable retirement systems, something I’m sure the beneficiaries might be interested in, as well. Once these benefit structures are addressed, then we can begin to find additional dollars and begin filling in Kentucky’s pension hole.

Legislative action related to the benefit structures of the systems in recent years has amounted primarily to some adjustments for new hires even though nervous policymakers desperate to be seen as doing something about the problem but not wanting to upset the apple cart have spun these meek moves as major reforms.

They certainly have done little to address Kentucky’s second-worst-in-the-nation unfunded pension liability. Meanwhile, the funding levels of the systems continue to drop toward insolvency.

If Frankfort takes the meek approach again and fails to address the benefit accrual rates of the state’s pension system, it will have failed to learn from history and will put the commonwealth’s entire pension system in peril.

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.

Bluegrass Beacon: Actuarial integrity key to repairing pension bridge

20111129beacon2Editor’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.

Any retiree who worked as an engineer in building and repairing Kentucky’s buildings, highways and bridges should concur with a hearty “Amen!” for structural integrity, which indicates the ability of a structure to withstand a certain amount of intended weight without failing, fracturing or otherwise weakening.

If Kentucky is to fix its pension mess, then “actuarial integrity” must become to its defined-benefit system what structural integrity is to its physical infrastructure.

The new Abraham Lincoln Bridge connecting Louisville with Jeffersonville, Indiana, has a $1.1 billion price tag, a weight-bearing capacity of nearly 5,000 pounds per linear foot and is designed to serve that load for at least the next 75 years.

It was built only after determining the structure’s cost and reaching an agreement between the two states that its beneficiaries cover a substantial portion of the needed funding via tolls.

When the Kentucky Employees’ Retirement System was established in 1956, it was created as a linear system whereby actuaries determine each year’s benefit levels based on several factors, including anticipated investment returns, salary and payroll-growth rates, life expectancy, retirement age and attrition.

When beneficiaries reached retirement, their pension payments would come from a fully funded, actuarially sound system.

However, by allowing the load placed on Kentucky’s retirement bridge to increase by raising benefits established and funded in previous years, actuaries – pension-systems’ engineers, if you will – have compromised the integrity of our entire retirement system.

If engineers want to increase the weight-bearing capacity on the Lincoln Bridge to, say, 10,000 pounds per linear foot, they would complete construction of more lanes or cable before accepting the increased weight.

Allowing the increased weight without expanding capacity would make the bridge structurally deficient and dangerous to all who dare cross it.

Similarly, retirees and current beneficiaries in the commonwealth’s pension plans increasingly rely on a structurally deficient system to provide for them the rest of their lives.

A main contributing factor to this structure’s weakness is the poor performance of actuaries who work for Kentucky’s retirement systems and have given their wink-and-nod blessing to increasing the weight on our pension bridge without a corresponding expansion of its capacity critical for handling the heavier load.

Legislators too often have enabled this to happen without the proper understanding, oversight and questioning critical to protecting their constituents who pay for such shenanigans.

Actuaries know that ensuring the long-term sustainability of the systems requires strict adherence to the original benefits that were fully funded with normal cost payroll contributions.

Enriching these benefits after the fact may represent the worst assumption of all: future employers will have unlimited funding to pay the principal and interest required to fund unaffordable and retroactive benefit enrichments.

But who wants to bear such bad news to the folks who sign your checks, even if not doing so ends up being a large contributing factor to an entire state’s growing pension crisis?

The impact of an outside audit by the PFM Group on addressing the pension plans’ structural weakness likely will be as limited as the scope of its review.

By evaluating the systems only back to 2004, PFM’s audit simply cannot include the impact that increasing benefits and then applying those benefits retroactively in each of Kentucky’s retirement plans for years has exerted on weakening the integrity of our pension systems.

We’re still waiting on PFM’s final recommendations.

Perhaps the firm’s auditors will offer meaningful help in returning our retirement system to one based on actuarial integrity rather than debt, unfunded liabilities and unreasonable expectations by beneficiaries.

To do any less would be the equivalent of giving their own wink-and-nod – consciously or not – to weakening Kentucky’s pension bridge, in which case taxpayers should demand a full refund.  

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.

Bluegrass Institute pushes pension reform @ Georgetown

Waters TalkingBluegrass Institute president and CEO Jim Waters presents “Sound Solutions for Kentucky’s Public Pension Crisis” for the Georgetown Rotary Club on Tuesday at the Scott Country Public Library in Georgetown.

You can view the Bluegrass Institute Pension Reform Team’s PowerPoint presentation here. This PowerPoint is not a full report, which is in the works, but the outline of the Institute’s position and ideas regarding pension reform.

Read more about the Bluegrass Institute’s work on pension reform here and here.

Also, President Waters will be speaking on pension reform at Noon on Sept. 20 at the Harrodsburg Christian Church.


Bluegrass Beacon: The due process of defining pension benefits

20111129beacon2Editor’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.

“Can pension benefits be cut?”

My answer to the reporter’s question may sound political but when it comes to Kentucky’s responsibility to its public servants, it’s nevertheless true: “It depends.”

The commonwealth’s moral obligation to protect properly earned and funded pension benefits doesn’t extend to improperly awarded ones.

Just because some group of politicians in the past improperly awarded new benefits or enhanced existing ones doesn’t mean future generations of Kentuckians should be forced to pay the bill for time and eternity for such gravy trains.

Unfortunately, beneficiaries, retirees and even legislators have been misled to believe that any benefit ever granted at any time or level and for any reason – regardless of actual rules or the commonwealth’s ability to pay the bill – is inviolable.

“We will not accept cuts to benefits promised under an inviolable contract,” wrote retiree activist Jim Carroll in a letter appearing in several newspapers. “If a bill is considered that reduces promised benefits, we will storm the Capitol with torches and pitchforks. If it is signed into law, we will litigate.”

That’s a wonderfully emotional statement designed to fire up a base of misinformed beneficiaries and retirees.

Here’s the rub: what benefits are promised “under an inviolable contract?”

Carroll rightly notes that previously awarded cost-of-living adjustments (COLA) not only no longer exist for Kentucky Retirement Systems’ participants but also that such benefits were “a contributor to our unfunded liabilities.”

COLAs still exist for Teachers’ Retirement Systems’ (TRS) beneficiaries, and thus – take Carroll’s word for it, not just mine – remain “a contributor to our unfunded liabilities.”

Plus, they are only one of many benefit enhancements that have helped dig Kentucky’s deep, dark pension hole.

The biggest shovel of all in digging that hole in each of the state’s retirement plans have been decisions, primarily by past legislators, to increase benefits in a particular year and then apply those gifts to all previous years of beneficiaries’ service.  

The very nature of a defined benefit pension system is that the level of benefits fluctuates each year according to actuarial assumptions considered each year, including investment returns, longevity, growth rate of salaries and payrolls, retirement age and attrition rates.

When, for example, investment returns are estimated to be higher, it may be possible to properly fund a higher benefit factor for that year because it is actuarially sound and properly funded.

But for beneficiaries to be led to believe that the commonwealth has a moral obligation to keep the rate at that level and to never lower it for years when returns are down is the worst kind of fake, even fraudulent, news.

Retirement benefits are to be determined annually by the systems’ actuaries based on solid, credible data on what the commonwealth can actually afford.

They form an agreement between the state, employees and taxpayers that’s smashed and broken when policymakers in future years reach back to increase the benefits from previous years.

Doing so is the equivalent of believing that while your personal investment in a money-market account offered a 3-percent return one year, 5 percent during another and 8 percent this year that you’re entitled to an 8-percent return ad infinitum for all years – both past and present.  

While the state has a moral obligation regarding benefits properly established, no such obligation exists for arbitrary benefits or those awarded either retroactively or prospectively without the due process of the actuarial process.

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.

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.