When Warren Rogers started a retirement plan for his employees more than thirty years ago, he never seriously considered offering a defined benefit program like Kentucky provides state and local government workers.
“Those plans are built on an assumption that growth never ends,” Rogers, president of W. Rogers Company in Lexington, said.
Defined-benefit plans offer employees retirement pay based on years of service. As costs rise over time, any expenses not paid by investment gains become the responsibility of the employer. On the other hand, defined contributions pre-fund an investment account with employee and employer contributions. The employee is then responsible for investment gains or losses in the account.
Public-employee fringe benefits are at the heart of an odd controversy during the Kentucky General Assembly’s special session, which began Monday. Despite nearly unanimous floor votes for a reform package of Kentucky’s generous health and pension plans this week, wide divisions persist on what needs to come next for the government offerings. The state is languishing under a nearly $30-billion shortfall in its public employee benefit accounts.
While House Bill 1 makes some changes to benefits for newly hired state and local employees after September 1, it depends heavily on new dollars from the state‘s General Fund and merely slows the growth rate of the huge shortfall. The new anticipated contributions haven’t received much public discussion mostly because no one knows how high the numbers will go.
In a floor speech Monday, House Speaker Jody Richards tried to sound hopeful.
He said “the structural changes we are making will prevent the system from going bankrupt provided that future legislators have the will to fund the system at an actuarially acceptable level as statutorily required by this legislation.” Then he added that “investment performance will need to be improved.”
All that means if increasingly higher amounts of money are poured into public retirement funds each year, health-care costs don’t get too far out of control and investment returns improve, the benefits system may not become insolvent. Insolvency would necessitate putting in even more taxpayer dollars.
Rogers is skeptical about the legislators‘ plan.
“That’s crazy,” he said. “That’s no reform at all. Uncertainty like that would run my company out of business. Frankly, a well-funded defined contribution plan properly invested can provide much more retirement benefit to an employee than a company pension. There is a reason that virtually the entire private sector has converted to defined contribution plans and the public sector remains mired in the past.”
Indeed, House Bill 1 specifies required contributions from taxpayers into the benefits accounts for the next two decades, starting at 44 percent of the full funding amount in 2011 and increasing 4 percentage points a year until reaching 100 percent in 2025. Mandating taxpayer contributions is a first for Kentucky, which has fallen far short of making such payments for the last quarter of a century.
But Rep. Bill Farmer, R-Lexington, said future General Assemblies will be free to ignore what really amounts to a funding suggestion. Farmer sees an ulterior motive in the hesitancy to address exploding health-care spending for government employees.
“If they decide not to make those payments in a future General Assembly, they just won’t make them and there is nothing anyone can do about it,” Farmer said. “I think (House leaders) are counting on the federal government to take over the health-care system sooner rather than later and then those benefits won’t be their problem anymore.”
Rep. Bob Damron, D-Nicholasville, questioned where the extra money will come from for Kentucky to catch up with escalating expenses for existing employees and retirees.
“Are we going to cut back on spending or raise taxes or both?” he said. “I don’t know.”
Senate President David Williams, R-Burkesville, has been sounding the alarm for public-employee benefits reform for years.
“If we don’t change the benefits package to match what is available in the private sector, taxpayers will be paying for benefits none of them could ever afford,” Williams said. “(The funding deficit) will cause a huge decrease in services or a huge increase in taxes.”
He also charged House leaders with having already mapped out a plan to pay for benefits with new tax dollars.
“Obviously, they want to increase taxes,” he said.
That sentiment concerns Kathy Gornik, president of Thiel Audio in Lexington, who sees the issue as one of fairness that puts at risk Kentucky companies‘ ability to compete.
“As a business owner who struggles to earn a profit, I find it unconscionable that the Kentucky state Legislature is jeopardizing Kentucky’s financial and economic future by continuing to borrow money and raise taxes to fund the unsustainable state employee pension plan,” Gornik said. “I don’t see why state workers should have better benefits than those workers who are creating the wealth that makes their very existence possible.”
President Williams expressed optimism that Kentuckians will ultimately realize the problems caused by offering “unsustainable” benefits. He predicted that every state will move toward more viable defined contribution plans because employers can “pre-fund” their portion of the benefit and then it becomes the employee’s responsibility.
Mark Wilden, a vice president at Merrill Lynch in Lexington, said the sooner Kentucky makes that change, the better it will be because of how rapidly the costs are increasing.
“They don’t have a choice but to switch over,” Wilden said. “Most of these defined benefit plans have fallen apart.”