Bluegrass Institute Pension Reform Team presentation tonight in Northern Kentucky

BIPRT Bill SmithBluegrass Institute Pension Reform Team leader Dr. William Smith will present “Sound Solutions for Kentucky’s Pension Crisis” at tonight’s meeting of the Northern Kentucky Tea Party at 7 pm at the Holiday Inn at 7905 Freedom Way in Florence.

While much of the discussion about pension policy has centered on legislative funding and investment returns, the Bluegrass Institute is calling policymakers and taxpayers to focus on the underlying cause of the $48 billion unfunded liability plaguing the commonwealth’s retirement systems.

This presentation was made recently to the state’s Public Pension Oversight Board and is drawing interest from around the commonwealth.

For a preview of this presentation and to hear some of the comments made by the Institute’s team at the PPOB, click here.

Q&A will be included as part of the presentation.

Please come and bring someone with you to hear this important presentation.

For more information on scheduling a Bluegrass Institute Pension Reform Team presentation, contact Bluegrass Institute President and CEO Jim Waters at jwaters@freedomkentucky.com or 859.444.5630.

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 www.bipps.org. He can be reached at jwaters@freedomkentucky.com and @bipps on Twitter.

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.

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

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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 BIPRTKentucky@gmail.com or Jim Waters at jwaters@freedomkentucky.com, 859.444.5630 ext. 102 (office) or 270.320.4376 (cell).

 

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.

Bluegrass Beacon: Don’t know a lot about pensions? See a doctor

BluegrassBeaconLogoI recently stood in Philadelphia’s Independence Hall, where 55 delegates gathered in May 1787 to create the U.S. Constitution and form a new government.

While that hallowed room is filled with desks and other period fixtures, the only original piece of furniture is the chair occupied by the future President George Washington while presiding over the convention.

Businessmen, merchants, shippers, farmers, scientists and physicians were framers of the document that would set their new nation on a path toward unprecedented freedom and prosperity.

If doctors were included in framing the foundation of this nation’s success, you will have a hard time convincing me that Madisonville dermatologist Bill Smith, M.D., is somehow unfit to serve on the board overseeing the troubled Kentucky Retirement Systems.

Smith, who served his country for nine years, rising to the rank of lieutenant commander in the U.S. Navy, full commander in the Navy Reserve and served a tour as a flight surgeon with the Marine Corps, founded his practice in 2000 and has grown it into a multimillion-dollar operation.

Smith while building his practice has studied state and local retirement systems, including helping Madisonville successfully address challenges that threatened that city’s firefighter pension plan a few years ago.

For Smith, the solutions to saving and fixing arguably the nation’s worst government-run pension fund are not political. Rather, they involve doing the math and abiding by Kentucky’s Constitution and its statutes.

He strongly believes that decades spent ignoring Kentucky law requiring actuarial analyses of proposed benefits and benefit enhancements before they’re granted to employees or retirees has been a primary contributor to the decline of the state workers’ retirement fund – from being 74 percent funded a decade ago to currently containing only about 17 percent of the funding needed to cover future retirement benefits.

KRS bureaucrats want you to believe that the major contributor to Kentucky’s pension crisis is underfunding by the legislature and – as they occasionally admit – unproductive investments.

They vehemently oppose Smith’s appointment by Gov. Bevin to their board because the doctor’s made it known that the malady is the result of overspending in the form of enhancing benefits beyond available funding or a strategy to develop one beyond the biennial budgetary shakedowns of the General Assembly.

When it comes to enhancing benefits, for instance, the potential purchaser of a house or car must demonstrate he’s got funding – either in terms of up-front cash or the ability to make payments – before he’s allowed to move in or drive off the lot.

Smith posits the system is unsound because its leadership has performed like a buyer who purchases a house he can’t afford then goes to his employer and demands a raise because he’s “underfunded.”

This seems the model of choice for too many Frankfort politicians, who’ve offered new and increased benefits without either the funding or the required actuarial analysis. Instead, they just add the benefits’ increased costs to the funding to the state’s annual Actuarially Required Contribution (ARC). Then, when Frankfort doesn’t meet that obligation, detractors claim the system is underfunded.

It’s appalling that William Thielen, the retirement system’s overpaid and ineffective executive director, dismisses the statutorial requirement for solid analysis of what benefits cost before they’re granted as no longer acceptable.

I sat on the second row at the most recent meeting of the state’s Public Pension Oversight Board during which Sen. Jimmy Higdon, R-Lebanon, tried to impress upon Thielen that the legislature can no longer vote for benefit enhancements without at least an estimate regarding their future costs.

Thielen claimed such costs are “indeterminable.”

“Indeterminable?”

He knows that Smith, once he’s seated, will ask the questions, do the math and figure out what’s really going on in that huge retirement system.

No wonder Thielen obsessively opposes Smith’s appointment to the board to whom he answers.

Jim Waters is president of the Bluegrass Institute, Kentucky’s free-market think tank. Reach him at jwaters@freedomkentucky.com. Read previously published columns at www.bipps.org.