Reform current pension benefits, ensure systems' future survival

Editor’s Note: The Bluegrass Beacon is a weekly syndicated newspaper column posted on the Bluegrass Institute’s website after being published by newspapers statewide.

Recent coverage of a slight increase in the Kentucky Employees Retirement System’s (KERS) funding level offers some needed perspective on the current environment.

Consider that KERS was 140% funded in 2000 but fell to below 13-percent funding in 18 years.

Investment returns north of 20% and an infusion of taxpayer funds via government of $1.13 billion barely moved the needle this year; even after all those dollars, the system’s barely 18% funded.

If I were a state government retiree, I’m certain I wouldn’t hold the view of Larry Totten, who sits on the Kentucky Retirement Systems board audit committee, that “this is terrific” – especially considering taxpayers are already dealing with Washington-induced inflation playing Pac-Man on steroids with citizens’ paychecks and the state’s two large retirement systems seeking $4.6 billion in the next budget.

Rather, count me in agreement with Lexington Herald-Leader reporter John Cheves’ pithy prognosis: “Eighteen percent is still dangerously low, potentially one stock market crash away from disaster.”

The Teachers’ Retirement System wants more than $2.5 billion of that requested funding in next year’s state budget.

Even if that happens, recent history tells us that simply throwing more money at the systems isn’t strengthening them nearly – nor nearly fast – enough.

Without addressing expenditures – which, in the case of pension systems, center on benefits – such demands on taxpayers will continue with little, if any, movement of the needle.

While it would be patently unfair and assuredly illegal to either take away already-earned benefits or break already-made promises, it’s entirely reasonable to reform those not covered by Kentucky’s inviolable contract with its teachers, including:

·         Ending the use of sick day benefits to spike pensions.

While local school districts should continue to have the option of providing retiring teachers a benefit for not using their sick days, those benefits shouldn’t be applied to final years’ salaries in order to spike retirees’ lifetime pension payments.

Allowing the accrual of sick days to enhance final compensation until legislation is passed ending it would ensure that no promises – nor perceived assurances – are broken, yet would allow ending a benefit currently costing taxpayers around $40 million annually.

·         Eliminating the use of longer-serving members’ highest three years of salary compensation formula.

Currently, each beneficiary starts out with a formula that bases their retirement benefits on their highest five years of salary.

However, that changes to the highest three years of salary for beneficiaries who reach age 55 with at least 27 years of service.

Considering there are more than 73,000 active beneficiaries, eliminating the high-three provision and determining all future TRS pensions based on the highest five years of salary would reduce costs and bring more certainty to the system by making it easier both to anticipate and calculate future pension obligations.

But this need not be a bull-in-the-china-shop approach.

It can be done gradually by allowing those close to retirement to still obtain the high-three benefit while giving those farther away sufficient time to plan appropriately for its removal.

·         Eliminating the 3% multiplier.

Currently those reaching 30 years in the system are allowed to boost their pension from 2.5% to 3% of final average compensation for each additional year they continue to work.

Thousands of beneficiaries receiving this bump over a period of years puts unnecessary strain on the system.

An adjustment to eliminate the 3% multiplier could be eased in by only applying it to those with less than 25 years of service so they would have time to plan – and anticipate – appropriately.

Rigid states which don’t have constitutional or legal flexibility to address pension costs as part of changing economic landscapes have the nation’s biggest problems.

A 2017 study by the Reason Foundation analyzing legal environments related to states’ ability to implement needed reforms found that states like Illinois and California are digging their pension holes deeper because of stifling constitutional and/or statutory provisions.

Kentucky needs to take advantage of its ability to make allowable – and needed – reforms which can bring substantial changes to its pension systems, which would at least allow it to quit digging.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free market think tank. Reach him at jwaters@freedomkentucky.com and @bipps on Twitter.