A new study shows that Kentucky has the worst-funded pension system in the nation, compounded by the fact that of all the states, the commonwealth is doing the worst at paying off its pension debt.
According to a new survey by S&P Global Ratings, Kentucky has $31. 2 billion in unfunded pension liabilities, and the state’s various pension funds have 37.4 percent of the money they need to make payouts to current and future retirees, the lowest ratio of all states.
Last month, state pension officials reported that the main pension fund for state workers — the $1.9 billion Kentucky Employees Retirement Systems non-hazardous fund — is only 17 percent funded and declined by about $347 million over the fiscal year that ended on June 30.
Officials blame $326 million of the loss on “negative cash flows associated with employer contributions” — which includes funds from local governments, the state and other agencies that participate in KERS — and a 4 percent increase in the number of retirees to whom the system had to pay benefits. The fund also saw a 0.68 percent decline in investment returns, attributing that to a loss of $21 million.
Meanwhile, the agency that manages the fund, Kentucky Retirement Systems, paid $123 million in fees to investment managers — a practice that has drawn fire from some lawmakers for being too secretive and costly.
Chris Tobe, a former Kentucky Retirement Systems trustee and author of the book “Kentucky Fried Pensions,” said the problem is exacerbated by “leakage” — fewer active state employees paying into the pension systems as a result of layoffs or quasi-agencies such as Seven Counties bowing out of the system altogether.
“By cutting the amount of people covered, that’s just creating a harder row for us to hoe,” Tobe said. “You just can’t starve the beast.”
Besides the fact that the state underfunded the pension systems for 15 of the last 22 years, the largest driver of Kentucky’s pension deficit is the $16.8 billion Kentucky Teachers Retirement System, which pays out larger benefits and only has 45 percent of the money it needs for future payments.
This year, the system requested the state set aside $1.03 billion of the $21 billion two-year budget just for teacher pensions. The legislature instead set aside $973 million for KTRS and $186 million for KRS — the largest contributions to date.
The study shows that in 2014, only 15 states followed policies that funded at least 100 percent of their pension needs. Kentucky trailed the pack of the other 35 states because the state paid only 35 percent of the more than $2.6 billion Pew estimates it should have to outpace interest.
Gov. Matt Bevin has made it a priority to get the state’s “financial house in order,” starting with the pension systems.
Besides larger infusions into the retirement funds made possible by budget cuts in other areas, he’s also attempting to overhaul the leadership of KRS, which he says needed a “fresh start” after years of mismanagement.
The move is currently tied up in court, though a judge has allowed the new Bevin-appointed board of trustees to continue meeting.