Group gives lawmakers results of study into state's pension system
Lawmakers got one explanation Monday for why the state’s pension systems ended up the worst-funded in the nation. PFM Group, a Philadelphia-based consulting firm, presented to the Public Pension Oversight Board the results of a study ordered by Governor Bevin. The main point of Monday afternoon’s lengthy report was that PFM feels pension funding at the state’s current level is an unstainable endeavor. Governor Bevin wanted the study done before he calls a special session to deal with pension and tax reform.
PFM’s report claims the state’s pension systems, combined, have had a $6.9 billion negative cash flow since 2005. The only plan PFM says saw a positive cash flow was the County Employees Retirement System Hazardous plan (CERS-H). The Teachers Retirement System (TRS) and Kentucky Employees Retirement System Non-hazardous (KERS-NH) plans were so bad the report says the state had to frequently liquidate assets to pay benefits. The report claims the basic problem is benefits paid to retirees and program expenses are greatly exceeding the money paid into the system. If things are not drastically changed for the KERS-NH plan and TRS than the PFM report says the two plans will run out of money. The KERS non-hazardous plan would reportedly be insolvent by FY2022 and TRS in 27 years.
Monday’s presentation focused on what PFM representatives say was the cause of the state’s current pension shortfalls. The report listed several factors: (1) negative amortization, in which inaccurate payroll growth rates were used, (2) underperforming investments, (3) changes to actuarial assumptions, (4) failing to fund the actuarially required contributions (ARC), and (5) granting retirees cost of living adjustments that were not paid for. Representatives from PFM said they found each plan within the Kentucky Retirement Systems appeared to have been impacted differently by each factor. For instance, the report claims the biggest contributing factor for a funding shortfall in the County Employees Retirement System Non-hazardous plan was actuarial back-loading while failing to fully fund the ARC created 28 percent of the funding shortfall in the KERS-NH plan. CERS did fully fund the ARC. In fact, PFM’s report says CERS employers funded more than the ARC required from 2005 to 2016. The report claims, however, that the ARC was not at a sufficient level and interest on the plan’s unfunded liability exceeded the ARC payment. The hazardous and non-hazardous plans of CERS are currently funded at 62 percent, much higher than KERS plans or the State Police Retirement System (SPRS).
The bottom line from Monday’s nearly 3-hour meeting was a claim by the PFM consultants that all the retirement systems are on unstainable paths. The Kentucky Retirement Systems Board of Trustees has already taken steps to change rates for all plans it manages. Thursday the board changed rates for KERS-NH and SPRS, setting the inflation rate for both at 2.3 percent, the payroll rate at zero, and the investment return rate at 5.25 percent. It will hold a special meeting to set rates for CERS and the Kentucky Employees Retirement System Hazardous plan.
A news release from the Office of State Budget Director John Chilton claims the state’s retirement systems are putting a strain on the state’s general fund. Chilton, who is also one of Governor Bevin’s appointees to the KRS board as well as a member of the Public Pension Oversight Board, was with representatives of PFM when the firm presented its report to the board on Monday. The report claims pension expenses are growing faster than state revenues. Governor Bevin has said pension and tax reform go together. The Kentucky League of Cities is continuing to encourage lawmakers to enact legislation that would separate CERS from the Kentucky Retirement Systems so the funding crisis within KERS can get the undivided attention of lawmakers.
The PFM group has already provided its first report on transparency and governance but Monday was the firm’s first appearance before the board. Its third report on reforming the pension system is expected later this year. Public Pension Oversight Board Co-Chairman Senator Joe Bowen told Chilton and PFM representatives he would like to see that report presented to the board at its June 26 meeting.