Protecting Retirement Security and Building a Better Kentucky

Jason BaileyJanuary 30, 2013

How Did We Get Here?

• Failing to make the full required contribution in 14 of last 21 years– State did not make $3.2 billion in required

contributions over 1993-2013; shortfall is $4.3 billion once you count missing investment returns

• Providing but not pre-funding COLAs & temporary retirement incentives in ’98 & ‘01

• Problem exacerbated by investment losses in 2 recessions

Sources: Kentucky Retirement Systems, Boston College Center for Retirement Research

Investment Returns Have Hurt, But Don’t Explain KY’s Problem

10-year returns 2000-2010: KRS 3.12% compared to 2.85%; Since inception to 2012: KRS 9.36% compared to 9.48% benchmark.

Source of the Problem

“Sponsors of seriously underfunded plans, such as those in Illinois, Kentucky, Louisiana, New Jersey and Pennsylvania, have behaved badly. They have either failed to make their required contributions or used inaccurate assumptions so that their contribution requirements are not meaningful.”

Alicia H. Munnell, State and Local Pensions: What Now?, Brookings Institution Press, 2012

Public employees are undercompensated in KY compared to private sector counterparts

Jeffrey H. Keefe, “Public Versus Private Employee Costs in Kentucky: Comparing Apples to Apples,” Kentucky Center for Economic Policy

Benefits are modest and have already been cut

• Formula multiplier– National average: 1.95%– Kentucky for most new employees post-2008:

1.1% - 1.75%• Final average salary

– Majority of plans use 3 years– Kentucky uses 5 years for new employees post-

2008• Average KERS non-hazardous retiree receives

$20,508/year

Source: Kentucky Retirement Systems

Economic Importance of Public Pensions

• $1.6 billion in annual payments• 93,422 retirees• 95% of whom live in Kentucky

Source: Kentucky Retirement Systems

Traditional defined benefit plans are efficient and effective ways to provide adequate benefits

Source: Bolton Partners/Kentucky Public Pension Coalition

Cash Balance Plan Results in Lower Benefits for Many Workers, Especially Long-Term Employees

Cash Balance Plan Would Harm State’s Ability to Attract & Retain Skilled Workers

Cash balance plan

Fewer skilled workers attracted Higher turnover

More $$ spent on recruitment &

training

Less experienced and skilled workforce

Lower quality and productivity of public services

Cash Balance Plan Could Harm Investment Returns, Reducing Benefits Further

• More turnover and more workers withdrawing lump sums means fewer assets & more need for liquidity

• Risk to state of <4% return could mean more conservative investment strategy

Cash Balance Plan Won’t Lower Costs or Reduce Unfunded Liability

• Pew/Arnold: “Kentucky’s current benefits for new employees are relatively modest and seeking meaningful savings from a new plan is not possible”

• Employer costs for cash balance plan = current plan.

Source: Pew/Arnold Foundation materials submitted to Task Force on Public Pensions in Kentucky

Addressing the Real Risks Kentucky Faces

Political risk of underfunding—need

for financial plan

Risk of lowering quality of public

services Kentucky desperately

needs to grow

Risk of deepening the retirement security crisis that is coming