(FRANKFORT, Ky.) – The Bluegrass Institute for Public Policy Solutions, Kentucky’s first and only free market think tank, issued the following response to proposals offered by state Democratic leaders to address pension-funding challenges faced by the commonwealth’s regional universities and quasi-governmental agencies like health departments, rape crisis centers and mental health agencies.
While the Bluegrass Institute welcomes new ideas to address Kentucky’s critical pension crisis, we share House Speaker David Osborne’s concern that these “are the very same policies that led to the pension problems we face today.”
The Democratic alternatives to relieving the pressure being faced by the commonwealth’s 121 quasi-governmental agencies center on increasing the Assumed Rate of Return (AROR) on Kentucky Retirement Systems (KRS) investments, raising payroll-growth assumptions and redirecting future funds designated to pay down KRS’ health-insurance liabilities.
The Bluegrass Institute has always advocated for the application of truly actuarially sound data to pension-system assumptions such as assumed rates of return, payroll-growth rates and, most importantly, employee benefits.
For far too long, actuaries have enabled the KRS Board of Trustees to substitute improperly inflated payroll-growth assumptions to decrease contributions needed from employees and taxpayers to fund benefits awarded at arbitrarily high – rather than actuarially sound – levels.
Worse, retroactive benefit enhancements have been commonplace for the past several decades, resulting in many workers being awarded retirement payments much larger than what they actually earned.
Such funding and investment decisions produce real and costly long-term consequences for both beneficiaries and taxpayers. If this were not the case, we could simply increase the system’s ARORs to 20% and payroll-growth rates to 10% and the problems would magically disappear. We’re certain most stakeholders, including taxpayers, beneficiaries and retirees, would agree this isn’t possible.
Arbitrary assumptions and arbitrarily determined employee benefits contributed to Kentucky’s pension crisis. The Democrats’ proposal continues down this path by arbitrarily tweaking the assumptions of the quasi groups to reduce payroll-contribution rates.
Such arbitrary changes must be prohibited, as should the use of incorrect assumed rates of return by association.
Quasi agencies should have different assumptions than the state agencies in the KERS system because quasi and state employees are demographically different. Payroll growth-rate assumptions, retirement rates, termination rates prior to retirement, the rate at which salaries are increased and members become disabled all differ significantly between quasis and state agencies.
At the same time, the Bluegrass Institute believes that quasi agencies should have the opportunity to remain in KRS and only be responsible for financing quasi-specific liabilities using quasi-specific assumptions.
The current proposal requires the continued subsidizing of state agencies by quasis, forcing them to continue to use unfavorable assumptions in order to remain in KRS. It also requires them to pay agency-specific liabilities calculated using the same unfavorable assumptions in order to leave KRS. Instead, all of these transactions should be made using the liabilities and assumptions that are correct for the quasis.
The only practical way to accomplish these changes is to move the quasis into a separate plan – just like the KERS and County Employees Retirement System have their own separate plans with different assumptions.
Click here to read Bluegrass Institute’s proposal for creating the Quasi-governmental Employees System (QERS), which is the only proposal being offered that would result in all agencies within the Kentucky retirement systems financing their own liabilities using correct actuarial assumptions.
The Institute’s approach would allow quasis to leave KRS but at a much-lower cost due to more favorable assumptions.
This commonsense plan treats quasi agencies more fairly, keeps dollars flowing into KRS to help fund the system, saves the state hundreds of millions of dollars and offers a long-term solution that will result in meaningful reform.
The Bluegrass Institute Pension Reform Team is led by Dr. William F. Smith, M.D., director; Board Chairman Aaron Ammerman; and Jim Waters, the institute’s President and CEO. For more information on public pensions in Kentucky and nationwide, visit KentuckyPensionTruth.com.
For more information, please contact Jim Waters at jwaters@freedomkentucky.com, 859.444.5630 ext. 102 (office) or 270.320.4376 (cell).
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