Legislative Update: House Budget Continues Commitment to Public Pensions

Published 10:21 am Wednesday, February 9, 2022

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During its most recent meeting, the House Budget Review Subcommittee on Personnel, Public Retirement, and Finance heard an update on the Kentucky Public Pension Authority (KPPA) funding.

Members also discussed pension funding included in HB 1, the House version of the state budget that we sent to the Senate for consideration in mid-January.

Pensions are a tough topic. They are complicated and the money we spend on them certainly does not create the same level of excitement as a new road or water project, broadband or education funding. However, they are critical to ensuring we have the public workforce to provide state services. After all, without pensions, we would not have Troopers or teachers, road crews or social workers.

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The House budget fully funds both the Kentucky Retirement System (KRS) and the Kentucky Teacher’s Retirement System (KTRS) at the actuarially required contribution (ARC) rate, which is considerably more than that required by state law. However, every dollar is necessary to ensure that the fund is solvent for future retirees.

These are the current pension provisions in the House Budget:
• Fully funds the actuarially required contribution for the Kentucky Retirement System at $1.2 billion per year

• Fully funds Kentucky Teachers Retirement System at the actuarially required contribution. HB 1 allocates an estimated $1.067 billion in the first year and $1.084 billion in the second year. (To fully understand the difference between the ARC and the amount required by law, consider that the ARC rate we funded is $629 million more in the first year and $646 million more in second year than what is statutorily-required)

• Provides $215 million to the Kentucky State Police Retirement Fund to reduce the employer contribution rate from 141% to 100%

• Funds the subsidy for regional postsecondary institutions at $2.2 million to ensure universities to pay their actual share of pension debt

The actual task of administering the pensions also comes at a cost. According to information shared with subcommittee members at the meeting, the Kentucky Public Pension Authority will spend $48 million to pay for employee salaries and other operating expenses.

I am pleased by the House’s commitment to public pensions, but I want to be clear that the pensions are in grave shape even after pouring this money into them. As of December, the KERS and KTRS face a combined $26.9 billion in pension debt.

The Kentucky Employees Retirement System stands at 18.4 percent funded, one of the nation’s worst rates and less than a fifth of what would be needed to meet our commitment to state retirees. While the Teachers’ Retirement System of Kentucky is in better shape at 65.6 percent, it still comes up woefully short.

Much of this is because of two decades of under-funding by multiple governors and legislatures. In fact, the KERS plan was almost fully funded in 1999. Then investments took a plunge and elected leaders in both the governor’s mansion and legislature began to divert money from pension obligations to pay for other pet projects while passing policies that incentivized early retirements for state employees.

Let me be clear, the teacher’s retirement fund was not used the same way, but the TRS fund has its own issues. Last year, the TRS Board updated how it calculates liabilities to include a more realistic snapshot of retiree needs. This added $3 billion in unfunded liability to its books and could require as much as $200 million more annually from the state budget.

Pension obligations remained on the backburner until 2017, the year Republicans were given control of the House of Representatives. At that time, legislators and the governor began focusing on replenishing the pension coffers and directed huge sums of money that far exceeded what state law requires. We also began overhauling policies, including moving new hires to more sustainable defined benefit plans like so many other public and private sector employees across the nation.

Kentucky is not alone in our pension problems. Similar patterns of mismanagement and misplaced priorities exist across the country and nearly half of all states have not saved enough to meet their pension obligation. However, this burden is very real and impacts every budget decision we make.

For perspective, that $26.9 billion liability is approximately the same amount of General Fund dollars included in the version of the state budget the House passed two weeks ago. It is extremely difficult to pay for tomorrow’s progress when you are still paying off yesterday’s mistakes.

As always, I can be reached at home in Nicholasville anytime, or through the toll-free message line in Frankfort at 1-800-372-7181. Feel free to contact me via email at Matt.Lockett@lrc.ky.gov. If you would like more information, please visit the LRC website www.legislature.ky.gov.
Representative Matt Lockett, R-Jessamine, serves the 39th District which includes Jessamine and Fayette counties.

Contact Information
Representative Matt Lockett
Mailing Address
702 Capital Ave
Annex Room 329
Frankfort, KY 40601

Legislative Address
702 Capital Ave
Annex Room 329
Frankfort, KY 40601

Phone Number
LRC: 502-564-8100