Kentucky pension systems see improvements in some areas, express needs and concerns in others

As the legislature works to craft Kentucky’s next two-year budget, the state’s retirement systems say continuing to put more funding toward pensions is critical for the health of the plans.

In a meeting of the House Budget Review Subcommittee on Personnel, Public Retirement, and Finances on Thursday, representatives from the state’s two pension systems briefed lawmakers on the status of their plans.

The Kentucky Teachers’ Retirement System (KTRS) Deputy Executive Director and General Counsel Beau Barnes said the system currently sits at just over 58 percent funded and has been seeing great performance from their investments.

Barnes stated that the additional funding the legislature has invested into the system in recent years has helped significantly.

On that point, Barnes said KTRS is again asking for funding over and above what is constitutionally required. Barnes said the system is requesting an additional $730 million in 2020-2021 and an extra $769.7 million in 2021-2022. He noted that for the second year of the budget that would bring what the state is paying into the system to $1.2 billion a year.

As for the Kentucky Retirement System (KRS), the worse-funded system, executive director David Eager said investments are looking good in the first six months of 2020 with a 15.2 percent rate of return and added that the system is seeing positive cash flow in eight of the ten plans for the first time in years. Eager stressed that investment returns, while important, will not solve the issues faced by the system.

When it comes to the funded status, Eager noted it is lower than what it was in 2019 but that was to be expected as the system took on $2 billion in additional liabilities in order to correct assumptions around life expectancy. He stated KERS Non-Hazardous plan, which has struggled the most, is currently 13.2 percent funded and has over $16 billion in liabilities.

Eager warned that active membership in the pension system, especially the worst-funded of the plans, has seen a huge decline in recent years as many agencies have opted to hire contract employees rather than government employees.

This change in active membership as the employer contribution rate for employers has reached over 90 percent of pay, meaning if an agency hires an employee with government benefits at $50,000 a year they would be paying over $40,000 in addition for that employee’s benefits—so the real cost of hiring for the position is over $90,000 a year. Eager warned the system could collapse without changes in this area.

The normal cost for employees hired after reforms in 2015 on this topic, however, have a normal benefits cost of only 2.5 percent because they are in a hybrid system rather than a full pension plan.

Stay tuned on The Bottom Line for more discussions on Kentucky’s pension systems and other budget issues.