Kentucky’s pension systems are ranked as the worst-funded in the nation. Kentucky Retirement System (KRS) Executive Director David Eager sat down with The Bottom Line to discuss the current funding level of the system, the impact of an economic downturn and market turbulence, and more.
In the wake of the COVID-19 pandemic, the country and state are facing economic downturns and the stock market is experiencing many changes. For many years, lawmakers have expressed concerns about what would happen to KRS, which is only 14% funded, in the event of another deep recession or harmful economic event.
Eager noted the system is currently cash flow positive, meaning they are bringing in more money than they are paying out. He stated he does not expect the system to experience huge issues as a result of the pandemic.
In terms of whether or not the state is seeing a spike in people retiring due to uncertainty, Eager said the system is actually experiencing a decline in retirements and credited that to fewer people now being in the system and the likelihood many individuals likely want to keep the stability of their employment in such turbulent times.
The pension system lowered many assumptions in recent years including assumed rates of return on investments, payroll growth, and life expectancy of their members. Eager noted the system’s investment returns have been better than expected and despite the turbulence in the market, he expects each of the plans within the retirement system to end the year with slightly positive, stating the plans are in “excellent shape, relatively speaking.”
The Kentucky General Assembly ended up passing a one-year budget and cut in many areas during the 2020 session due to the uncertainty and lost revenue caused by the COVID-19 pandemic. When asked if KRS got what it needed in the budget, Eager said the legislature did fund the retirement systems at the required levels and while they would have loved additional revenue to help with the unfunded liability, the system is currently in a good position and the funded status will likely remain stable.
As for problems that could be facing the pension system in the near future, Eager discussed what’s referred to as the “death spiral” where the employer contribution rate continues to rise (currently at 84% of pay for many employers) and many choose to move to use independent contractors rather than hiring new people into the system, further exacerbating the funding issues facing the system.
Eager said there was a bill proposed in the 2020 session that would have helped with this issue in some way but it did not see the finish line. When asked if he would like to see the bill come back up in 2021, Eager stated he doesn’t believe there will be the political appetite to pass such a bill through the legislature.
Watch the full interview with KRS Executive Director Eager below: