What Happened?
Kentucky lawmakers passed legislation to reform its current pension system that will save billions by addressing the unfunded liabilities issues at the local level. The legislation was approved along with another bill to raise $100 million annually specifically for paying down the $131 million required yearly to fill in the gap where Kentucky was unable to fulfill promises on pension contributions.
The Goal
Kentucky, like so many other states across the country, has accumulated significant unfunded liabilities at the local level. Unable to contribute their share toward public employee pension plans, municipalities are unable to balance budgets or pay out benefits to workers and retirees.
Kentucky’s retirement system was one of the worst in the country as of 2012, with an unfunded liability in pension plans for public workers besides teachers totaling $13.9 billion. The state had accumulated more than $26 billion in pension debt, despite its pension plan being 111 percent funded in 2002. By 2012, less than 30 percent of Kentucky’s pension system was up-to-date on contributions from the state. The more the state failed to meet its obligations, the harder it became for local governments to pay their dues as well.
Money-Saving Decision
The agreed upon solution calls for cost-of-living adjustments to be paid before they are distributed, as well as a plan immediately committing the state to paying its committed contribution to the funds with $100 million each year allocated toward repayment specifically.
In addition, a new cash-balance retirement plan which new workers would utilize to accumulate retirement savings from employer and their own personal contributions. The plan would include a guaranteed 4 percent return on investment as well as lifetime retirement benefits according to account balance. Because the benefit is more portable than traditional systems, it should prove equitable for workers who may not stay with an in-state public agency for the duration of their careers.
To come to this final piece of legislation, Kentucky’s House and Senate created a task force to brainstorm solutions to the pension system problem in June 2012. For more than a year, the task force weighed options, held public meetings to hear ideas and collaborated with advisors to base all decisions off unbiased analysis and data reports. The Kentucky pension system reform will go into effect for all new employees starting January 1, 2014.
Canadian Style
Similar to Kentucky’s reform legislation, British Columbia has also adopted a hybrid approach to public section pension plans. British Columbia has decided to veer away from conventional Defined Benefit pension plans and adopted a hybrid Defined Benefit and Defined Contribution strategy with a base pension amount but no guaranteed cost of living increases.
The pension reform does not leave taxpayers at risk for unfunded liabilities for the major pension plans, as there is a clear, 15-year response plan in place to immediately address any pensions that fail to be funded by public employers.
Tightening The Belt
As municipalities work to pay down mounting pension liabilities with unique strategies, Gov1 is monitoring the failures and success.