Consultant says current system out of money by 2052
Members of a task force appointed by Gov. Steve Beshear to develop recommendations to shore up Kentucky’s teacher retirement system are fast learning it won’t be easy.
William B. “Flick” Fornia
The group’s consultant, William B. “Flick” Fornia of Pension Trust Advisors, ran through a number of potential options Friday but several of them met with concerned questions from members of the group.
Fornia showed the group several charts and scenarios, including one that if nothing is done the system will run out of money by 2054. Another indicated even with 5 percent benefit reductions for new teachers going forward, the system would gain only about eight years, likely going broke in 2062.
Fornia told the group that there’s little use in arguing about who is responsible for the problem. Teachers and retirees complain that lawmakers didn’t contribute the full annually required contribution or ARC while some lawmakers complain the problem was caused by disappointing investment earnings and liberal benefits.
According to Fornia, it was a combination of all of those.
To catch up on the ARC, the state would have to increase contributions by about 14 percent — assuming an investment return of 7.5 percent on earnings. Historically, the system has managed to do that and more, but in recent years during the economic slump returns fell well below that goal. Fornia’s calculations indicate the 14 percent shortfall translates into about $500 million each year.
Beshear appointed the group this summer after the General Assembly was unable to come up with a plan acceptable to both the Democratically controlled House and Republican controlled Senate. The House wanted to issue bonds of $3.3 billion to “buy time” for the fund which is now having to sell assets to pay current benefits, buying time for legislature to increase the ARC over time. The theory was the money could be borrowed a lower rates than the pension fund could earn by investing it.
But the Republican Senate said it wasn’t logical to borrow money to pay down debt and sought structural changes — essentially a change in benefits and costs to employees, probably involving moving newly hired teachers to some sort of 401-K type plan. Toward the end of the session, a conference committee discussed a combination of the proposals but reached no agreement.
The task force is to issue recommendations by the end of the year, in time for lawmakers to address the problem in the 2016 General Assembly which convenes in March.
After first hearing from various constituent groups, the task force met Friday to consider options — not to argue about solutions though there was a little debate between those who want to preserve benefits for teachers and those who believe the current system is “unsustainable.”
There are limitations on what reductions can be made because of an “inviolable contract” with employees which guarantees certain benefits to current retirees and employees. Basically reductions would be limited to minor changes such as reducing or eliminating cost of living adjustments, increasing retirement ages, and ending the use of unused sick time to calculate benefits.
Fornia said there aren’t any easy stand-alone solutions. He said pension obligation bonds can be helpful — if they are combined with contribution increases and possibly with benefit reductions.
But he warned the group that an incomplete solution — just pushing the final reckoning out in the future — is ultimately more costly and said he wanted to get them to fully funded levels as quickly as practical.
One way to do that would be a combination of 10 percent contribution increases, phased in over 10 years while extending an existing special 2.7 percent assessment, a 3 percent benefit reduction for new hires and a 1 percent benefit reduction for current members.
Assuming an average 7.5 percent return on investments, Fornia calculated the system could be fully funded by the year 2044 using such an approach.
The group will meet again on Oct. 16 to start hammering out which solutions it will recommend.