Monday, August 28, 2017

KY Public Pension Audit

The Public Pension Oversight Board (PPOB) met this afternoon in Frankfort.  Today's meeting was highly anticipated, with PPOB consultants presenting the third and final report outlining recommended changes to Kentucky's public pension systems. The report includes recommendations on changes to benefits and actuarial assumptions, but very little information on how to fund the changes. Members of the Kentucky House of Representatives will meet on Tuesday for a private briefing on the report.  

We expect the recommendations will be used as a guide, as policymakers develop a proposal seeking reforms to the various public pension systems.  Following today's meeting, Speaker Hoover issued a press release indicating that he and his colleagues will be seeking public input and that the PFM report is only a recommendation on how to proceed. The Governor and legislative leaders have indicated over the past few weeks that the special session will be called sometime in October. 

PPOB Meeting Summary

John Chilton, State Budget Director, began the meeting by presenting an overview of the problems facing the pension systems and the Commonwealth's budget. Chilton outlined the work of the Consensus Forecasting Group and the anticipated shortfall in FY 19 of roughly $200M.  He also reminded the committee that in the previous PPOB meeting it was determined that Kentucky would need an additional $700M per year in order to fully fund the ARC (actuarially required contribution).

Chilton went on to explain that the state needs an additional $1Billion and outlined three options:
  1. Cut spending
  2. Increase taxes
  3. Adjust benefits
Chilton discussed how spending on pensions and Medicaid have increased the past several years, as spending in other state agencies and programs have declined.

If no changes are made, K-12 education will be cut by $510M per year, from the annual current appropriation of $3.024B. This is an area that has generally been held harmless during previous budget cuts.  According to Director Chilton, without pension reforms, protecting vital government spending, like the SEEK formula, won't be an option.

Chilton also spent some time discussing the unfunded liability and what that number actually is. After talking through several ways to arrive at that number, they have chosen to use assumptions and rates used for private, non-government plans.  In doing so, the unfunded pension liability is $64B.  It's often been said through this process that the liability is anywhere between $30B and $80B.  

Following Director Chilton's opening presentation. the consultants - PFM - presented the final report and recommended changes to Kentucky's Public Pension Systems.  You can view the full reporHERE.  

To summarize, PFM recommends the following changes, as stated in the report:

All future Kentucky state and local government employees would have access to a balanced set of retirement benefits providing positive income replacement levels, including:
  • Social Security participation (not now available to teachers and many local government public safety employees)
  • Additional defined contribution (401K style) plans with significant minimum employer contributions and additional employer match
  • Retiree health care coverage consistent with that provided to active employees
All current KY state and local government employees would have the value of their accrued benefits maintained and receive benefits for future service as good as or better than those available for future hires.
All retired KY former employees would receive at least the same benefit level they were guaranteed upon retirement and would see significant improvements to the funding of their benefits - strengthening the solvency of these vital commitments.
In addition, all Kentucky stakeholders would begin to see steady and meaningful restoration of fiscal stability to the Commonwealth's retirement systems, with greatly reduced risk of renewed pension crises in the years ahead. In turn, this progress would ultimately lead to more resources available for critical investments and services, or fair employee raises going forward, and for improved financial health and credit strength 

Additional resources/slides from today's meeting:



Please don't hesitate to contact Rachel Bayens or Dustin Miller with any questions or concerns that you have. We will continue to keep you updated with information on the likelihood and timing of a special session.