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Kentucky’s pension crisis.

1 Aug

I don’t normally share the papers I write for my graduate studies on this blog, but I think this one is pretty important – particularly for those of us who live in Kentucky.  I wrote this paper as my final for my Public Finance class. Here is the introduction, or click here to download the entire pdf.

A government makes promises to the public and to its employees, but what happens if the government finds itself unable to keep those promises? A private company can go bankrupt, but as of today, states are not allowed to do that.[1] So what options does a state have when they become financially unsustainable? Government intervention in the private market is often needed when there is a market failure. What happens when the government upsets, rather than stabilizes, the economy?

These are the issues facing the Commonwealth of Kentucky right now. The state’s pension system suffers from years of chronic underfunding[2] and they now find themselves billions of dollars shy of what will be needed in the near future. The working number for how much the state owes its pension system has been $37 billion.[3] However, a Moody’s report issued on July 21, 2017 doubled that number to $70 billion in unfunded pension liabilities[4]. To put that in context, the amount the state of Kentucky owes its worker’s pension funds is more than seven times the Commonwealth’s entire $10 billion annual General Fund budget.[5]

Who is this money owed to? More than 8% of the Commonwealth’s population: over 360,000 Kentuckians,[6] including firefighters, police, teachers, city, state employees, transportation employees, social workers, mental health workers, university employees,[7] are counting on these benefits for their future financial security.

Figure 1 [10]

A new study shows that Kentucky’s pension system is one of the most poorly funded in the nation and the Commonwealth is doing the worst at paying off its pension debt.[8] Based on plan information reported through the end of fiscal 2015, the median funded ratio across state plans was 74.6%, but for Kentucky, the funded ratio was only 37.4% (based on earlier S&P numbers), as shown in Figure 1. [9]

Because of the magnitude of the debt and the size of the Commonwealth’s budget, this trend will be difficult to change. But without drastic change, the state will continue to fall behind faster than any other state.[11]

So how did this financial disaster come about? Was it preventable? What are the steps the Commonwealth might take to address it? As Governor Matt Bevin considers calling a special legislative session[12] to address this crisis (and a recently discovered budget deficit from 2016-2017 fiscal year)[13] these are some questions citizens of the Commonwealth might be asking and that are addressed in the following sections of this paper. There have been many books and articles about this issue, this paper hopes to present an easily digestible overview of the various issues and potential paths out of financial collapse that the Commonwealth might take to right its course. Let’s begin with a more in-depth overview of the history: How did Kentucky get into this mess?

To read the whole paper, download it here.

 

[1] John Mauldin, “Don’t Be So Sure That States Can’t Go Bankrupt,” Forbes, Jul 28, 2016, https://www.forbes.com/sites/johnmauldin/2016/07/28/dont-be-so-sure-that-states-cant-go-bankrupt/#accda622f2d4, (accessed July 27, 2017).

[2] Ben Walsh and Travis Waldron, “Kentucky’s Hedge Funder Governor Keeps State Money In Secretive Hedge Funds,” HuffPost, June 24, 2017, http://www.huffingtonpost.com/entry/matt-bevin-kentucky-pensions_us_594bf56ce4b0a3a837be3d56, (accessed July 27, 2017).

[3] Tom Loftus, “Pension costs just jumped for Kentucky’s school districts, local governments,” Courier-Journal, July 12, 2017, http://www.courier-journal.com/story/news/politics/2017/07/12/pension-costs-just-jumped-kentuckys-school-districts-local-governments/467408001/, (accessed July 27, 2017).

[4] Moody’s Investors Service, “Kentucky (Commonwealth of) Update – Moody’s downgrades Kentucky to Aa3; outlook stable,” (July 20, 2017): 5.

[5] William M. Landrum III, Edgar C. Ross and Donald Sweasy, “Commonwealth of Kentucky Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2015,” 141, http://finance.ky.gov/Office%20of%20the%20Controller/2015CAFR.pdf (accessed July 27, 2017).

[6] “Kentucky’s Pension Crisis – Frequently Asked Questions,” (March 2016): 1, https://kypensioncrisisdotcom.files.wordpress.com/2016/03/pension-faq.pdf, (accessed July 27, 2017).

[7] Tom Loftus, “Don’t cut our pensions amid crisis, public workers tell Kentucky board,” Courier-Journal, June 26, 2017, http://www.courier-journal.com/story/news/politics/2017/06/26/stakeholders-give-their-views-pension-reforms/421347001/, (accessed July 27, 2017).

[8] Ryland Barton, “Kentucky’s Pensions Are Worst-Funded In U.S., Study Shows,” WFPL, September 15, 2016, http://wfpl.org/studies-show-kentuckys-state-pensions-worst-in-nation/, (accessed July 27, 2017).

[9] Sussan S. Corson, “U.S. State Pensions: Weak Market Returns Will Contribute To Rise In Expense,” Standards and Poor, (September 12, 2016): 7, http://www.nasra.org/files/Topical%20Reports/Credit%20Effects/SPGlobalstates1609.pdf, (accessed July 27, 2017).

[10] ibid.

[11] Barton, “Kentucky’s Pensions Are Worst-Funded In U.S., Study Shows.”

[12] A special session would cost more than $63,000 a day, according to the Legislative Research Commission.

[13] Tom Loftus, “Can public pension benefits be cut? Kentucky officials looking into it,” Courier-Journal, July 14, 2017, http://www.courier-journal.com/story/news/politics/2017/07/14/can-public-pension-benefits-cut-kentucky-officials-looking-into/434944001/, (accessed on July 27, 2017).

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