Difference between revisions of "Jim Waters’ presentation to the Pension Task Force"

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I’m watching as legislators have been more than willing to double – even triple – dip into the pension systems, not only at taxpayers’ expense but also at the expense of state employees, who received only 1 percent raises each year for fiscal years 2008, 2009 and 2010, and no raises for fiscal years 2011 and 2012, and in the current budget, no COLA for retirees — apparently because raises and cost-­‐of-­‐living adjustments are being crowded out, as money is being diverted to try to keep the pension systems solvent.
 
I’m watching as legislators have been more than willing to double – even triple – dip into the pension systems, not only at taxpayers’ expense but also at the expense of state employees, who received only 1 percent raises each year for fiscal years 2008, 2009 and 2010, and no raises for fiscal years 2011 and 2012, and in the current budget, no COLA for retirees — apparently because raises and cost-­‐of-­‐living adjustments are being crowded out, as money is being diverted to try to keep the pension systems solvent.
  
As I see it, as a state employee, our legislative body, through its greed, has tarnished the General Assembly as an ins;tu;on, and has lost its credibility in terms of now being able to ask government employees to make sacrifices to fix the pension problem.
+
As I see it, as a state employee, our legislative body, through its greed, has tarnished the General Assembly as an institution, and has lost its credibility in terms of now being able to ask government employees to make sacrifices to fix the pension problem.
  
 
The choices for solving this problem are harsh: either higher taxes, robbing Peter to pay Paul (i.e., crowd out other essen;al services), or borrowing from the bond market (going further into debt, which would lower the state’s credit rating). Doing nothing is not an op;on because states, under current federal law, cannot file for bankruptcy.
 
The choices for solving this problem are harsh: either higher taxes, robbing Peter to pay Paul (i.e., crowd out other essen;al services), or borrowing from the bond market (going further into debt, which would lower the state’s credit rating). Doing nothing is not an op;on because states, under current federal law, cannot file for bankruptcy.

Latest revision as of 07:46, 5 September 2012

This was the testimony given to the Kentucky General Assembly public pension task force on August 21, 2012 by Jim Waters of the Bluegrass Institute

Testimony

Thank you, Mr. Chairman and members of the Task Force on Pension Reform, for conducting this hearing and allowing me, on behalf of the Bluegrass Institute for Public Policy Solutions, to present some of our concerns about and solutions to this issue.

The Bluegrass Institute is a state-­‐based, free market think tank that will, in just a couple of weeks, celebrate our ninth anniversary.

Sitting with me today is Lowell Reese, the author of a recent study on Kentucky’s state-­‐administered public employee pension systems titled “Future Shock,” which he conducted for the Bluegrass Institute as a free-­‐lance project. He has agreed to participate with me today to share with you some insights from his report and respond to any questions you may have about it.

I’m concerned that some have attempted to downplay the serious condition of a very ill patient known as the Kentucky Public Employees' Pension Systems, and the urgency with which a cure must be found. Meanwhile the patient’s illness continues to worsen. Not only has this pa;ent’s condition declined, it has done so rapidly – which is even more reason for concern.

As the Bluegrass Institute reported this year in a series of releases of the “Future Shock” report, the state’s unfunded public pension liability went from less than $960 million in 2000 to $33.5 billion in 2011. It was the equivalent of a patient’s condition worsening from a stomach ache to full cardiac arrest.

But it’s sensible to get a second opinion when determining the condition of and treatment for a patient in such a serious condition – especially when that patient has declined so rapidly. That’s why I note that it’s not only the Bluegrass Institute that warns: While other states’ pension systems may be in the intensive care unit, Kentucky’s is on life support.

Jeanne Pierre Aubrey at Boston College’s Center for Retirement Research has spent more than a decade following and analyzing 126 different public retirement plans across the nation.

One of those is the Kentucky Employees' Retirement System, one of the six funds under the umbrella of the Kentucky Retirement Systems (KRS). Only a dozen short years ago, Kentucky’s pension fund for state employees was one of the healthiest on Aubrey’s list. Today, it’s at Pension Hospice.

Aubrey concluded last year that while there is a lot of discussion about the health of his different “patients,” if you will – that is, the different pension systems he monitors annually – the Kentucky plan for state employees, KERS, was the only one he was really concerned about in terms of solvency. As of June 11, 2011, KERS’s unfunded liability was 30.1 percent, according to the agency’s Comprehensive Annual Financial Report (CAFR), the actuarial valuations.

As I have thought about this issue, I’ve tried to put myself in the shoes of a typical state worker. How would I be feeling about all of this about right now? Well, as state worker, I’m probably very concerned – if not outright nervous – about what I am hearing.

I’m wondering, for example, how it is that of the six pension funds, the one that will provide my retirement has gone from being fully funded to only 30 percent funded in such a short amount of time, while the retirement fund of legislators is in the best shape of the six with a good-­‐health range at 71.5 percent funded. Legislators’ pensions are booming – as if there’s no concern about affordability.

Some people say the lion’s share of the blame for Kentucky’s re;rement-­‐fund woes lies with the economic recession and the legislature failing to meet it full ARC payments.

There’s no doubt the worst economic downturn since the Great Depression surely has had a substantial negative impact, and the lower ARC payments have also contributed to this patient’s condition.

But I’m wondering how that reasoning holds up during all of those other years since the year 2000, when we were not in recessionary tomes. In 2000, KERS was 113.2 percent funded and has declined every year except for one since then. And according to the Boston study, we have gone from the top of the heap to the bottom.

I’m also aware that right in the midst of that decade, legislators quietly legalized a prac;ce known as “reciprocity” and changed elements within their pension formulas that handsomely enriched their pensions.

Soon aher the ink was dry on the “reciprocity” provision, legislators began knocking on the door of the Governor’s office to get plum jobs – not for their cons;tuents but for themselves. You can read about some of the most egregious offenders of reciprocity In the Bluegrass Institute’s report authored by Mr. Reese. It documents that Kentucky’s public pension systems have become a modern-­‐day gold rush for some legislators.

As a state worker watching all of this, I’m becoming very concerned that our legislators are not leading by example – and I view it as totally unfair that they are enriching themselves, as tough choices lie ahead in an effort to ensure that I will have something in my re;rement fund on my last day at work.

I’m watching as legislators have been more than willing to double – even triple – dip into the pension systems, not only at taxpayers’ expense but also at the expense of state employees, who received only 1 percent raises each year for fiscal years 2008, 2009 and 2010, and no raises for fiscal years 2011 and 2012, and in the current budget, no COLA for retirees — apparently because raises and cost-­‐of-­‐living adjustments are being crowded out, as money is being diverted to try to keep the pension systems solvent.

As I see it, as a state employee, our legislative body, through its greed, has tarnished the General Assembly as an institution, and has lost its credibility in terms of now being able to ask government employees to make sacrifices to fix the pension problem.

The choices for solving this problem are harsh: either higher taxes, robbing Peter to pay Paul (i.e., crowd out other essen;al services), or borrowing from the bond market (going further into debt, which would lower the state’s credit rating). Doing nothing is not an op;on because states, under current federal law, cannot file for bankruptcy.

Our governor claims that meaningful pension reforms were enacted in 2008. While those reforms were important, they were mainly cosme;c and did not stop the bleeding, not even close. The positive effect from those changes will not be realized for 20 years or, not until mostly young, new workers retire down the road.

As a state worker, I’m not naïve enough to think that these challenges will not require something of me, too. I know that we probably are going to have to go to some kind of 401-­‐k style plan.

The Bluegrass Institute’s report recently estimated that a Defined Contribution plan could save the state an estimated $635,000 on just one “mid-­‐management” career employee. I know the up-­‐front cost to switch to such a plan would be about $5.6 billion during the first 15 years. However, beginning in the 16th year, savings would kick in. Between 2028 and 2035, the report states that just in the KERS plan alone – savings could exceed $11 billion.

Finally, I’m wondering why there is such a resistance to making re;rement system informa;on transparent to those who ultimately pay the bills. I’m sure that doing so would shine a real light on how much some politicians benefit from inflated pension checks, and how deep double and triple pensions are embedded into Frankfort’s culture.

Contrary to what some may think, there’s no federal law against transparency in the state pension systems. Oregon, Pennsylvania and Nevada recently opened their pensions to the public. In Oregon it was revealed that a former University of Oregon football coach hauls in a $41,000 taxpayer-­‐funded monthly pension check, while two former public school administrators have twenty thousand reasons to be happy every month.

What might we learn if the blinds on Kentucky’s pension systems were opened? Transparency in Oregon revealed that while a majority of the thousands of retirees receive modest monthly pensions of $3,000 or less, more than 800 government retirees in that state are taking home pensions of more than $100,000 a year.

Former Gov. Wendell Ford in 1972 either demanded or allowed the Kentucky Legislature to pass KRS 61.661, the state statute that hides public pension spending and ensure that those who get two – or, in some cases, even three – public pensions, will not be exposed.

I leave you with some recommendations today:

  • End the practice of double and triple dipping for all government workers, not just new hires.
  • Move to some kind of 401(k) system where workers contribute more to their own re;rement.
  • Reform the boards of the retirement systems to include more members with financial expertise and remove the dominance of the ruling boards by beneficiaries.
  • End reciprocity for lawmakers.
  • Make the systems transparent.

It’s time to make a 9-­‐1-­‐1 call. The “patient” is en route. What room should we put him in? — “Tax increases?” ... ”Crowding out of services?” ... “Deeper bonded indebtedness?” Or, where a lasting recovery can occur: In the room marked “living within our means, defined contribution plans, and transparency?”