Here's How Kentucky's Pension Funds Became So Underfunded

May 24, 2017

A Daviess County lawmaker isn’t surprised by a consultant’s report released this week that shows how Kentucky’s pension systems became the worst funded in the nation. 

A consultant’s report released this week shows the systems combined have seen nearly $7 billion in negative cash flow since 2005, as benefits paid to retirees greatly exceeded appropriated funding. 

State Senator Joe Bowen of Owensboro co-chairs the Public Pension Oversight Board.  He says there are a number of reasons why the retirement plans got into the current crisis. 

For one, the state has been basing contributions to pension plans on a level percent of payroll rather than a level dollar.

"We funded based on an anticipation of payroll growth that never happened," Bowen told WKU Public Radio.  "Instead of just a level dollar funding mechanism, we used a percent of payroll, and the payroll never happened, so we kept getting further and further behind."

The unfunded liability growth is also blamed on past state legislatures failing to make required contributions, bad forecasts by actuaries, and not pre-funding cost-of-living adjustments for retirees.

Experts say Kentucky needs to boost its pension funding about $700 million annually to keep the plans solvent.  That's in addition to the $2 billion the state will spend on the retirement systems in the fiscal year that begins July 1.

Bowen adds the state must make structural changes to the pension systems and determine how to generate the additional revenue to make payments to current and future retirees.  Governor Bevin plans to call a special legislative session on pensions and tax reform later this year.