Kentucky Pension Plans Are In Crisis and So Are Employer Budgets

Oct 5, 2017

Thousands of public employees and teachers in Kentucky are waiting with nervous anticipation to find out what changes Kentucky lawmakers will make to their retirement plans.  The pension systems face massive shortfalls and have been rated among the worst in the country. 

Employers also have skin in the game as skyrocketing pension costs threaten their budgets and daily operations.  In a letter last month to all employers in the Kentucky Employee Retirement System, or KERS, State Budget Director John Chilton warned that pension costs could rise to as much as 84 percent of payroll in the next budget.

"As a non-profit, we’ve got no place to get that," said Finance Director Debbie Chandler at Barren River Area Safe Space.

The domestic violence shelter serves a ten-county region in south central Kentucky.  Currently, the agency is paying $313,000 in pension contributions in the current fiscal year.  Without legislative changes, the projected cost for next fiscal year will be $532,000, a jump of nearly 70 percent.  BRASS Executive Director Tori Henninger says the increase is almost certain to affect her 28-member staff.

"It’s not something we can get out of, but it also means I’m not going to be able to hire full-time people into that system, and unfortunately, it may mean re-classifying my current full-time employees into part-time employees," Henninger explained.

When BRASS became part of KERS in 2002, the agency’s pension contribution was six percent of an employee’s salary.  Today, it’s nearly 50 percent.

BRASS served about 400 women and children in its shelter last year and provide a few thousand people with other services such as clothing, food, and rent assistance.  Henninger says higher pension contributions may also mean less assistance to victims of domestic abuse.

"It could mean that someone who’s trying to relocate to California to get away from their abusive partner, that $200 bus ticket is no longer an option for us," stated Henninger.

Kentucky’s public colleges and universities also face huge changes to the amount of pension contributions they have to make.  Western Kentucky University President Timothy Caboni says the current situation with retirement plans for state and local government workers is unsustainable, both for the commonwealth and WKU.

"In one of our pension systems, the university’s contribution in the past decade has gone from eight percent of an employee’s salary up to 48 percent," commented Caboni.

While the current KERS portion of an employee’s salary paid by the university is nearly 50 percent, Caboni warned in a September email to faculty and staff that the amount will likely increase to 84 percent next year. 

Dr. Caboni says pension obligations are consuming a lot of revenue that could be devoted to salary increases and other campus priorities.

The state budget director says the significant jump in employer pension contributions is primarily the result of revised actuarial assumptions by the Kentucky Retirement Systems Board.

Dennis Chaney heads the Barren River District Health Department that serves Warren and seven surrounding counties.  Of the department’s 200 workers, nearly all are in KERS.  Chaney says the majority of his budget is personnel.

"If not much were to change, we would have to look at cutting programs, which in effect, would be cutting people," Chaney told WKU Public Radio.

The health department serves communities with everything from immunizations to restaurant inspections.  This fiscal year, the agency will pay nearly $3.2 million in pension contributions for its employees.  That number is projected to jump to $5.4 million in the 2018-19 fiscal year.  The health department's contribution rate will grow from 48 percent of an employee’s salary to 84 percent. 

While the higher costs are blamed mostly on revised financial predictions, for about a decade, state lawmakers made smaller contributions to the pension plans than what was recommended by actuaries.  Chaney questions the stewardship of those tax dollars.

"What was the money used for when the appropriate contribution wasn’t made?  Was it used for infrastructure across the state, highways, water, sewage, those sorts of things?  If the commonwealth were able to benefit from that, then it’s time now for the commonwealth to pay that money back," stated Chaney. "It’s almost like we’ve loaned the state in 15 years a tremendous amount of money and now it’s time to call that loan in and repay what wasn’t contributed for 15 years.”

The state’s pension system for public employees has unfunded liabilities estimated between $37 and $64 billion.  According to State Budget Director Brad Chilton, six of Kentucky’s eight retirement plans would have to freeze benefits and be terminated if they operated under the same standards as private sector plans. 

There’s no question the plans are in crisis, but what does remain a question is how the state legislature will change benefits and lower costs without jeopardizing retirement security for current and past public employees.