A group of Louisville teachers plans to file a class-action lawsuit claiming the governor and Kentucky General Assembly violated a contractual obligation by deliberately underfunding the teachers' retirement fund by billions of dollars.
Lebanon attorney Theodore Lavit said the lawsuit will name Governor Steve Beshear, Senate President Robert Stivers and House Speaker Greg Stumbo as defendants in the suit. The potential plaintiffs will seek $11 billion to restore money to the underfunded Kentucky Teachers Retirement System, which covers about 140,000 teachers across the state, according to sources familiar with the prospective case.
"Some experts believe that in four, maybe five years, at the present funding rate, that it'll be impossible to recapture what's needed," Lavit told Kentucky Public Radio. "There are quite a few teachers upset about the present state of affairs."
Currently, the KTRS pension is funded at about 50 percent, placing it well below what experts say is a pension's proper balance of its assets to its unfunded liabilities—the difference between how much money it has on-hand versus how much it has to pay out in benefits.
Put another way: It's the difference between how much money a household has in its bank account versus how much it owes on its credit card bills. KTRS has about $13.9 billion in such unfunded liabilities—a number that is expected to swell exponentially to about $23 billion in 2015 when new federal accounting standards kick in, according to the most recent numbers.
By that point, the potential plaintiffs' argument goes, the pension will come dangerously close to entering a "death spiral" when the total figure to bailout the pension will be too high.
That could result, they'll argue, in negative effects on the state's credit rating or, as in the case of pension-addled Illinois, reduced benefits for public employees. Earlier this year, The Retired State Employees Association of Illinois and the Illinois Retired Teachers Association filed suit against the state for those reasons.
In the most recent budget passed by the General Assembly, KTRS received only half of the $1.4 billion it requested, or about $752 million.
"It's quickly becoming too big to bail," said Randolph Wieck, a social studies teacher at Louisville's Manual High School and one of the proponents of the lawsuit.
"The longer the legislature breaks its promise to the teachers, the greater the damage. And we finally have been forced to take some rather drastic action."
Wieck, 64, says the group has formed the Teacher Retirement Legal Fund to help pay for the suits cost in the absense of any official support from their union, the Jefferson County Teachers Association. Brent McKim, president of the JCTA, could not be reached for comment.
Lavit plans to argue the case on the grounds that the state has violated Section 19 of the Kentucky Constitution, which prohibits the legislature from enacting laws (in this case, budget bills that don't appropriate money for KTRS) that impair the obligation of contracts. He also alleges lawmakers could have violated Article I, Section 10 of the U.S. Constitution, opening the legislature up to a federal suit; but he said the case will most likely go to Franklin Circuit Court.
Lavit said that although he is unsure when he will file the suit, he believes it already has a stronger legal basis than the landmark 1989 decision of Rose v. Council, which concerned how the General Assembly's funding public education resulted in systemic inequalities. Lavit successfully argued that case before the Kentucky Supreme Court in the mid 1980s, which resulted in the Kentucky Education Reform Act of 1990.
Chris Tobe, a public pension consultant and author of "Kentucky Fried Pensions," is aiding the teachers group to collect financial evidence of the legislature's failure. He provided Kentucky Public Radio with a "damage estimate" of how much Frankfort has deprived the fund over the years.
"Of the $13.8 billion in KTRS liability, only about $2.7 billion can be attributed to the broad market meltdown in 2008," Tobe said, adding that "over $11 billion was the result of deliberate underfunding (or raiding) by the legislature."
Tobe said amount would essentially restore solvency to the fund, bringing it to about an 80 percent funding level. That would leave the aforementioned $2.7 billion gap, which Tobe said represents losses on investments from fluctuations in the investment market and, therefore, shouldn't be considered the fault of the legislature or the governor.
Tobes notes that KTRS is unique among Kentucky's top public pension systems in that it is relatively free from the kind of back-door dealing and risky hedge fund investment that have befallen the Kentucky Employee Retirement System, which he estimates has lost about $3.9 billion because of mismanagement and underperformance of its investments.
KTRS legal counsel Beau Barnes, who also advised the teachers group on the finances of their pension system, said that the 2008 market meltdown delivered the biggest hit to the pension fund. While he said that KTRS is not officially weighing in on either side of the lawsuit at the moment, he agreed that the legislature has the ultimate responsibility in honoring its contract with teachers to fully fund their pensions.
"Ultimately, the responsibility for providing the pension rests with the Commonwealth," Barnes said, "The Commonwealth has an obligation to provide these benefits, and the obligation is not subject to alteration."
State Rep. Jim Wayne, a Louisville Democrat and longtime critic of the state's fiscal activities, said an independent actuarial analysis should be conducted of the KTRS to verify the claims, and that the current system has enough problems that it should be studied regardless of any pending lawsuit.
Lavit said he believes the lawsuit will only be successful if it attracts enough support for teachers among the public and from the courts themselves, adding that he has not spoken with either the JCTA nor the Kentucky Education Association to gauge their reaction.
"They've got to walk a tight rope, some of these organizations, especially the unions, because they have to deal with these legislators on other issues," Lavit said. "They have to figure out which side of the bread their butter lies on."