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Old 03-01-2019, 06:27 AM
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Mary Pat Campbell
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KENTUCKY
ILLINOIS

http://www.governing.com/topics/fina...m_medium=email

Quote:
The Drastic, Risky, Measures to Fix America's Brokest Pension Systems
Kentucky and Illinois are weighing extreme options to reduce their pension debt -- but critics say they could ultimately cost the states more.

Spoiler:
Kentucky and Illinois have two of the worst-funded pension plans in the country, and they’re struggling under the weight of skyrocketing costs. Both are now considering drastic measures to ease the annual burden in ways that critics say will ultimately make the problem worse.

In Kentucky, where teachers staged a "sickout" on Thursday over separate pension legislation, an unusual, if not unprecedented, bill is making its way through the legislature that would allow regional colleges, universities and other quasi-government institutions to leave the state's troubled pension system without immediately paying off their debt. Instead, they could pay it off over 25 years. Employers leaving the fund would be required to provide other retirement options for their employees, such as a 401(k).

The legislation is being pushed by the presidents of the regional universities as increasing pension costs are squeezing their budgets and forcing them to raise tuition.

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But ditching the plan without a lump sum payout is a move that actuaries have warned could threaten the solvency of the $2 billion plan.

“We believe that enacting this provision will result in substantial sustainability risk as other employers lobby for the enactment of similar type legislation to reduce their pension cost,” GRS Retirement Consulting said in a report last week.

Jim Carroll, co-founder of the advocacy group Kentucky Government Retirees, is worried that the government employers that don't leave the pension system will ultimately pay the price.

“This makes a bad problem worse by incentivizing employers to leave,” he says. “You could end up with a bankrupt plan, and how does that help anything?”

Kentucky’s state employees plan has been in a freefall for more than a decade, despite major reforms. Over the past 10 years, it’s gone from paying the equivalent of 6 percent of its payroll costs toward pensions to roughly half last year. (The average among all states is less than 15 percent.) During that time span, the state plan has gone from having about 60 percent of the assets it needs to meet its liabilities to just 13 percent.

A big reason costs have spiked recently is because the pension system changed the way it values its liabilities. That’s resulted in a roughly one-third increase in pension payments for government employers. The state’s regional colleges and universities have been allowed to phase that in, but they’re worried about future hikes. The schools say the strain has already forced them to increase tuition, which is making college unaffordable for middle- and lower-class families.

The bipartisan bill passed the Kentucky House this week by a wide margin and is now before a Senate committee. Gov. Matt Bevin has stayed quiet on the bill, but he previously vetoed legislation that would have allowed government agencies to exit the state-run, county employees pension plan.


Illinois Gov. Pritzker's Pension Plan
In Illinois, pension costs are similarly overwhelming. Newly elected Gov. J.B. Pritzker’s administration is pushing a plan that -- if it fails -- could result in Illinois being the first state in the modern era to be downgraded to junk status.

Facing a $3.2 billion budget deficit, Pritzker wants to extend the schedule for paying off the state's pension debt by seven more years. He says the change would save $800 million a year.

That sort of delaying the inevitable is exactly what got Illinois into its current pension crisis and, S&P Global Ratings warned this week, “has been a key contributor to Illinois’ deteriorating credit position,” which is one notch above junk. “If it adopts the budget in its current form,” the agency continued, “it remains at risk of repeating a pattern of putting off hard choices while eroding pension funding.”

The plan would put a huge dent in the state’s pension payment, which is scheduled to be $9.1 billion next year, or roughly 21 percent of the budget. (The average among all states is about 6.5 percent, according to the Center for Retirement Research.) The state employees plan, which represents about one-third of that $9.1 billion payment, is in the worst shape -- over 10 years, it has gone from 54 percent funded to just 35 percent. Meanwhile, the state's annual payments into the plan have nearly tripled.

Pritzker’s administration is also looking at reducing the pension system’s unfunded liability by issuing $2 billion in bonds and is evaluating publicly owned assets to sell or repurpose. Proceeds from bond and asset sales or transfers would go into the pension plan to pump up the value. The administration is pitching an income tax hike on higher-earners to help pay off the bonds.

Analysts characterize those ideas as big risks that have a high chance of not paying off.

Pritzker's budget plan faces long odds as conservatives criticize it for relying on new taxes, and progressives say it doesn't go far enough to tax the wealthy and corporations.


Comparing Kentucky and Illinois
Illinois and Kentucky share some key similarities that contribute to how they got here.

For starters, neither state paid its full pension bill for years, which is akin to skipping credit card or mortgage payments and letting the interest pile up. While many other states did the same, Illinois and Kentucky neglected pensions to the point where they were already unhealthy by the time the recession hit in 2008 and severely damaged plans.

Both state employees plans also have more retirees than active employees, which means they are paying out more money than they are taking in most years.

But when it comes to turning things around, the states face different barriers.

Illinois' obstacles are generally legal and political. Protections for worker pensions are fierce and, barring a change to the state constitution -- which is likely difficult -- Illinois will be hard-pressed to find ways to reduce its retirement liabilities.

Kentucky’s biggest barrier is time. Its state employees' plan has been cash-flow negative for more than a decade. Following pension reform, it reduced its liabilities and has for the past three years met or exceeded its payments. But according to actuaries, Kentucky must continue to overpay for years to keep the plan solvent. Any slight shift in finances could derail the fund.
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