Policy Documents

Future Shock: Legislators Stoking the Coals on Kentucky’s Runaway Pension Train

Lowell Reese –
January 2, 2012

The pension and healthcare funds for government employees in Kentucky — the state-administered pension systems — are in significant financial stress. The unfunded liabilities stand at $31 billion. 

Public employee pensions in Kentucky are badly draining the budgets of city and county governments, dipping into the budget of the commonwealth as never before, pushing up the state’s debt level while pulling down its credit rating. The pension obligations are on the brink of dramatically crowding out funds for essential government services such as public safety and education. 

Kentucky’s public servants and retirees are increasingly and rightfully concerned about the security of their retirement livelihood. But towering above that, funding their pensions has become a societal issue. The standard of living of all Kentuckians is at stake. 

How is that, you ask? Human progress depends on economic progress, and economic progress depends on laws that favor it — and on education. Two-thirds of the state’s budget, the General Fund, goes to education. When public employee pensions compete with other government programs for funding, pensions will come first. 

An education is not guaranteed in the U.S. Constitution; honoring a contract, arguably public employee pensions, is expressed in the U.S. Constitution, in Article I, Section 10, the contract clause. 

Specific provision for government pensions is not included in the commonwealth’s constitution. However, protection language for public pensions is firmly embedded as “inviolable” contracts in Kentucky’s statutes and court rulings, language that legal experts say strengthens its judicial standing, if it’s ever contested in federal court. 

So, the options are limited on how Kentucky can pull itself out of this deep hole, which it must do, ultimately, because the retirement benefits that were in place on the first day of a government worker’s job represent binding promises, guaranteed by taxpayers, that cannot be taken away, short of a court order, during the employee’s lifetime, or longer if the retiree predeceases his or her spouse. 

The state’s six retirement funds have long-term obligations (benefits owed to retirees) that are double the funds’ assets (the ability to pay the future obligations) – $61.7 billion in future obligations but only $30.7 billion in assets, which means that 50.3 percent of the obligations are not funded. That’s a collective figure; the state employees’ fund (KERS) is in the worst shape of all — in Kentucky and in the nation — with 67 percent of its future obligations not funded. 

Lawmakers need to come up with $23 billion for Kentucky’s retirement systems, on top of the systems’ current revenue stream, to get the systems in good health again. That amount would not entirely erase the $31 billion unfunded liability, but an influx of $23 billion would bring the funding up to an 80 percent - level, where the actuaries and experts want it to be: 80 percent or above.