Research & Commentary: Kentucky Pension Reform

Published March 2, 2013

Kentucky’s government employee pension system is currently carrying a $33 billion unfunded liability and has less than half the money it needs to cover all its present and future obligations. Both houses of the Kentucky General Assembly are considering proposals that would reform the state’s failing pension system.

One proposal would create a new 401(k)-style hybrid plan for new state employees and eliminate annual cost-of-living increases for retirees. This legislation, Senate Bill 2, is based on recommendations from a legislative task force that reviewed Kentucky’s financially troubled pension system.

The legislation also recommends the state pay its full contribution to the Kentucky Retirement Systems beginning next fiscal year, meaning an additional $200 million in funds for the pension system. The bill does not include a new funding source for payments.

When SB 2 reached the Kentucky House of Representatives, lawmakers struck language from the bill that shifted the system for new workers to a 401(k)-like plan, and they added new language allowing retirees to receive cost-of-living increases as long as the state can afford them. Proposals for new revenue sources for the state’s pension system include increasing the state’s cigarette tax from 60 cents to $1 per pack and new revenue from lottery games and horse tracks.

Raising taxes and ignoring the core problems created by the state’s current defined benefit system only ensure that Kentucky’s pension system will never become solvent. Comprehensive reforms that allow the state to better manage employee retirement costs are desperately needed. 

By placing newly hired public-sector workers in a defined-contribution pension plan, the state would be able to reduce the cost of retirement benefits and prevent new unfunded pension liabilities. State workers would gain flexibility with their retirement benefits because they would own their pensions and be able to keep them if they leave the public sector.

The documents linked below offer additional information about pension system reform in Kentucky and elsewhere.

Kentucky Pension Reform Bill Clears First Hurdle
Beth Musgrave of the Lexington Herald-Leader examines the pension reform bill proposed in the Kentucky Senate that would move new state employees to a 401(k)-style hybrid plan and eliminate annual cost-of-living increases for retirees. 

House Passes Pension Bills, Sends Them to Senate
Roger Alford of the Associated Press examines the Kentucky House’s changes to and passage of the Senate’s pension reform bill and the passage of additional legislation for new revenue to fund the state pension program. “Revenue from lottery games and slot-like machines at horse tracks could be used to shore up Kentucky’s pension plans for government retirees under legislation that passed the Democratic-controlled House largely along party lines,” he writes. 

Kentucky’s Pension Challenges: Opportunities for Real Reform
This paper from the Pew Center on the States examines the challenges posed by Kentucky’s failing pension system, how those problems came to happen, and some opportunities for reform. 

Future Shock: Kentucky Politicians’ Opulent Pensions Have Become a Modern Day Gold Rush
Lowell Reese, owner of Kentucky Roll Call, a public affairs publishing company in Frankfort, and a former state chamber of commerce executive, names both current and previous legislators who personally benefited from critical votes approving House Bill 299 in 2005. 

Future Shock: Legislators Stoking the Coals on Kentucky’s Runaway Pension Train
The second of the Bluegrass Institute‘s four-part “Future Shock” series written by Lowell Reese chronicles the disintegration of the commonwealth’s six retirement systems and urges lawmakers to undo the bad decisions that brought about the problems. 

Research & Commentary: Defined Contribution vs. Defined Benefit Pensions
John Nothdurft of The Heartland Institute provides a bullet-point comparison of defined-benefit pensions and defined-contribution retirement plans.

The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform
The Reason Foundation tackles the looming crisis created by states’ continued use of defined-benefit pension plans, offering solutions to the problem and an analysis of why the current system is a disaster in the making. 

The State Public Pension Crisis: A 50-State Report Card
The Heartland Institute examines problems facing public pension systems, including the enormous burdens they pose in some locations. The report ranks each state on the operation and disposition of its pension plans and suggests ways to solve states’ pension system problems. 

Research & Commentary: Public Pensions and the Assumed Rate of Return
Heartland Institute Senior Policy Analyst Matthew Glans examines the problems facing state and local pension funds, how assumed rates of return affect pension fund debt, and proposals to change the projected rates of return on pension fund investments. 

Are State Public Pensions Sustainable? Why the Federal Government Should Worry about State Pension Liabilities
Joshua D. Rauh of Northwestern University analyzes the flow of state pension benefit payments relative to asset levels and contributions. Even assuming future state contributions fund the full present value of new benefits, many state systems will run out of money in 10 to 20 years unless they improve the funding of liabilities already accrued. The expected shortfalls raise the possibility the federal government will be asked to bail out states driven to insolvency by their pension programs. 

State Pension Funds Fall Off a Cliff
Barry W. Poulson and Arthur P. Hall consider different measures of historical and current funding shortfalls in state pension plans. Two case studies—the Public Employee Retirement Association of Colorado (PERA) and the Kansas Public Employee Retirement System (KPERS)—are examined in depth to explore the fatal flaws that have caused funding crises in these plans. 

Let Employees Control Future of Retirements
Jagadeesh Gokhale and Peter Van Doren of the Cato Institute explain why the market is best-suited to relieve the fiscal pressures caused by state pension funds.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the FIRE Policy News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Legislative Specialist Matthew Glans at 312/377-4000 or [email protected].