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Kentucky’s pension overhaul: No time to waste

By David Adams

For decades, Kentucky policymakers have recklessly avoided tackling a burgeoning crisis involving the state’s public employee-benefits system.

The 2006 financial report of the Kentucky Retirement Systems indicates unfunded pension and health-care liabilities totaling $16.9 billion, which adds up to more than $4,000 for every man, woman and child in Kentucky.

The direness of the situation is impossible to exaggerate and should be dominating the 2007 session of the Kentucky General Assembly. Instead, proposed fixes offered by the House and Senate being offered in the final week of the session fail to pay even passing attention to the problems at the root of this fiscal disarray.

Senate President David Williams deserves commendation for finally accompanying his stated dismay of the problem with an unmistakable admonition for House leaders to get serious about addressing the crisis or face gridlock on most spending projects. However, even Williams’ plan fails to make fundamental changes in how state government benefits are doled out.

House Bill 418 proposes extending for one year the practice of calculating public-employee pensions based on the three years that state workers earned their highest salaries. Theoretically, this bill would help address the current crisis by holding off the expected tidal wave of government retirees whose pensions the state will have great difficulty paying without productive reform.

Proponents of this approach hope that the resulting higher salaries contributing to bigger retirement checks in the future will coax current state workers to remain on the job longer and delay their pension payments.

If HB 418 is a Band-Aid for a broken leg, then the Senate substitute is an Ace bandage.

By proposing that the entire $538 million actuarial shortfall be bonded, the Senate substitute offers an improvement compared to the original House bill. However, it still leaves to the future issues that must be confronted and dealt with in order to bring effective reform to this entrenched and costly system.

In addition to its bonding proposal, the Senate’s plan also includes a partial switch from a policy based on “defined benefits” to one of “defined contributions.”

While this is certainly the right direction for the state to eventually travel, trying to include this plan now – at the end of a legislative session – is ill advised. This switch would likely start a war with union officials, which would be extremely counter-productive and kill what little chance of progress exists.

However, it appears that the Senate plan is the best we can hope for this year. Therefore, policymakers should implement those parts of the provision that finance contributions through the funds provided by the bonding process.

But far more needs to be done. Problems with the commonwealth’s pension system are not limited just to investments falling short of future liabilities. Issues abound concerning Kentucky’s entire public-employee system.

For example, the oft-abused practice of “double dipping” must be addressed. This scheme involves an employee retiring and then getting another state job – at or near the same salary – almost immediately. These workers get a salary and pension from taxpayers. But taxpayers receive no more productivity for their increased investment.

When government employees retire, they should be thanked for their years of service and receive promised pension checks. But allowing them to re-enter the workforce at nearly the same salary as when they retired from their earlier job and started drawing a pension is breaking the bank.

Rather than just nibbling at the edges of the pension situation, Kentucky needs to either encourage would-be retirees to go ahead and leave en masse, or – and perhaps more important – stay around a few more years and train their replacements.

The lack of systematic succession training in government offices is hurting our state financially and will only get worse as the number of public retirees swells to unprecedented levels. Instead of hiring back recent retirees at or near their last salary in addition to their pension, why not make training new workers part of fulfilling their job requirements before leaving?

This way, state employees – with higher salaries due to the tenure of their employment – would be replaced with younger, better-trained, employees at a significantly lower cost. The savings could then be applied to make pension payments.

Failure to end such practices as double dipping or address other critical issues, including public-employees’ over-utilization of health benefits – currently double that of the private sector – will ensure that Kentucky’s public-pension plans will be unable to meet their obligations.

– David Adams is the director of KentuckyVotes.org, a voter information Web site. Contact him at s.dadams@prodigy.net or at (270) 782-2140.

The Bluegrass Institute is an independent research and educational institution offering free-market solutions to Kentucky's most pressing problems.

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