Local governments facing major increases in pension contributions unless Legislature acts, Chilton says

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By Tom Latek
Kentucky Today

Local governments in Kentucky would pay 50 to 60 percent more next year to fund pensions for workers, unless the General Assembly acts, according to an email to local officials from State Budget Director John Chilton.

Without changes by lawmakers to the state’s wobbly pension system, local governments will have to make payments into the County Employees Retirement System of between 29 percent and 51 percent of their payroll, depending on the type of employee.

“To address budgetary implications to the Commonwealth and to all employers, priorities must be set and choices must be made,” Chilton wrote. “Unfortunately, the choices are not happy choices – make structural changes to the pension plans and/or reduce other spending.”

State Budget Director John Chilton, shown at a July legislative committee meeting, sent an email to local government leaders about the dire situation of the pension system. (Kentucky Today/Tom Latek)

The most significant revised assumptions include the long-term average investment rate of 6.25 percent which was previously 7.5 percent and the payroll growth rate that is 2 percent and previously 4 percent, he wrote.

“While the CERS plans are in better shape than other Kentucky plans, the funding level is below 60 percent. This is in spite of the fact that the assessment of funding levels is based on the old actuarial assumptions that were used in the FY 2016 calculations,” he wrote. “Applying realistic assumptions, CERS plans’ funding levels are actually much lower. In addition, using the same investment rates of return that corporate plans are required to use – the Corporate Bond Index rate – the CERS unfunded liability goes from $5 billion to $9 billion.”

Across Kentucky’s eight plans, using the Corporate Bond Index rate, the aggregate underfunding goes from $33 billion to $64 billion, he wrote.

Chilton wrote to the CERS member CEOs how dire the situation has become.

“If Kentucky plans were subject to federal standards for single-employer private plans, the CERS plans would be designated as having severe funding shortfalls because their funded status is less than 60 percent,” he wrote. “As such, federal law would require that all benefits be frozen and the plans terminated. This is true even using the old 2016 actuarial assumptions, not the more realistic discount rates and other assumptions required of private plans. The need for significant reform is evident to anyone looking at the health of the CERS plans within that larger context, not simply benchmarking it against the health of the KERS plans.”

According to the letter, Chilton said discussions of the pension system have become more intense, since PFM Group, the state’s pension consultant firm hired by the Bevin administration, issued its recommendations.

“That report presented options that Governor (Matt) Bevin and legislative leadership are evaluating and considering,” he wrote. “The recommendations provide a framework for legislation to be proposed in an upcoming special session of the General Assembly.”

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