Kentucky Pension Panel to Recommend New Reforms, Funding

kentucky-state-capitol-357.jpg

BRADENTON, Fla. — With one of the lowest-funded pension systems in the nation, Kentucky is once again poised to consider reform measures during the upcoming legislative session, including additional funding to avert potential insolvency, state officials said.

The recommendations, ranging from providing more tax dollars to fund the pension system to increasing oversight, are expected to be included in the annual report of the Kentucky Public Pension Oversight Board.

The 13-member panel meets Dec. 15 to finalize the document that will go to the General Assembly for consideration during next year's session, which begins Jan. 6 and runs through March 30.

Rep. Brent Yonts, D-Greenville and co-chair of the Pension Oversight Board, said there are ways the state can improve cash balances of the Kentucky Retirement Systems.

Yonts suggested that the state could consider giving KRS $200 million in additional sales taxes expected to be collected through the Marketplace Farness Act of 2013. The federal act gives states the authority to compel online and catalog retailers to collect sales tax at the time of a transaction, no matter where they are located.

The state retirement systems serve more 334,000 active, inactive, and retired members.

KRS has $14.5 billion in assets but faces more than $17 billion in unfunded liabilities due to investment losses during the recession, and years of underfunding from the state, KRS officials said.

Kentucky's funded pension ratio is 24%, the third-lowest in the country behind Illinois at 22% and Connecticut at 23%, according to a Nov. 12 report by State Budget Solutions, a project of the nonprofit think tank the State Policy Network.

The pension board has approved 13 recommendations, though five measures are administrative and could be implemented without legislative action, officials said.

Eight recommendations, including new sources of revenues to deal with KRS' general underfunding and cash flow needs in the non-hazardous employees' pension fund, will require action by lawmakers.

One legislative recommendation is designed to prevent "pension spiking" where employees inflate their compensation in the years immediately before retiring in order to receive larger pensions than they otherwise would be entitled to receive.

Two other recommendations address certain agencies that participate in the retirement systems, and stipulate how they can withdraw from the pension system.

Those measures were proposed because of a situation that arose when a nonprofit community mental health center called Seven Counties Services filed for Chapter 11 bankruptcy. In June, Seven Counties obtained a judicial ruling allowing its contract with KRS to be rejected.

KRS, which has said that Seven Counties has about $90 million in unpaid pension liabilities, has appealed the bankruptcy judge's ruling.

Some of the recommendations in the pension board's report have already been the subject of pre-filed bills for the upcoming session.

Though Kentucky has addressed pension reform measures in recent years, failure to make the full actuarial required contribution has kept the funded levels low, an issue cited by all three rating agencies.

In June, Moody's Investors Service revised its outlook on the state's Aa2 issuer credit rating to stable from negative due to the improving economy, but said large pension liabilities remain a source of credit pressure.

Standard & Poor's affirmed its AA-minus issuer credit rating in May, while maintaining a negative outlook due to pension funding concerns. Earlier this year, Fitch Ratings assigned an implied general obligation rating of AA-minus, and said the rating outlook is stable while cautioning that Kentucky's pension system liabilities are well above average for a U.S. state.

For reprint and licensing requests for this article, click here.
Buy side Kentucky
MORE FROM BOND BUYER