A key finding of the Public Pension Task Force review of the Kentucky Employees Retirement System in 2012 was that repeated underfunding by the General Assembly was a major reason Kentucky’s system became one of the worst funded in the country. Kentucky’s budget process (from proposal to final passage) fails to indicate whether employer contributions for retirement are adequate to meet the systems’ liabilities.
The budget does not set forth the total amount that actuaries have determined is needed to adequately fund Kentucky’s pension systems (known as the actuarially required contribution or ARC), nor does the budget clearly account for all funds being provided to the systems. As a result, it is not clear to the public, or even policymakers in some cases, the total amount of the employer contribution in the state budget and whether that amount is sufficient to ensure the retirement systems have adequate revenues to pay pension benefits and to pay down any outstanding unfunded liability.
Critical changes are needed in Kentucky’s budget process to ensure public disclosure of funding levels of the state’s pension systems. The Chamber proposes statutory changes requiring that the budget the Governor submits to the General Assembly:
- clearly sets forth the total amount of employer contributions (the ARC) that actuaries have determined is necessary to fully fund the retirement systems.
- specifies the source of the funds for employer contributions for the budget biennium (state General Funds, federal funds, agency funds, etc.).
- clearly states the adequacy of funding being provided as a percent of the ARC (100% of the ARC, 85%, etc.).
As the budget moves through the General Assembly, an actuarial analysis of the retirement contribution should be required before the budget can be considered on the floor of either chamber. This analysis would determine whether funds provided in the budget for the retirement systems are adequate and certify the percentage of the ARC being funded.
The proposal also would address another problematic finding of the Public Pension Task Force: that some assumptions made by the actuary for the retirement system were determined to be incorrect. (And it is worth noting that the assumptions for both KRS and KTRS are made by the same actuary.) The creation of a Consulting Actuarial Group would help to remedy this problem by providing independent expertise to inform pension funding decisions. This group, similar to the existing Consensus Forecasting Group that estimates state revenues, would conduct an annual review of Kentucky’s pension systems to determine:
- whether the enacted employer contribution to the systems is adequate based on actual experience.
- the accuracy of assumptions made by actuaries for the retirement systems on which the contribution rate is based; this includes assumptions such as the rate of return on investments, the rate at which employees are retiring, health insurance costs, the average compensation and pay raises of state employees (on which the amount of pension benefits are based), etc.
- the financial impact on the system of actuarial assumptions not being met. To ensure transparency, the Consensus Actuarial Group would annually report its findings to the Public Pension Oversight Board created by the 2013 pension reform legislation.
The Chamber also supports adding members to the KRS board with investment experience and promoting transparency by publicly posting investment fees. KRS also should be required to operate under the same procurement and personnel rules as the rest of state government.