Kentucky pension systems expect to need $4.6 billion from next two-year state budget

Kentucky’s state pension agencies told lawmakers on Tuesday that they expect to need nearly $4.6 billion from the next two-year state budget when it’s written this winter, mostly to cover massive pension debts.

The largest share will go to the Teachers’ Retirement System of Kentucky, which provides retirement benefits to 56,629 retired Kentucky educators, with 73,151 more educators actively enrolled. For fiscal year 2023, TRS expects to need $1.25 billion from the state; for fiscal year 2024, it’s $1.33 billion.

The state’s General Fund is about $12.5 billion a year, said Rep. Jim DuPlessis, R-Elizabethtown, at Tuesday’s meeting of the Public Pension Oversight Board in Frankfort.

“So that’s 10 percent, basically, of the entire state’s General Fund budget ... is going to pay for educators’ pensions,” DuPlessis told his colleagues on the panel.

“It’s mind-boggling to realize,” he said. “And when you hear that we need to pay teachers more, I agree. We need better roads, we need better this. But when 10 percent of any budget is going to an item, that’s significant.”

The state’s obligations to the Kentucky Public Pension Authority are estimated at roughly $1 billion for each of the next two fiscal years, including what it owes for state government employees and other public employees enrolled in KPPA for whom the state provides assistance on pension costs.

Nearly 400,000 state and local government workers or retirees are enrolled in the KPPA, including non-teaching employees at school districts and regional universities.

For both TRS and KPPA, most of the current cost is the result of unfunded pension liabilities that resulted from many years of inadequate funding by state leaders.

TRS has 54 percent of the money it’s expected to need for future pension payouts. The total pension funding level at KPPA is 33 percent across all of its funds, but for the primary state government pension fund, it’s only 14 percent, ranking it at the bottom for public pension funds nationwide.

Both pension agencies are in the early stages of three-decade amortization plans to pay down their unfunded liabilities at the same time they cover newly incurred — and much smaller — obligations to current workers. For most state employees, for example, budget-writers must find 67.42 percent of their payroll costs to pay down the pension shortfall, compared to just 7.9 percent of payroll costs to pay for new pension obligations.

In roughly 25 years, if Kentucky stays on schedule to successfully pay off these debts, public pension costs will shrink to a small fraction of their current size. But that’s in the future, lawmakers remarked Tuesday.

“I just want to caution everybody,” said Senate budget chairman Chris McDaniel, R-Taylor Mill. “We just have to remember that we’re a ways off from what would be a healthy funding level.”

Officials from both pension agencies said Tuesday’s numbers are preliminary, but they don’t expect the final numbers their actuarial advisers provide later this fall to be much different.

Also on Tuesday, an advocacy group for state government retirees asked lawmakers to consider providing them with their first cost-of-living adjustment in a decade.

Jim Carroll of Kentucky Government Retirees said the KPPA portfolios gained $3.15 billion in value during the last fiscal year, with investment returns beating 20 percent. The state could use some of that “unprecedented windfall” to give a one-time, 1.5 percent raise to state pensioners that would last for five years, Carroll said.

Carroll said his group understands the state’s top goal has been paying down the pension debt. But the cost of living has risen about 14 percent since 2012 while pensioners have lived on frozen benefits, he said.

“We just thought this was an opportunity, when you’re making $3 billion,” Carroll said. “Ninety-five percent of the retirees live in Kentucky, so this is money that will be spent in Kentucky, that will be spent in local communities.”

Several lawmakers gave sympathetic but noncommittal responses to Carroll’s proposal.

“I think COLAs need to be part of the discussion,” said DuPlessis. “I’m open to ideas.”

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