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September 26, 2013

$400M needed for teacher retirement system

FRANKFORT — Back in the spring as Democrats and Republicans worked on a pension reform bill, the Republican Senate initially insisted the increased costs could be met through normal growth in state revenues.

Last month, the group of independent economists who forecast state revenues on which lawmakers base their two-year budgets made a preliminary forecast of about $259 million in new state revenue next year.

But it was clear Thursday at a meeting of a budget review subcommittee that $259 million will be eaten up pretty quickly.

Gary Harbin, executive secretary of the Kentucky Teachers’ Retirement System, told lawmakers the teachers retirement system will request $400 million in new money from the General Assembly next year to keep the system financially sound.

The teachers’ system wasn’t included in the pension reform cobbled together last spring, in part because it was in better, though not ideal, financial condition. And teachers, as Harbin pointed out, stepped up in 2010 by increasing their contributions to the system by 3 percent to help pay medical costs.

Harbin said that “took $5 billion of liability off of the taxpayer,” and a pension bond approved by the legislature also helped pay back transfers the system made from retirement liabilities to cover rising medical costs. But the system still has a $14 billon unfunded liability.

While the teachers’ system is still in better shape than the state employee system, the problem will grow worse if the legislature doesn’t help next year, Harbin said.

Subcommittee chairman Sen. Chris McDaniel, R-Latonia, also reminded other lawmakers that the pension reform will require an additional $122 million next year as well.

Not all of that will come from the General Fund, McDaniel said later, but maybe as much as 90 percent will. Some agencies, which receive federal grants and other funds can use a portion of those for employee retirement costs.

But that’s more than $500 million any way it’s calculated, and right now, budget forecasts are predicting only about $259 million in revenue growth.

Pension costs aren’t the only increasing demands on the budget. The current budget used reserve money for some ongoing expenses, and Gov. Steve Beshear has said he wants to restore some education cuts made over the past five years, a period in which basic school funding has held steady while enrollment has grown.

Bill Thielen, executive director of the Kentucky Retirement System, the one which was covered by the 2013 pension reform bill, also spoke to the subcommittee.

KRS has assets of $14.5 billion, pays out about $2 billion a year in benefits, and faces an unfunded liability of about $17 billion.

About 68 percent of KRS revenues come from investments, which have averaged about 9.5 percent return over the past 30 years. Actuarial forecasts assume a 7.75 percent return.

But the return rate took hits during the recession, losing money in 2011 and especially in 2008. That brought the 10-year return down to 6.65 percent. But returns have recovered along with the stock market and last year the system earned an 11 percent return.

The system also faces a challenge from some quasi-government agencies like mental health groups, which want out of the system and have gone to court seeking to be allowed to opt out.

Each of those groups, Thielen said, has a significant share of the overall unfunded liability and if they are allowed out of the system it will drive up others’ shares and required contributions.

Ronnie Ellis writes for CNHI News Service and is based in Frankfort. Reach him at rellis@cnhi.com. Follow CNHI News Service stories on Twitter at www.twitter.com/cnhifrankfort.

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