Kentucky pension crisis: Local governments face 50 to 60% increase in pension costs

FRANKFORT, Ky. — Pension costs could jump 50 to 60 percent next year for local governments across the state, according to a letter sent to them Thursday by state Budget Director John Chilton.

To pay its share, Louisville Metro Government's cost of its employees' pensions would jump from $76.5 million this year to $120 million next year. For Jefferson County Public Schools, the pension tab for non-teachers would go from $36.4 million this year to $54.8 million. 

Chilton's letter notified hundreds of local government employers across the commonwealth of the specific dollar amount of increased pension costs each can expect when their new fiscal year begins next July 1.

Chilton's letter noted that local governments are confronting the same dilemma faced by state government in addressing the pension crisis. "The obvious problem is most employers cannot afford the additional pension contributions, ..." Chilton wrote. "The pension plans are in a crisis but so are employer budgets."

The increased cost to all local governments combined would be about $345.5 million next year, the letter says.

The letter went to local government employers who have employees in the County Employees Retirement Systems, or CERS, pension plans. JCPS is affected because, while its teachers are in the separate Teachers' Retirement System, its many non-teaching employees like cooks and bus drivers are in the CERS plans.

More:As anxiety grows over pensions, Louisville and JCPS brace for 'mass exodus' of retirees

Kentucky pension crisis:Bevin, top legislators reject reversing cost of living adjustments

Spokespersons for JCPS and metro government said later Thursday that they had received the letter and were still reviewing what impact it would have. 

These big estimated increases could be affected by reforms that the General Assembly may adopt later this year at a special legislative session that Gov. Matt Bevin says he will call to deal with the pension crisis.

The increases result from new, more conservative assumptions adopted in July by the Kentucky Retirement System's board for the future of the CERS plans.

Those assumptions called for reducing the assumed rate of return CERS will get on its investments from 7.5 percent to 6.25 percent, and reducing the assumed annual rate of payroll growth of the local governments from 4 percent to 2 percent.

The assumptions result in less anticipated revenue to the CERS from interest and payroll growth than previously assumed, and will require the local governments to increase their contributions to keep these pension plans afloat.

"It's a significant increase, but is not a shock today because we estimated what the impact would be after the new assumptions were made in July," said J.D. Chaney, deputy executive director of the Kentucky League of Cities.

More:Legalize pot and gambling to fund Kentucky's pensions? 'Not going to happen,' Bevin says

The League of Cities, Kentucky School Boards Association and Kentucky Association of Counties had unsuccessfully urged the Kentucky Retirement System board to not drop its assumptions so much, or at least phase in the new assumptions so local governments would not face such suddenly higher costs next year.

"These numbers are what we've anticipated - sudden and substantial increases," said Eric Kennedy, director of governmental relations for the Kentucky School Boards Association.

Chilton's letter said the new assumptions provide a "realistic" outlook for the plans as opposed to prior rosy assumptions which contributed to past underfunding adding to the state's overall public pension debt. "No more pretending that everything is just fine," he said.

Chilton said, "Priorities must be set and choices must be made. Unfortunately, the choices are not happy choices – make structural changes to the pension plans and/or reduce other spending.”

Officially, the CERS plans have nearly 60 percent of the money they need to pay future obligations. As low as that is, it is far better than the main pension plan for Kentucky state government employees that is only about 15 percent funded.

But Chilton said CERS funding levels are actually much lower than 60 percent and are so poorly funded that if they were subject to federal standards for single-employer pension plans, they would be terminated.

Kennedy, of the school boards association, said that single-employer private pension plans can not be fairly compared to multi-employer public plans. 

Betty Pendergrass, a member of the Kentucky Retirement System board elected by CERS members, said she voted against the new assumptions in July because she said they were too conservative. Pendergrass said that even state government's pension consultant PFM Group, which made a raft of controversial pension reform recommendations last week, suggested that contribution increases from local governments could be capped at 5 to 10 percent a year.

But she said the letter shows that local governments starting next year "will come under a great deal of stress - stress that I believe may not be warranted."

2017 09 07 - Chilton Ltr to CERS Employers Re Pension