It’s no secret that Frankfort’s bureaucratic bean counters possess quite the penchant for manipulating socioeconomic data to make their preferred agency’s performance appear as rosy as possible.
Within the sphere of Kentucky’s six retirement funds, this fact is all the more troubling. That’s because the best arithmetic acrobatics our number crunchers could pull off still resulted in a reported unfunded public-pension liability of $34 billion, which ranks close to the worst in the nation.
Could that actually be rosier than reality?
According to a new report from the non-partisan group State Budget Solutions (SBS), even that dismal figure turns out to include $37 billion worth of statistical hand-waving.
Accounting for actual market rates of return on investments, instead of the ludicrously arbitrary and unrealistic rate of just under 8 percent generally used in official state reporting, SBS finds that Kentucky has amassed more than $71 billion in unfunded public pension liabilities – more than twice the $34 billion figure we’ve repeatedly heard from Frankfort.
Given that Kentuckians are lucky if they can find savings accounts offering even 1 percent interest rates – not to mention nonexistent rates for checking-account dollars – how in the world have our elected officials gotten away with assuming such a whopping rate of return on invested retirement funds?
Of course, it’s easy to understand why Frankfort’s bookkeepers would want to make such an assumption. By pretending money taken out of public workers’ paychecks will earn such unrealistic returns, the debt hole our public servants have dug for us doesn’t seem quite as foreboding.
But appearances can be deceiving. According to the SBS report, called “Promises Made, Promises Broken – The Betrayal of Pensioners and Taxpayers:”
·Kentucky’s public-pension system is only 27 percent funded – third-worst in the nation. Only Illinois and Connecticut have retirement plans less funded than the Bluegrass State’s.
·Our state’s unfunded obligations currently total 41 percent of its economic output in 2012.
·Just to cover these existing unfunded obligations, each man, woman and child in the commonwealth would have to fork over more than $16,000.
It’s these realities, not Frankfort’s fudged figures, which show that the half-measures taken by Kentucky’s legislature in 2013 are not going to cut it.
Fundamental reform must be made to our public pension systems beyond simply raising taxes or taking a few dollars out of some road account if Kentucky is to become economically competitive.
Some obvious hints toward that sort of reform can be found by taking a quick look at retirement packages in the private sector.
According to Brian Strow, Ph.D. economist at Western Kentucky University and member of the Bluegrass Institute’s Board of Scholars, while defined-benefit pension plans continue to be the public sector’s retirement package of choice, in the private sector the number of defined-benefit packages has fallen by about 80 percent since 1985.
Though legislators during the 2013 legislative session did take baby steps in the direction of the proven market alternative by establishing limited “hybrid plans,” they refused to take the kind of bold stride that would guarantee total employer-employee contributions toward retirement. Instead, public workers continue to languish in an illusory world that absolutely guarantees rich benefits in the unknown – and uncertain – future.
No amount of number crunching in Frankfort can change the fact that, due to longer life expectancies and market volatility, plans that guarantee rich benefits no longer are valid systems for ensuring that public workers receive the secure retirements they earn.
The private sector discovered this reality decades ago.
Unfortunately, Kentucky’s bean counters seem content to ignore the unfortunate truths of our public pension woes in an attempt to disguise Kentucky’s $71 billion Grand Canyon of debt to look more like a pothole on the Bluegrass Parkway.
Jim Waters is president of the Bluegrass Institute, Kentucky’s free-market think tank. Reach him at firstname.lastname@example.org. Read previously published columns at www.bipps.org.