This is one of those stories that gets more amazing the further you dig into
it. Seems that while Chicago descends
into a very public, front page news bankruptcy, Kentucky is, dollar for dollar,
screwing up even more badly:
State
pension funding level drops again, to 17 percent
(Kentucky.com) - The $16 billion Kentucky Retirement Systems on Thursday
lowered the rate of investment return it assumes state pension assets will
earn, which means funding levels for two tax-subsidized systems - ranked
among the nation's worst - fell even further.
For the next state budget, the change means lawmakers must find tens of
millions of extra dollars to keep the retirement systems afloat. The state's
annual recommended contribution to KRS already was expected to hit $880 million.
"We're in a disastrous cash position. We need help immediately from the
next governor and the legislature," said Jim Carroll, a member of an advocacy
group called Kentucky Government Retirees. "We're in a fund that can't afford
any more market losses. There's no cushion left. What happens if the market
crashes is, we go flat busted, and then maybe a judge has to step in and
order the state to make payments."
The KRS board of trustees voted to drop the assumed rate of return from
7.5 percent to 6.75 percent for two of the pension funds the agency oversees,
the Kentucky Employees Retirement System (Non-Hazardous), which includes
120,595 state workers and retirees, and the State Police Retirement System,
which includes 2,379 active and retired troopers.
Consequently, KERS now has only 17 percent of the money it's expected to
need to pay promised benefits, down from the 19 percent announced just last
month, and it faces $10.9 billion in unfunded liabilities, as compared to
the previous sum of $10 billion. SPRS' funding level now stands at 31 percent,
down from last month's 33 percent, and it must cover a $542 million gap in
coming years, up from $485 million.
The County Employees Retirement System, which includes local government
workers and retirees, is in better shape financially, with $6.4 billion in
pension assets and a 60 percent funding level. CERS can continue to make
substantive, long-term investments that produce higher returns over time,
unlike cash-strapped KERS and SPRS, so its assumed investment return will
remain at 7.5 percent, KRS officials said.
KRS previously lowered the assumed rate of return for all of its funds to
7.5 percent in 2014, down from 7.75 percent, which seemed unrealistically
high, given the systems' actual investment performance. The average assumed
rate of return among public pension systems this year is 7.68 percent, KRS'
investment consultants told the board Thursday.
For more than a decade, Kentucky governors and lawmakers failed to contribute
the recommended sums into the state pension systems, spending the money elsewhere
as funding levels steadily dropped from around 100 percent. That inadequate
support left KRS unable to recover from the 2008 recession. Elsewhere around
the country, where state officials were more fiscally disciplined, the median
state pension fund last year had bounced back to a 70 percent funding level.
The same Kentucky lawmakers who write the state budget keep their own state
retirement accounts in a separate system, one that is 85 percent funded,
and they repeatedly have rejected calls to merge their pensions into the
ailing KRS.
At its Thursday meeting, the KRS board approved a resolution calling for
the 2016 General Assembly to make the entire annual recommended contribution
to KRS, as well as any additional funds it can provide.
Board members discussed different ideas for more state funding, such as
a pension obligation bond. That would require the state to borrow billions
of dollars from the bond market in the hope that its return on that money,
wherever it was invested, exceeded the bond payments and interest. Generally,
lawmakers have not been receptive to the idea of bonding to raise large sums
for KRS or the Kentucky Teachers' Retirement System, which also faces growing
unfunded liabilities.
"It's up to them to determine if it's available and what the source is.
But we obviously would recommend additional funding, given our current cash
position," KRS executive director Bill Thielen said after the board meeting.
Where to begin.
The fact that the state's pension plans are this underfunded after an epic
bull market in stocks, bonds and real estate means that in the next downturn
the carnage will be breathtaking.
The fact that these funds are still expecting 7%+ returns going forward with
investment-grade bonds yielding less than half that much and equities at valuation
levels that have historically preceded bear markets implies that the people
running these plans are clueless, desperate or some combination thereof.
The fact that the politicians' pension plan is almost fully-funded implies
that they know how to run such a program competently but have chosen not to
bother keeping the promises they made to public sector union workers. Major
electoral turmoil coming.
This is all shocking, of course. But why should non-Kentuckians care? Because
a lot of other state pension plans are nearly as badly run, and the aggregate
amounts are in the trillions of dollars. In the next stock or bond bear market,
these funds' problems will become too big to ignore and will either result
in a wave of municipal bankruptcies or a federal bailout on the scale of 2008-2009,
which is to say several trillion dollars.
Out there somewhere is a black swan so heavy that its landing breaks the current
system. There's no way to know which it will be, since the possibilities (junk
bonds, over-the-counter derivatives, wide-spread war, emerging market dollar-denominated
loans, a sudden bear market in a major asset class) are so numerous. But public
pensions are definitely in the mix, and seem to be heading this way fast.