BY JOHN CHEVES

Kentucky's next governor will inherit about $30 billion in public pension debt from departing Democratic Gov. Steve Beshear — more than twice what the state government spends in a year, and up 40 percent since voters re-elected Beshear in 2011.

Nothing else is likely to cast a darker shadow over the incoming administration.

"Whoever gets elected in November, they're going to start in such a deep hole that I'm not sure any of the candidates seriously grasp it," said Chris Tobe, a Louisville financial consultant and pension watchdog who sat on the Kentucky Retirement Systems Board of Trustees from 2008 to 2012.

"The painful truth is, the next governor almost certainly will have to raise taxes in order to make the full actuarial required contribution to the retirement systems," Tobe said. "I'm talking about taking the top income tax rate from 6 percent up to 9 percent. Or else slashing state spending for schools. Or maybe both, if the economy tanks again. We haven't really passed a balanced budget in this state, one that includes adequate pension funding, for more than 10 years. Now the bill is due."

The state of Kentucky has promised far more money for the retirements of its school teachers and government employees than governors and legislators actually set aside in the state budget. Money that should have gone into pensions was spent elsewhere. As the public pension funds shriveled, they no longer bounced back from the investment losses of periodic stock market slumps.

One Kentucky Retirement Systems fund that covers about 120,000 state workers — with an average payout of $22,404 a year — is soon expected to have less than 20 percent of what it needs to meet its future obligations. It's cashing out investments just to keep payments flowing, which means weaker returns. Across town in Frankfort, the Kentucky Teachers' Retirement System, with more than 141,000 members, either has a little more or a little less than half the money it expects to need for future payments, depending on which accounting method is used.

Legislators who write the state budget keep their own public pensions in a small, separately managed system that is much better funded and that avoids the risky, high-fee hedge funds where state workers see their money parked. In Fiscal Year 2015, the legislative pension system posted a 10.9 percent return; KRS posted a meager 2 percent return.

Nationally, bond analysts don't like where Kentucky is headed. They are steadily lowering its credit rating because of public pension debt, which will make the state's borrowing more expensive.

"The state faces significant financial pressures until the underfunded pension liabilities are managed," Atlanta-based Asset Preservation Advisors warned investors in June. "Absent meaningful pension reform, we believe Kentucky could face further downgrades by the ratings agencies in the near term, and thus recommend investors remain highly selective when purchasing bonds issued in the state."

This fall's gubernatorial candidates — Republican Matt Bevin, Democrat Jack Conway and independent Drew Curtis — offer competing plans to deal with the state's pension debt. Here's a look:

Bevin, a Louisville financier, says defined-benefits retirement plans that guarantee monthly pension checks until a worker dies are not viable. He would put future public employees in a less generous defined-contribution plan, such as a 401(k), that could run out of money if employers and employees don't contribute adequately or invest their holdings well enough to cover the employees' retirement years. That would limit the state's liability, he says.

The legislature's recent attempt at "pension reform" fell short, Bevin says, because it merely switched future state government hires to a "hybrid" model that's still too generous.

"We did change two years ago to a cash-balance plan," Bevin said Sept. 15 at the Bluegrass Debate in Louisville. "It comes with a guaranteed rate of return. The guaranteed rate of return is 4 percent. This year, the market so far is down roughly 3 percent. That's a 7 percent differential. That's $70 million for every $1 billion that is in the plan. We are digging deeper and deeper into the hole."

To relieve pressure on the existing retirement systems, Bevin said he would allow current public employees to transfer their vested assets from a traditional pension plan to a 401(k) plan if they want.

There are state employees who would like to change careers, but they are "locked in" because they cannot quit their government jobs without forfeiting most of the value of their retirement plans, Bevin said.

Bevin opposes the idea of a "pension bond," where the state of Kentucky would borrow billions of dollars on the bond market to pay down its pension liabilities, hoping that the retirement systems could make more on investments from that money than the state would owe for interest on the bonds. The legislature last winter rejected a $3.3 billion pension bond for teachers as too risky, but another push is expected in 2016.

"A bad idea," Bevin said about pension bonds this summer during an interview for the Kentucky Chamber of Commerce. "I'm not a fan of just sticking it to the future. That's not solving anything."

Kentucky's retirement system leaders say Bevin's ambitious proposal would fail. Switching future hires to a 401(k) plan doesn't solve the problem of what's owed generations of workers and retirees in the existing plan, protected by inviolable contract language. Also, much of the money for today's pension checks comes from deductions from current employees' paychecks. Moving future state hires to a separate 401(k) plan — and diverting their contributions and employer matches — would cut the knees out from under retirement systems already starved for cash.

"We actually looked at switching to a 401(k) plan a few years ago," said Bill Thielen, executive director of Kentucky Retirement Systems, which covers state and local government employees. "But our financial consultants explained that it would cost us a significant amount more, because you're essentially eliminating the funding for the existing legacy plan. Some other funding would have to replace it. And if we're not getting enough money from the state as it is, realistically, where did we think this extra funding would come from?"

Another wrinkle: Kentucky's school teachers are prohibited by law from participating in Social Security, said Gary Harbin, who runs the Kentucky Teachers' Retirement System.

Switching teachers from guaranteed pensions to less-secure 401(k) accounts either would require a statutory change to start enrolling them in Social Security — which would cost the state twice as much in employer contributions as the current system — or it could put retired educators at risk of poverty in their old age, Harbin said.

"If we can't guarantee a secure retirement for our teachers, then we're going to see a lot of qualified people who choose to go into something other than education," said state Rep. Brent Yonts, D-Greenville, who co-chairs the Public Pension Oversight Board.

Conway, Kentucky's attorney general, shares Bevin's opposition to pension bonds, and he suspects that retirement rules will have to be changed to require public employees to work longer before they're eligible to collect pensions. Currently, some public employees can retire after 20 to 27 years, depending on the nature of their jobs and when they began.

Otherwise, Conway endorses a wait-and-see approach. For the Kentucky Retirement Systems, he says he would faithfully obey the legislature's 2013 pledge to fully fund each year's actuarial required contribution, or ARC, which is expected to cost $786 million next year, an increase of $124 million over what the state paid this year.

Separately, the Kentucky Teachers' Retirement System — which the state has not adequately funded since 2008 — will request $520 million from the legislature for next year.

"It's gonna take 15 years of responsible budgeting to get ourselves out of this," Conway told the Kentucky Chamber of Commerce this summer. "And I'm committed to making that full ARC payment ... I think we can afford that."

Conway says he opposes moving teachers into 401(k) plans that could put them at risk of outliving their savings. Instead, he's waiting to see the recommendations of a task force Beshear appointed this year to study the unfunded liabilities of the teachers' pension fund. That task force is supposed to issue a report for the 2016 General Assembly.

Pension watchdogs who fear that Bevin would go too far say Conway doesn't seem inclined to go far enough.

Consultants advise KRS that even with full ARC payments and other recent changes by the legislature, the largest state pension fund could keep shrinking until it has only 14 percent of the money it needs for future liabilities. If there is another stock market crash and recession, like the one in 2008 that tanked investments, then all bets are off. The teachers' pension fund likewise forecasts a continued drop in its funding level.

"It's not sufficient anymore to pay the full ARC," said Jim Carroll, a retired state parks worker who co-founded the Facebook group Kentucky Government Retirees.

"That would have been good a few years ago, when we weren't doing it, but now it's going to have to be 'ARC-plus,' where we're committing additional millions on top of the full ARC payment," Carroll said. "We obviously can't get that kind of money out of the existing budget, so we'd need to find some other revenue source, whether it's taxes or gambling or something else. Otherwise, this is the sword of Damocles hanging over Kentucky's economy."

Curtis, a Versailles man who founded the news aggregation website Fark.com, can't be accused of glossing over the pension debt. He says he nearly dropped out of the race in horror when he grasped the problem's enormity.

"If no solution to the underfunded pension system is put in place in 2016, the next governor will preside over the worst economic apocalypse the commonwealth has ever experienced," Curtis wrote on his campaign website. "Worse than 2008, worse than the Great Depression. It will bankrupt the state and set growth back for a generation."

Like Carroll, whom he consulted, Curtis favors an "ARC-plus" strategy for Kentucky Retirement Systems: Let the state contribute 110 percent of the required funding level to KRS over the next 20 years.

Don't touch the pension funds during this time, Curtis says; let them remain invested and earning returns.

To keep pension checks going out, Curtis says the state could borrow $5 billion through a pension bond, but structured as a line of credit that could be tapped in segments as necessary, to minimize the interest owed on it.

"This proposed plan only fixes (KRS)," Curtis notes on his campaign website. "Kentucky Teachers' Retirement System is also in dire shape. We have a few more years of wiggle-room on KTRS, but it also must be funded soon to prevent disaster. I would propose a modified form of the (KRS) fix."

Curtis says he supports an eventual switch to 401(k) plans for public employees, but not until the existing retirement systems are sufficiently funded, so that removing future hires and their paycheck withholding wouldn't "bankrupt the system faster."

He also pledges to issue executive orders that would expand the Kentucky Open Records Act to every portion of Kentucky Retirement Systems and the Kentucky Teachers' Retirement System. At present, state law allows the retirement systems to keep much of their information private, including details about their hundreds of millions of dollars in payments to investment managers and their much smaller pension payouts to individual retirees. Both systems are being sued this year by members demanding more information about their internal finances.

Pension watchdogs say they appreciate Curtis' ARC-plus approach, but they're not sure they understand his proposal for a $5 billion credit line or how it would be enough to cover monthly checks while leaving the KRS pension funds untouched for 20 years. KRS sends out $1.8 billion in payments every year.

Paying off the pension debt would take a much bigger bite out of the state budget than even Curtis seems to realize, they say.

"None of the math works for any of these three guys, when you come right down to it," said Tobe, the former KRS board member.