State Journal, Frankfort, Aug. 2, 2015
Kentucky Teachers’ Retirement System attempts
to tackle pension woes
By Brad Bowman
While financial and pension officials offered no magic solution for solving the funding challenges to the Kentucky Teachers’ Retirement System funding workgroup Friday, they gave insight that a hybrid plan with a bond and a change in benefits outside the state’s inviolable teacher contract could put the plan back at 100 percent funding in 30 years.
The KTRS workgroup had a lot of information thrown at it during the four-hour session Friday at the Capitol Annex, but certain assumptions were made going forward.
• If Kentucky doesn’t increase payments into the KTRS, the state won’t be able to pay its current level of benefits and would reach insolvency by 2036.
• If the state moves forward with a risky pension obligation bond, the bond shouldn’t be used as the sole component of the plan as it could hurt Kentucky’s credit rating, give little budget flexibility, but is the fastest and softest route into the annual required contribution.
New consultant
Chairman David Karem introduced William B. “Flick” Fornia of Pension Trustee Advisors as a consultant who has worked on both sides of state pension problems across the United States.
Fornia has worked previously with pension woes in other states that included teacher plans without Social Security benefits like Kentucky, Ohio, Colorado, Alaska, Missouri, California, Louisiana and Rhode Island.
While Fornia said every state’s system and situation is different, he quelled any concerns that merging any of the state’s pension systems would have any large positive effect.
Moreover, he didn’t see the plan’s returns or administrative costs as the problem, but the obvious — the plan is about $500 million below the ARC.
At first blush, Fornia said the KTRS financial requests and assumption amounts don’t look overstated and if the state shifted to a hybrid pension system for new hires that included Social Security it wouldn’t provide any solutions toward solvency.
“Your problems are fairly big,” Fornia said. “Merging the system, going into Social Security … isn’t enough. I think we are trying to find low-hanging fruit. I would contend there isn’t any low-hanging fruit.”
Rep. Derrick Graham, D-Frankfort, raised the concern that the state needed to ensure it retained teachers while Sen. Damon Thayer, R- Georgetown, clarified that no one in the workgroup wanted to cut any existing contracts.
Bonding
Ed Koebel of Cavanaugh Macdonald told the board that if the General Assembly would have passed House Bill 4’s bond proposal that $3.3 billion in fiscal year 2015-2016 would have phased the plan into the ARC over a seven-year period, but officials from Morgan Stanley advised that bonds do have a risk.
William Mack, Morgan Stanley’s banking coverage officer for Kentucky, and Dennis Farrell, the company’s head of municipal credit, told board members that a pension obligation bond (POB) doesn’t give the state much budget flexibility and if the bond is perceived as deficit borrowing it could impact the state’s credit.
The overall positive of a bond, Mack said, is it provides liquidity and would keep the fund from selling any high performing assets in order to pay out retiree benefits.
Future considerations
The workgroup will tentatively meet again Aug. 28 to consider comparisons with other similar state systems, consider benefit changes that have cost-cutting measures and consider changes that impact educators the least.