Pension Consultant Offers Dire Outlook For Kentucky: Freeze Pension And Slash Benefits Or Else

Underfunded public pensions are undoubtedly the biggest threat facing America's long-term economic stability.  As we've argued numerous times in the past, the size of the aggregate underfunding, $5-$8 trillion depending on your assumptions, is simply too large for even the overly generous American taxpayer to cover.

Of course, one of the biggest contributors to this inevitable crisis is the state of Kentucky which has a funding hole of $33-$84 billion, depending on your discount rate assumptions, according to an analysis recently conducted by PFM Group.



The problem is that the aggregate underfunded liability of pensions in states like Kentucky have become so incredibly large that massive increases in annual contributions, courtesy of taxpayers, can't possibly offset liability growth and annual payouts.  All the while, the funding for these ever increasing annual contributions comes out of budgets for things like public schools even though the incremental funding has no shot of fixing a system that is hopelessly "too big to bail."



So what can Kentucky do to solve their pension crisis?  Well, as it turns out they hired a pension consultant, PFM Group, in May of last year to answer that exact question.  Unfortunately, we suspect that PFM's conclusions, which include freezing current pension plans, slashing benefit payments for current retirees and converting future employees to a 401(k), are somewhat less than palatable for both pensioners and elected officials who depend upon votes from public employee unions in order to keep their's a nice little circular ref that ensures that taxpayers will always lose in the fight to fix America's broken pension system.

Be that as it may, here is a recap of PFM's suggestions to Kentucky's Public Pension Oversight Board courtesy of the Lexington Herald Leader:

An independent consultant recommended sweeping changes Monday to the pension systems that cover most of Kentucky’s public workers, creating the possibility that lawmakers will cut payments to existing retirees and force most current and future hires into 401(k)-style retirement plans.


If the legislature accepts the recommendations, it would effectively end the promise of a pension check for most of Kentucky’s future state and local government workers and freeze the pension benefits of most current state and local workers. All of those workers would then be shifted to a 401(k)-style investment plan that offers defined employer contributions rather than a defined retirement benefit.


PFM also recommended increasing the retirement age to 65 for most workers.


The 401 (k)-style plans would require a mandatory employee contribution of 3 percent of their salary and a guaranteed employer contribution of 2 percent of their salary. The state also would provide a 50 percent match on the next 6 percent of income contributed by the employee, bringing the state’s maximum contribution to 5 percent. The maximum total contribution from the employer and the employee would be 14 percent.


For those already retired, the consultant recommended taking away all cost of living benefits that state and local government retirees received between 1996 and 2012, a move that could significantly reduce the monthly checks that many retirees receive. For example, a government worker who retired in 2001 or before could see their benefit rolled back by 25 percent or more, PFM calculated.


The consultant also recommended eliminating the use of unused sick days and compensatory leave to increase pension benefits.

Even if all of that is accomplished, State Budget Director John Chilton said Kentucky would still need to find an extra $1 billion a year just to keep its frozen pension systems afloat. Moreover, absent tax hikes the state will ultimately be forced to cut funding for K-12 schools by $510 million and slash spending at most other agencies by nearly 17% to make up the difference.

Meanwhile, PFM warned that the typical "kick the can down the road approach" would not work in Kentucky and that current retiree benefits would have to be cut.

“This is the time to act,” said Michael Nadol of PFM. “This is not the time to craft a solution that kicks the can down the road.”


“All of the unfunded liability that the commonwealth now faces is associated with folks that are already on board or already retired,” he said. “Modifying benefits for future hires only helps you stop the hole from getting deeper, it doesn’t help you climb up and out on to more solid footing going forward.”

Of course, no amount of math and logic will ever be sufficient to convince a bunch of retired public employees that they have been sold a lie that will inevitably fail now or fail later (take your pick) if drastic measures aren't taken in the very near future. 

Nicolai Jilek, the legislative representative for the Kentucky Fraternal Order of Police, said expecting first responders to work until they are 60 is problematic given the physical requirements of the job.


“We’re very grateful that PFM is just offering recommendations … that they are not lawmakers because his plan would be horrible for first responders,” Jilek said.


Stephanie Winkler, president of the Kentucky Education Association, shared a similar sentiment.


“The PFM had some pretty drastic recommendations that we think are not what’s in the best interest of public school employees and public school students,” Winkler said.


Jim Carroll, president of Kentucky Government Retirees, said his group would likely sue if the legislature proceeds with PFM’s recommendation to roll back the cost of living adjustment that retirees received between 1996 and 2012.


“We think its very clear that the cost of living adjustments that were granted to us are ours as long as we are retirees in the system,” Carroll said.

As such, no matter the long-term consequences, the "kick the can down the road" approach to pension reform will continue to win right up until the plans actually run out of money...then we'll all lose together.


OregonGrown Tue, 08/29/2017 - 20:19 Permalink

When 49% of ALL union workers TODAY in this country are local government employee's, it was inevitable we were going to have problems.  It is like the fox guarding the henhouse and in my personal opinion, a failing pension could not happen to a FINER bunch of folks......  In my world, ANYONE that works for the government, KNOWINGLY works for the employer of last resort. 

NoDebt OregonGrown Tue, 08/29/2017 - 21:33 Permalink

Couldn't have said it better myself, OG.  And the fun part is you've got at least 20 more years of failing pensions to look forward to across this great land.  The size of this problem and it's DISTRIBUTION ACROSS GEOGRAPHY AND SO MANY DIFFERENT GOVERNMENT ENTITIES makes a single "stroke of a pen" federal-style solution virtually impossible, short of opening up public pensions to PBGC protection at massive taxpayer cost (which is probably what they'll do, but it still won't be enough).  

In reply to by OregonGrown

MisterMousePotato NoDebt Wed, 08/30/2017 - 00:30 Permalink

The author begins his article by writing: "Underfunded public pensions are undoubtedly the biggest threat facing America's long-term economic stability."Actually, I think there's plenty of doubt about that.One need not even look very far; for instance, fully funded public pensions is quite patently an even bigger threat, which is why we're even having this discussion.I can think of another half-dozen without even trying.

In reply to by NoDebt

MisterMousePotato HRH Feant2 (not verified) Wed, 08/30/2017 - 14:14 Permalink

I am embarrassed to admit that there was a time when I engaged in dialogue with such as you.But I've grown up a bit and come to realize that the world is populated by two groups: Those for whom no explanation is necessary, and those for whom no explanation is possible.Something about teaching a pig to sing, or expecting someone whose "pay packet depends ... ."Sorry. I have better things to do. Including absolutely nothing at all.

In reply to by HRH Feant2 (not verified)

nmewn VWAndy Tue, 08/29/2017 - 20:56 Permalink

The choice is between the two poles of socialism, Hitler or Stalin.Why, whatever shall we do?/////Awww, I've offended a Marxist by enlightening the audience as to the true nature of what they claim to be polar opposites...because fascism & communism could never be state controlled & directed on fear of "legal persecution" to the common man. Well, good. Desecrate another memorial, censor another book, expunge the past. I like it when you do that.It proves my point...precisely ;-)

In reply to by VWAndy

gregga777 Tue, 08/29/2017 - 20:22 Permalink

"As we've argued numerous times in the past, the size of the aggregate underfunding, $5-$8 trillion depending on your assumptions, is simply too large for even the overly generous American taxpayer to cover."

That's because the political parasites, who do NOT represent the American People, bribed by the financial system's access to Goldman Sachs Feral Reserve System fiat, bailed out of the banking gangsters following the Great Financial Crisis.

nmewn Tue, 08/29/2017 - 20:22 Permalink

Why oh why can't the public support government employees in the lifestyle they've become accustomed to over their altruistic working lives for the public into retirement? The public must be greedy!RAISE THEIR TAXES! ;-)

sgorem nmewn Tue, 08/29/2017 - 22:19 Permalink

i have to agree. i believe the should make everyone that is NOT a public employee, i.e. federal, state, or municipal employee, a "politician", could mean dog catcher to us senator, or freeshitter, DEPOSIT their paycheck into a new government fund where they could keep their fucking rainbow promises to these poor unionized public servants that have spent probably 15 to 20 years eating fucking donuts & drinking free coffee and then retire with a $100,000 year pension per person. ANYTHING left over outta the fund could be sent back to people like me to live on after a coupla months. seems fair to me, OR just go ahead and tax me 100%.......................where's my fuckin pitchfork?............

In reply to by nmewn

Shpedly Tue, 08/29/2017 - 20:24 Permalink

Any support or votes for Obama came from 2 counties in Kentucky. Those were Jeffersonville and Fayette. Those are Louisville and Lexington. The other 118 counties voted republican..

KropDick G-R-U-N-T Tue, 08/29/2017 - 20:42 Permalink

That's why they herd us into the red or blue teams.  It's so we beat up on each other instead of them. It's the politicians that were stealing from the pension funds for the past twenty years in Ky.  The whole show now will be to pit two sides against each other. It had already started.  

In reply to by G-R-U-N-T

chubbar Tue, 08/29/2017 - 20:29 Permalink

It's hard to understand the level of denial these people live in? What the fuck are they thinking? If they all take a hit, then they can actually save their pensions, albeit at a 60%- 70% level or so. If they don't, they get NOTHING in a few years time. It's just fucking incredible. I especially like the teachers union response that says the plan isn't good for the students either, like they give a sweet shit about the teachers pension plan.

oDumbo Illini Fan Wed, 08/30/2017 - 03:37 Permalink

I second that motion..."good for the kids". What the fuck. Take away their books. Take away their parks. Take it all so your stupid fat ass can rest a little easier in that broken porch swing at age 45. Government workers should be ashamed to ask for lifelong payouts with our hard earned money. Here's an idea... how about I stop working and they can work another 20 years in a shit field somewhere to pay for my lavish retirement. Public garbage.

In reply to by Illini Fan

gregga777 Tue, 08/29/2017 - 20:29 Permalink

But at least the fat pensions and obscene annual bonuses for the banking gangsters and CON Street Swindlers were saved thanks to the American People. It's going to be a wonderful world when they ALL swing by nooses from lampposts in every major American city.

Shpedly Tue, 08/29/2017 - 20:31 Permalink

I have plenty of Kentucky municipal and state government friends who have worked 25 plus years for a lower real world paycheck because they expect that fat retirement plan that they were promised. Should be interesting.

Omen IV Shpedly Tue, 08/29/2017 - 20:48 Permalink

Baloney - give me the job / private company / dates / wage rate / pension  and the government job  / wage rate / pension etcthese people  - assuming they even have an IQ greater than 100 -  which i doubt could not duplicate their RISK FREE package in the real world you could get rid of 50% of government emloyees and not have a ripple in the operations of most communities especially major cities public education is a baby sitting service - there is no education - could remove 80% of the teachers and provide a computer and software and the grades would not change NYC $25,000 per pupil - 2016 - graduation rate - 86% - tests yield comphrension of less than 5% in Math and English! welfare for white people is public education

In reply to by Shpedly

Shpedly Omen IV Tue, 08/29/2017 - 21:11 Permalink

No doubt they could reduce head count drastically but I haven't seen it yet. At least in my area of Lex, the public schools are pretty damn good. Both my girls are out of college and doing very well, while I have friends that paid 15 grand a year for catholic high school and their kids are going nowhere. I have 2 principal friends and 3 teachers. They all tell me the same thing. Much of their time is wasted dealing with psycho parents or parents who just don't give a shit. They walk on eggshells afraid of a discrimination claim. Back in the 70's when I went through grade school and high school, there was none of that bullshit. We towed the line or got our ass beat. There was no questioning the teacher. If that note came home it was ass whipping or grounded time.

In reply to by Omen IV

CingRed Shpedly Tue, 08/29/2017 - 22:20 Permalink

If they are engineers then they should have been able to do the math and figure out that it was a Ponzi scheme. They should also have realized that a bird in the hand (higher current private sector pay) was worth more than two in a bush (promised retirement benefits by politicians who we all know never tell lies, break promises and only have the publics best interest in their hearts). All I can say is too bad suckers, do you have any interest in owning a bridge?

In reply to by Shpedly