The Kentucky State Pension Disaster: My $0.02

First, some disclaimers:

(1) I am a Kentucky state employee. I am a non-merit employee.

(2) I am NOT part of any of the pension systems. When I hired in, I opted for a defined contribution plan.

(3) I have no gripe with any state employee or retiree who padded their retirements or retired early via any of the controversial practices–double-dipping, padding their overtime, or cashing in on large amounts of unused sick time–as those employees were/are merely playing by the rules of the system.

If there is blame to be assigned, then let it fall on those who created the system. More on them later.

The Kentucky state pension crisis, at $33 billion–which carries both short and long-term solvency challenges–is one of the worst pension crises in the history of the United States. This crisis has been brewing for most of the last 17 years and threatens the retirement checks of not just those workers in the pipeline, but also the retirees.

Those in the pipeline include not just regular state employees but also policemen, firemen, and teachers.

Given that the pension systems were over 100% funded in 2001, how did the system get to this point of insolvency?

(a) For one, in the wake of revenue crunches that began in the early 2000s–from the aftermath of the dot-com crash and the wake of 9/11–the General Assembly began to balance the budget by cutting corners: among those corners was not paying the actuarially required minimum payments into the pension systems.

(b) For another, over the years, the General Assembly created unfunded incentives that sweetened the deal for state employees in the pipeline:

  • Normally allowed to retire at 27 years of service, employees were given a window whereby they could buy 5 years, allowing them to retire in as little as 22 years of service. What that means: employees, who hired in when they were in their late teens or early 20s, are now retiring under age 40, with health insurance discounted in the same group as state employees. I know of employees who are able to retire at under 40 years of age. This means the pension system is on the hook for that person’s retirement for potentially more than 30 years. The general rule–27 years–is already quite generous, but the “window” puts an even greater strain on the system.
  • The sick and vacation leave accrual formulas are extraordinarily generous. Even for those of us not in the pension system, it’s the same: we can bank our overtime (up to 240 hours, although, over the years, this has become more difficult); we can bank our sick time in proportion to our years of service, and some employees have well over a YEAR of sick time accrued, and this is credited to state employees upon retirement; we can bank our vacation time in proportion to our years of service (here is the link). As you can see, these are far more generous than anything you will see in the private sector.

(c) Making matters worse, the managers charged with managing the pensions engaged in a level of malfeasance that, had the pensions been subject to ERISA, the managers would be rotting in prison.

Make no mistake, had the Kentucky pensions been a private entity, the pensions would have been declared insolvent, offloaded to the Pension Benefit Guaranty Corporation, and retirees would take the mother of all paycuts. And the managers would be lucky to get less than ten years in prison.

(d) Worst of all, the General Assembly and three successive Governors–Patton, Fletcher, and Beshear–each ignored the problem.

Patton was too mired in sex scandals to have the gravitas to face the problem when doing so would have been a lot easier. And he allowed the continuation of many of the fat incentives that drained our systems. The failure to provide the actuarially-required minimums began on his watch.

Fletcher, almost immediately after taking office, became mired in a hiring scandal that depleted his ability to address the problem for his 4 years in office. The failure to provide the actuarially-required minimums continued on his watch.

Beshear–for 8 years–gave mere lip service to the problem. He helped implement small changes that amounted to pissing into a forest fire. And the failure to provide the actuarially-required minimums continued on his watch.

The General Assembly, run by Democrats for most of the last 100 years (Republicans won the House for the first time last year), was the principal culprit in both the design of the pension systems, and their failure to fund them.

Now, Governor Matt Bevin has inherited the perfect storm from Hell: a $33 billion albatross that the private sector must fund–as courts hath decreed it–while many state employees are facing the prospect of perhaps not getting the fat retirement that they were “promised”.

Bevin’s most recent proposals to reform the pension system are shockingly mild:

  • existing retirees would see no change in their checks, their Cost of Living Adjustments (COLAs), or their health insurance premiums;
  • those who retire before July would be able to cash in on their unused sick leave,
  • those who retire after July will no longer be able to cash in on that.
  • Those employees with less than 5 years of service will get transferred to a Defined Contribution–401(k)–plan;
  • those with more than 5 years will remain in the pension pipeline.

Even under the proposed changes–assuming that what the legislature passes will be similar–the Kentucky state employee will have pension and leave accrual rules that are light-years more generous than almost any entity in the private sector!

I worked in the private sector for ten years before hiring into the State. For three years, I was an Engineering Systems Engineer at Electronic Data Systems, which–at the time–was a subsidiary of General Motors.

Back then, we received no sick time to accrue, nor were we paid overtime, nor could we bank overtime, as we were “salaried” employees. We received two weeks of vacation time per year, and that time was “use it or lose it”. In fact, in 1992, everyone in my account had to take the vacation at the same time–during the two week changeover during which GM did their model transitions.

We did not complain.

None of us were on a pension plan; EDS did, however, have generous 401(k) matching.

For six years, I worked as a contractor for Seltmann, Cobb, and Bryant (which became SCB Computer Technology). We received no sick time, and any overtime–and they kept strict tabs on it–was paid, as there was no accrual. We received two weeks of vacation leave per year, and we were never allowed to carry over more than one week to the next year. There were no pensions, as all of us were on 401(k)s.

No one complained.

My point in all of this: no business in America could provide such generous benefits and expect to remain solvent.

Imagine if your company

  • allowed employees to retire at age 40;
  • provided full pension benefits to retirees for the duration of their lives;
  • allowed them to pad their salaries with overtime pay to calculate their retirement income, thus allowing some in the $30K-$50K range to enjoy retirement checks in the 6-figure range);
  • provided for COLAs even during recessions, even when employees were getting pay cuts.

How long would your company expect to remain in business?

If the private sector couldn’t even operate that way, and given that the private sector must pay for those benefits enjoyed by the public sector, then why foist them with such an insolvent system?

And before you–the state employee–start waxing eloquent about how the private sector enjoys your services, let me remind you of a few things:

  1. You, the government worker, produce NOTHING for the economy. Fact is, the minimum-wage burger flipper at Hardees does more for the economy than the hardest-working government employee. That is not to say that your work doesn’t matter; at best, however, we are part of the service sector of the economy.
  2. You, the Government worker, serve at the pleasure of the private sector. They pay your salary, your benefits, and even your pension. The taxes you pay wouldn’t be possible but for the contribution of the private sector.
  3. While you, the government worker, have endured hardships–including pay freezes, pay cuts (furloughs), and force comp leave uses–it pales in comparison to the private sector worker who faced job losses in the dot-com crash, the wake of 9/11, an the Great Recession of 2008. While my bottom line has been crimped over the last ten years, I have been able to keep my house and my job. I did not, like many private sector folks, face job loss, foreclosure, and even bankruptcy.

I’m not saying this to beat up the government workers–I am one myself. All I’m saying is that a little humility would go a long way. You have had it rough, just as those in the private sector have. There is plenty of misery to go around.

And while I empathize with the new employees (with less than 5 years of service) who will no longer be in pensions and therefore may not be able to retire at 27 years, I would also remind them that many of us in the real world would be happy to retire at age 70.

As for Governor Bevin, I’ve heard no small number of employees complain of his proposals, and call him every name in the book.

I have yet to hear that same level of angst aimed at Rep. Harry Moberly or Rep. Jody Richards or Sen. Julian Carroll or Rep. Greg Stumbo or Gov. Paul Patton or Gov. Steve Beshear or even Gov. Ernie Fletcher: they are the ones who got you into this mess.

Matt Bevin, whatever his faults, is the adult in the room telling you the truth.

Matt is an adult. Be like Matt.

One thought on “The Kentucky State Pension Disaster: My $0.02

  1. I didn’t realize Kentucky had such a massive pension funding crisis, but it appears GOP control of state government may bring some much needed reform. Wish we had someone like Matt Bevin in Illinois. Then again, if the Democrats weren’t in charge of both houses of the general assembly, problems might actually get fixed.

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