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 Kentucky’s state pension crisis is
bad – one of the worst in the nation. But it isn’t as dire as that of Illinois,
and the governor of the Bluegrass State wants to keep it that way.
Kentucky Gov. Matt Bevin is promoting 401(k)s as the main solution to the
state’s crisis going forward, even though Kentucky’s retirement debt burden per
household is just half of what Illinoisans face.
Kenucky’s pension debt has grown significantly over the past decade. The state’s
pension systems were almost fully funded in 2000, but have been declining ever
since. Now, lawmakers are looking for solutions so retirement costs for
government workers don’t get worse.
“The net result…[is] something more like a 401(k)-type, defined contribution
type, with matching, with the ability to be portable. And that’s in line with
what’s happening everywhere else in the real world, and frankly it’s what will
have to happen,” Bevin said.
Each Kentucky household is on the hook for $22,600 in pension and retiree health
insurance debt. That amount, by any measure, is already at crisis levels.
Illinois’ pension crisis, by comparison, is about double that, with households
burdened with over $43,000 in retirement debt.
Yet, despite the smaller relative
size of its burden, Kentucky is considering making far more comprehensive
changes to its public sector retirement systems than Illinois ever has.
Bevin recently released the final report of a consultant group hired to examine
the state’s pension crisis. The group’s analysis highlighted the dire straits of
Kentucky’s crisis and recommended several reforms – including the creation of
401(k)-plans for new workers.
In contrast, Illinois has a long history of failed pension reforms. The changes
the state has pursued in the past have been minor, unfair, unconstitutional or
have made the crisis even worse.
Kentucky and Illinois’ big crises
Illinois’ massive $130 billion in pension debt usually ranks it at or near the
top of the list of state pension crises.
Kentucky also tends to rank near the top of the pension crisis list. The
Bluegrass state has been dealing with a growing $33 billion state pension crisis
of its own for more than a decade.
Both have less than half the amount they need to meet their future obligations.
If either state’s collection of pension funds were in the private sector, they
would have been declared bankrupt many times over by now.
But while both Kentucky and Illinois’ pensions are in terrible shape, Illinois’
crisis is worse in almost every way.
After adding local pension and retiree health insurance debts to Illinois’ total
to allow for an apples-to-apples comparison with Kentucky (the state of Kentucky
pays for the pension costs of local government employees while the state of
Illinois does not), Illinois owes about $206 billion in unfunded retirement
debts compared to Kentucky’s nearly $39 billion.
 In per household terms, Illinois’ debt imposes nearly double the burden
Kentucky’s does. Illinois households are on the hook for $43,000 in debt while
Kentucky households are burdened with $22,600 each.
It should be noted that the above comparison understates the size of both
states’ pension crises by using both states’ official actuarial numbers.
Illinois’ pension crisis is far worse under more realistic accounting methods.
For example, Moody’s Investors Service calculates Illinois’ state pension debt
is closer to $250 billion, far larger than the state’s official $130 billion.
And Kentucky’s pension debt in 2014 was closer to $40 billion – far larger than
the state’s official $30 billion debt.
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And Joshua Rauh of the
Hoover Institution found that under conservative assumptions,
Illinois’ 2015 unfunded pension liability equaled more than $360
billion and Kentucky’s equaled nearly $68 billion.
Kentucky’s proposed
pension reforms
In 2017, Gov. Bevin hired a consulting group to analyze Kentucky’s
pension crisis. The group released a final report in August, which
included its proposed solutions to the crisis.
One of the biggest reforms the consulting group recommended for
Kentucky was the creation of 401(k)-style retirement plans going
forward for new teachers, university employees, state workers, local
government workers, judges and legislators. K-12 teachers would also
start paying into Social Security along with their new 401(k) plan.
The group’s final report also recommended other major changes,
including increasing the normal retirement age for new teachers and
university workers to 65 from 60, ending new workers’ ability to
grow pension benefits by accumulating and applying unused sick
leave, rolling back some cost-of-living adjustments for active
workers and ending cost-of-living adjustments for teachers,
university workers, legislators and judges until their pension
systems reach 90 percent funding.
Other than some changes to cost-of-living adjustments and early
retirement rules, the report recommended leaving the benefits of
local and state public safety workers virtually unchanged.
In all, the consultant group found that its proposed reforms could
save Kentucky over $1 billion a year in state pension costs.
By providing a reasonable plan that includes 401(k)s for almost all
new workers, the consultant group’s report will at least move
Kentucky politicians’ discussions toward a solution that actually
begins an end to the state’s pension crisis.
Illinois pension crisis needs comprehensive reforms, 401(k)s
Kentucky lawmakers are debating the consultant group’s proposed
reforms, which if enacted, will go a long way toward ending its
pension crisis.
Illinois lawmakers, on the other hand, have spent decades ignoring
the reforms necessary to begin an end to the pension crisis in
Illinois. They’ve spent time papering over the crisis with higher
taxes and borrowing. They’ve passed “reforms” that turned out to be
minor, unconstitutional, or unfair. And some “reforms,” like
then-Gov. Jim Edgar’s pension ramp compromise, only made the crisis
worse.
Even Illinois’ most recent changes do little to bring the state’s
pension crisis to an end. The new hybrid package allows workers to
continue to accrue pension benefits. Workers’ retirements will
remain under politicians’ control. And taxpayers are still on the
hook for the cost of pensions. That’s unsustainable, as Illinois’
pension crisis will never end as long as pension liabilities
continue to grow.
What should infuriate Illinoisans the most is that there has been a
solution to the crisis right under lawmakers’ noses for nearly two
decades. And it’s based on the same 401(k)s that Bevin is proposing
in Kentucky.
A successful, standalone 401(k)-style plan for state university
workers has been operating in Illinois for nearly 20 years and has
over 20,000 members. Illinois can begin an end to its current crisis
if it simply expands that 401(k)-style plan to all state workers.
Illinois should take a page from Bevin’s playbook. Rather than wait
for things to get worse, Illinois should move to 401(k)s. Only then
can it really begin to focus on the key reforms – from changes to
the constitution to municipal bankruptcy – that will reduce
Illinois’ massive pension debt.
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