I understand a discussion about pensions is about as welcome as Lyme disease. But, while much has been written about who is to blame for Kentucky’s pension crisis and what the impact might be to participants in the various retirement systems, very little has been written about why those of us who don’t have pensions should care. Here is why we should care: because if this is not fixed, Kentucky will slide back rather than be able to invest for our economic future. Enjoy the state parks? You might have to take the kids to Opryland instead. Appreciate the opportunities that our public schools and public universities offer? Well, get ready to sell more wrapping paper and explain to your student that history didn’t end in 2002, despite when the textbook was published.
At Moneywatch Advisors, we often work with young clients who have high debts, usually student loans. The first step toward their financial freedom is to create a plan to pay off their debt. Only then can they pay themselves first and invest in their future selves. Kentucky must develop a plan for this massive pension debt so we can start investing in our future.
A quick review of the problem: $36 Billion is the total of the pension systems’ unfunded liability. In layman’s terms, that’s the amount we’re short to pay the present and future promised benefits for all those retirees and employees in the systems. Think of that as credit card debt the state has run up, only you can’t take the sweater back. That number varies depending on who is doing the calculation and what assumptions they use, but I’ll stick with $36B for our purposes here.
The Governor is expected to call a special session of the legislature later this fall to address this pension problem. Here is a secret: at best, whatever changes they make to the retirement plans will only stop the hole – the $36 Billion – from getting deeper. It won’t fill the hole.
The hole won’t get addressed until the 2018 regular session when the legislature will write the budget. That’s when they will have to figure out how to fund that $36 Billion. The preliminary estimate of how much additional state money is needed to get us on the right path is $600 Million…each and every year for a very long time. Here are the legislature’s three broad options:
1. Do nothing, always a viable option in Frankfort, and hope the changes they make in the special session will not only stop the hole from getting deeper but will eventually help fill the hole too. This option is not only irresponsible but it has consequences too – such as a lower credit rating. Similar to a personal credit score, that will increase borrowing costs for things like schools and infrastructure. Doing nothing will not only not solve the problem, it will make things worse.
2. Cut roughly $600 million from the state budget each year and redirect that money to pay pensions. There is absolutely no way that can happen without cutting investments in our future. In fact, finding dollars of this magnitude would even require cuts to the main funding formula of K-12 education that, until now, has always been off the table. Senator Chris McDaniel, chair of the Senate budget committee, was recently quoted by the Courier as saying all areas of government would have to be cut 12%, including K-12 education, to fill the hole. A 12% cut to K-12 is the equivalent of cutting roughly $350 per child in every school district in the state. Think if they have to cut K-12 that your favorite item in the state budget – such as higher education, state parks or healthcare for the poor, etc. – will be spared, think again. Not a viable option.
3. Comprehensive tax reform. Adding 1 penny to the state sales tax will raise approximately $570M each year. If the base on which sales tax is charged expands, it would raise more. In addition, about $10 Billion in tax credits and exemptions are applied to a variety of activities – some of those have outlived their usefulness and should be eliminated. Now, some of those such as the exemption of sales tax on groceries counts for a big chunk of that $10B and won’t be eliminated. Others, however, need to go away in order to help fund a greater cause.
After having spent more than 20 years around the General Assembly I’m not politically naïve – I know this is hard. And I welcome a tax increase with roughly the same enthusiasm as I do a bad haircut. So, I don’t take raising additional revenue through tax reform lightly. But I am willing to bite the bullet so that we as a state can finally put this behind us so that we may again invest in our future.
Kentucky is a special place with amazing people – a place that needs to continue to educate people at all levels as well as create and attract more jobs. Let’s cut the chain on this anvil that we’ve collectively been carrying around for the last two decades so we can focus on investing in our future rather than our past.