Op-Ed By Frederic J. Cowan and W. Gordon Hamlin Jr.
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Kentucky has the strongest public-pension contract protection of any state in the country. The legislature long ago created the “inviolable contract” for all the major plans, and the Kentucky and U.S. Constitutions prohibit any legislative impairment of contracts.According to Kentucky statutes, employee benefits are “not subject to reduction or impairment by alteration, amendment or repeal.”Kentucky, in contrast to every other state, has spelled out in statutes exactly what the pension contract consists of, leaving no room for judicial interpretation. Virtually all the significant recommendations for pension reform made by PFM, Gov. Matt Bevin’s consultant, require amending those inviolable contracts.
In fact, only a few of PFM’s recommendations specifically suggest rolling back provisions “not subject to the inviolable contract.”
What if the lawyers all reached the same conclusion we have about the inviolable contract, but didn’t want to acknowledge it?
Let’s examine what happened in Illinois. Gov. Pat Quinn averaged one bond rating downgrade every 181 days, with the ratings agencies always citing the unfunded pension liabilities. Desperate to stop the hemorrhaging, he pushed pension reform through the legislature in 2013, despite abundant warnings of the obstacle in the Illinois Constitution.
A major Chicago law firm, which today boasts over 1,700 lawyers, produced a memorandum supporting the governor’s position, and the legislature bought it.
Two years later, the Illinois Supreme Court unanimously rejected that giant firm’s arguments.
When the Illinois Supreme Court struck down the pension law, Illinois wound up with embittered state employees (who concluded their elected representatives did not care about them) and frustrated taxpayers (who concluded their elected representatives were incompetent, or worse). Today, businesses and individuals are migrating out of Illinois, making a bad situation worse.
What happened to Illinois’ bond ratings? In June 2013, before the pension reforms, Moody’s cut Illinois to an A3 rating. In July 2017, again citing the unfunded pension liabilities, Moody’s downgraded Illinois again, this time to Baa3, one notch above junk status.
In July 2017, Moody’s downgraded Kentucky to Aa3, barely above where Illinois was in 2013.
There is a better way forward. Look to the Canadian example.
Ontario is about three times the size of Kentucky and has about three times as many teachers. The independent Ontario Teachers’ Pension Plan is 10 times the size of Kentucky’s. Since 1990, their annualized investment return has been 10.1 percent. The last 10 years’ returns have been 7.3 percent, in contrast to 6.3 percent at KTRS, and 5.02 percent at KRS.
Those differences add up. The Ontario plan invests in infrastructure worldwide. It owns airports, high-speed rail lines, bulk liquid fuel storage facilities, dozens of prime shopping areas, and much more.
Kentucky could do the same if it transitioned its defined benefit pensions to the Canadian model, sharing risks among employees, retirees and taxpayers.
In addition, Kentucky could expand the size of its fund by creating a savings system for the 50 percent of Kentuckians without a retirement plan. One possible model could be based on the Pension Fund for the Christian Church.
Churches contribute 14 percent of ministers’ salaries and housing allowances, liabilities (money owed to retirees) are calculated with a 4.5 percent discount rate, benefits can be enhanced if the plan is more than 120 percent funded, and ministers generally begin drawing at age 65. Pension credits accrue at 1.5 percent of salary annually.
One could imagine different contribution levels for a Kentucky plan, perhaps at 5 percent, 10 percent and 15 percent, with accruals reduced accordingly.
Options exist, but are not being considered. Kentucky can choose to be world class or last in class. Go ask the local Christian Church minister what he or she thinks about the pension fund.
Fred Cowan is a former attorney general of Kentucky and retired circuit judge. Gordon Hamlin is president of Pro Bono Public Pensions.