Kentucky's pension crisis can't be solved with 401(k) plans, group says

FRANKFORT, Ky. — Moving public employees into 401(k)-style pension plans would not help Kentucky dig its way out its pension funding crisis, according to a report released Tuesday by a group called the Kentucky Public Pension Coalition.

Moving from traditional pension plans to 401(k)-type plans "would increase the cost of paying off the existing unfunded liabilities" of about $43 billion within Kentucky public pension plans, said Jason Bailey, co-author of the report and executive director of the Kentucky Center for Economic Policy.

Bailey said the report shows such a transition would significantly reduce retirement security for public employees, make it harder for the public sector to attract and retain a skilled workforce and harm local economies.

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The Kentucky Public Pension Coalition is comprised of a dozen groups including the Jefferson County Teachers Association, the Kentucky Retired Teachers Association, the Kentucky State Fraternal Order of Police and the Kentucky State AFL-CIO.

The release of the report comes as Gov. Matt Bevin is planning to call a special legislative session in the next few months to propose legislation to tackle the pension crisis. The governor has yet to set a date for the session or specify the reforms he will propose.

But Kentuckians are likely to get a clue as to what Bevin may propose on Monday. That's when PFM Consulting Group, a Philadelphia-based firm retained by the Bevin administration, is expected to release a report offering options for addressing the crisis.

Neither the governor's communications office nor budget office responded to emails and phone calls seeking comment on Tuesday's report by the public pension coalition.

For decades private sector employers have reduced their risk by shifting from traditional "defined benefit" pension plans for their workers to 401(k) plans where they generally match employee contributions up to a certain level in the employee's retirement accounts.

The Kentucky Chamber of Commerce supports moving toward a "defined contribution," or 401(k)-type, plan for future state government employees, though not for teachers. 

And also on Tuesday Jordan Harris, founder and co-executive director of the Pegasus Institute, a think-tank based in Louisville, released a statement endorsing the idea of transitioning public employees in non-hazardous jobs into 401(k)- style plans as a way of reducing state risk and saving money in the long term.

"These plans are competitive, portable and modern – bringing flexibility and retirement security for employees," Harris said.

But Bailey said the move will not help solve the pension crisis.

Closing existing state pension plans to new workers, he said, means no more contributions into those plans from new workers and their employers.

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And as employees in the old pension plans age and retire, those plans "will have to take on a more conservative investment portfolio. That lowers the investment returns.” And, that, he said, means state and local governments will need to contribute more to pay off the unfunded liabilities in those plans.

Bailey said only three states have some form of 401(k)-type plan for public employees, while 14 states have considered the idea and rejected it.

"We’re looking at potentially a vastly inferior plan, for little to no savings for new workers, and the added cost of paying down the unfunded liability," he said.

Others who spoke at the news conference had no interest in swapping current benefits for a 401(k).

Brian O’Neill, a captain with the Louisville Fire Department, said that like many public employees, he took a job years ago that had a lower salary than he could have earned in the private sector because he knew it had a good pension benefit.

"Unlike what you may have heard about a pension being some type of a bonus that taxpayers are financing for a small percentage of the Commonwealth to benefit from, that is not the case," O'Neill said. "These pensions are part of our compensation package.”

Reporter Tom Loftus can be reached at 502-875-5136 or tloftus@courier-journal.com.