Lipstick on a Pig

So what is being considered by the Blue Ribbon Commission to save the retirement systems? The list below contains the Commission’s best thinking as of last Thursday. Note these are recommendations for consideration, not the final recommendations of the Commission.

Work Group II Recommendations for Consideration

1. Expand the Board of both KRS and KTRS by two additional appointed members and require those new members to have professional experience in the area of private investment, funds management, or private sector pension funds.

2. Require investment and fiduciary training for all Board members (KRS and KTRS).

3. Extend service requirement to 32 years (retain service purchase options, if purchased at full actuarial value) before qualifying for unreduced pension benefits. (KRS and KTRS)

4. Require a “rule of 87” (at least 32 years of service and age 55) to qualify for unreduced pension benefits (KRS and KTRS).

5. Eliminate “separation of employment” payouts (annual leave and/or “comp” time) counting toward the computation of final salary and pension benefits (KRS and KTRS).

6. Create a “Career Average Payment Plan” to better align ultimate benefit computations with career benefit contributions. (KRS and KTRS)

7. Change COLA to a pre funded fixed percentage of 1.75% payable, as “13th” check payable in 1/12 installments each month and only in years when the trust fund’s percentage of funding exceeds 80%. Increase to 2% if the trust fund’s percentage of funding exceeds 90% and to 2.25% if trust funds’ percentage of funding exceeds 100%. In the case of “mixed service” employees the COLA will be set at level of the trust fund with the lowest percentage of funding of the various systems that comprise the employee’s mixed service. (Both systems?)

8. For new hires, change the eligibility for health coverage to those that are “Medicare eligible” for the case premium assistance but allow those with 20 or 25 years service to have buy-in privileges for the period between their early retirement and their Medicare eligibility.

9. Require and actuarial analysis before any proposed benefit change may be considered by the Consensus Pension Benefit Review Group (if adopted) or a Legislative Committee or Body.

10. Create a Consensus Benefit Review Group comprised of persons with specific pension and investment management experience to review and sign-off on any benefit enhancement proposal before it can be considered by the General Assembly.

11. Given the purported breadth of Kentucky’s “inviolable contract”, require any proposed pension benefit enhancement to introduced and considered in not less than two sessions of the Kentucky General Assembly before it can be enacted and become law. All future benefit enhancements shall have a 5 year sunset that will require affirmative reconsiderations by the General Assembly every 6th year.

12. Unwind “unescorted retiree” and “non-certified, part time participation” issues.

So what do we have here?

The recommendations fall into four groups.

First, items one and two are window dressing to hide the questionable management and investment practices.

Second, items three and four make requires the employee to work longer in order to retire.

Third, five thru eight, aim to reduce the actual amount a retiree can draw when retired. I am personally fond (note the sarcasm) of the change to the COLA provision. This would lock the checks of existing retiree’s. They don’t have the guts to say kill the COLA. Instead they set a level of performance, given their track record that will never be met.

Fourth, items nine thru eleven are and attempt to tie the hands of the legislature when it comes to enacting laws regarding the retirement systems.

Fifth, item twelve is pretty vague about what they would do about other issues, it probably should be lumped with items five thru eight.

So the recommendations pretty well come down to this:

Keep the legislature from making changes, cut as many benefits as we can get away with, put a little lipstick on this pig and pretend we are increasing investment expertise.

These recommendations, even if all of them are implemented, will not solve the problem.

The real change they will want to make is to float a loan to cover the bad investments. What this group will probably ultimately recommend is a Pension Obligation Bond (POB) to make up the underfunding and less than average performing investments.

The idea is that the investments can return 8% while you borrow the POB's at 6%. But given the track record here, I don’t see these guys making it work.

The one recommendation you won’t see coming from this Commission is to replace the management that got the Retirement Systems in this mess.

That’s the change that needs to be made first.