Government pensions have long been a sweet deal for government employees — and, in Kentucky, for some non-government employees, too. Seven Counties is the name of a nonprofit corporation that provides mental-health services in the Louisville area, and it was just bankrupted by the Kentucky state pension system.
Though it is not a state agency, Seven Counties joined the state pension system, Kentucky Retirement Systems (KRS), in 1979. It must have sounded like a good idea at the time, and it was in fact a great deal for many years. Like practically every other government-run pension system in the country, KRS provided generous benefits to state workers, and employees of Seven Counties, too. At the same time, they have done very little to secure its ability to meet the attendant profligate financial promises. It’s a win-win for the political class: Public-sector employees earn inflated retirement benefits, but taxpayers don’t get dinged for it immediately, because that compensation is pushed off into the future. And then the bill comes due.
Seven Counties alone is now responsible for a $227 million shortfall in its pension funding, an amount that the organization’s president, Anthony Zipple, says it could not pay in “200 years.” That is not quite true: The nonprofit’s three highest-paid employees take home nearly $1 million a year by themselves, almost enough to cover the deficit over the period of time stated. Chew on that for a second: As I argued in The Dependency Agenda, the real beneficiaries of the welfare state are the high-income contractors who provide government-funded social services. Here we have a nonprofit that is funded mostly by Medicaid, supplemented by other taxpayer-derived sources, with an employee paid more than $325,000 a year. Who says Medicaid is a program for poor people?
It will not surprise you that Mr. Zipple said that his biggest concern about health-care reform is that it would prove “too timid,” nor will it surprise you that 100 percent of the 2012 political donations from Seven Counties employees disclosed at OpenSecrets.Org went to Barack Obama, or that 100 percent of their donations in earlier years went to Democratic candidates and Emily’s List.
Mr. Zipple expects KRS and the state to make good on that $227 million.
Kentucky enacted a sham pension reform in 2008, which consisted mainly of a promise to start fully funding pensions . . . in 2025. Another, more robust pension-reform bill was signed in March, and it requires agencies to start making pension-fund payments that more closely reflect their underlying liabilities. That means that Seven Counties will see its annual pension payments rise from $9.5 million to $15.5 million. Faced with that reality, the nonprofit announced Friday that it would file for bankruptcy.
Kentucky’s pension system is a veritable horse-trading operation. Its managers are currently the subject of an SEC investigation of its payments to investment agents with ties to the pension board. KRS has unfunded pension liabilities of around $37 billion, while the separate teachers’ system has another $11 billion in unfunded liabilities. Kentucky’s unfunded pension liabilities are growing at a rate of $500 million a year, while the unfunded obligations of its retiree health-care plans are growing at $600 million a year. Which is to say, Kentucky needs to cough up more than $1 billion a year just to keep the situation from deteriorating further. As Professor Brian Strow of the BB&T Center for the Study of Capitalism at Western Kentucky University notes, the 2013 round of “reform” will add only about $100 million a year to the pension system, with a great deal of that money diverted from road repair and maintenance. The center also notes that Kentucky already has cut education spending by 26 percent in real terms since 2008. The roads and the schools get shortchanged, but the pensions of the political class are inviolable.
And what of the structure of those reforms? Professor Strow explains: “New state workers in Kentucky are moved to a hybrid retirement plan. Rather than have a defined-benefit plan, they are guaranteed a 4 percent rate of return on their defined-pension contribution. Where does one guarantee a 4 percent return on investments these days? Not in U.S. government bonds.”
Some of Kentucky’s counties and municipalities, which by law have been obliged to be more fiscally responsible than the state, want out of the state system, or at least a measure of independence. But there is no escape: Whether they are managed locally or at the state level, those liabilities are not going away. As recently as 2002, pension payments accounted for only 6 percent of the city of Louisville’s spending. Today they account for 15 percent of the city’s outlays, and that number will continue to grow. Every household in New York City is $35,000 in debt to retiring city workers — and that is beyond the billions they’ve already put in the pension funds. As Professor Joshua Ruah of the Kellogg School of Management calculates, “If states wanted to remedy this situation over the next 10 years with supplemental contributions, total contributions would have to rise by $75 billion annually, again assuming 8 percent investment returns. For comparison, total 2008 state tax revenues were $781 billion, and annual contributions in 2008 were approximately $100 billion. Thus, annual contributions would have to rise by 75 percent during the coming decade.” And that 8 percent seems very optimistic.
If you think that your schools or roads need more funding, ask yourself where the money is going. By the time a child born today finishes high school, pension costs in Ohio will be eating up more than half of all projected tax revenue. That isn’t a compensation package, it’s a Viking raiding party on taxpayers, carried out by government workers — and, in the case of Kentucky, with some berserkers from the nonprofit sector joining in too.