Well, worry no more … several states, including Kentucky, are already airborne, according to more and more people who know, due to underfunded state pension funds. Underfunded by $30 billion, at last check.
(For some context, the entire 2011 state gross domestic product for Kentucky is about $168 billion, according to the Federal Reserve Bank of St. Louis.)
It’s a story that no one seems to “get,” especially the mainstream media.
But if you read financial sites and blogs by people who understand state and municipal finance – which ultimately becomes your financial burden, Mr. and Mrs. Kentucky Taxpayer – it’s clear one of three things is about to happen in Kentucky:
1 – As an accelerating pace of retiring Baby Boomers drain retirement pension funds, Kentucky will raise taxes and make radical budget cuts to replace billions taken from those funds over decades to balance the state budget, a balanced budget being required by the constitution.
2 – Kentucky will make retroactive cuts in retirement benefits, or default on those benefits, creating a doomsday scenario where Kentucky’s credit rating goes to zero. If you’re in certain categories of state employees, you’re going to be living this in a few years.
3 – Kentucky will issue billions in bonds to refund the entire system, taking borrowing capacity out of the system for other projects.
Kentucky whistleblower Chris Tobe, an investment expert and former Kentucky Retirement Systems trustee, has been tracking this crisis for years. (See his most recent interview with Jacquelin Pitts at CN2 here.
Chris just sent us another update from Pension Pulse blog, where he is interviewed along with pension experts across the United States:
An article on the Pension Pulse blog mentions the grave situation in Illinois but as aiCIO recently reported, Kentucky now has the honor of being the worst funded public pension in the United States:
America’s public pensions have hit a new low.
At a board meeting today, the Kentucky Retirement Systems (KRS) announced that its funded ratio is now 24.5 percent, according to Chris Tobe, beating out Illinois’ as the lowest in the nation.
From 2007 to the fiscal year-end of 2011 (the latest date for which data is available), KRS’ total assets dropped by more than a third, from $6.44 billion to $3.97 billion. In KRS’ 2011 annual report, Chief Operations Officer William Thielen acknowledged the dwindling funding ratio, and attributed it to a variety of causes.
Funding ratios have fallen both steadily and significantly over the last decade as a result of unfavorable market conditions, higher than anticipated retirement rates, employer underfunding…and increased expenses or annual cost of living adjustments that are not pre-funded by the employers,” Thielen wrote.
It gets worse: “While improved market conditions and the increased funding in…FY 2011 have slowed the growth of the unfunded liabilities of the various systems, KRS uses a five-year smoothing method and the full effects of the market losses in 2008 and 2009 will not be realized for another three years.”
Tobe attributes KRS’ sorry state to other factors.
“This 24 percent is unique,” he wrote in an email. “Unlike Illinois, most Kentucky officials were not aware of the extent of this underfunding. This is primarily due to complete lack of transparency. KRS held back disclosing this level for nearly a month from their normal November meeting.”
KRS officials were subpoenaed by the U.S. Securities and Exchange Commission in 2011 as part of an investigation into the role of middlemen in public pensions.
Wow, talk about Kentucky fried pensions! All the pension bonds in the world won’t help Kentucky get out of its pension hellhole.
All this was picked up by Fairfield, Conn.-based Assets International’s aiCIO magazine last week, which posted a story with the headline, “Kentucky = Worst Funded Public Pension in U.S.”
The Assets International newsletter is read by CIOs at the world’s largest defined benefit pensions, sovereign funds, insurance conglomerates, endowments and foundations.
Think they’ll be clamoring to buy Kentucky debt when we most need them?
For the record, there are no good guys in this, as Chris Tobe always points out.
The Democrats got Kentucky into this mess.
Republicans in the General Assembly enabled them in anticipation of someday ending such entitlement programs as pensions.
Except their own, of course.