The Case for Public Pension Reform: Early Evidence from Kentucky

Kentucky has managed to effect major changes to some of its pension plans in the face of poor funding ratios that threatened to swamp other budget priorities. At this point it is unclear whether the reforms are deep enough to bring the plans funding levels in line with those of “healthy” states like Wisconsin. It is also unclear whether there is the political will in other jurisdictions to curb costs by moving to defined contribution or hybrid cash balance vehicles. Transparency combined with a fear that pension obligations would soon swamp all other state budget priorities appears to have been the motivating force behind the changes in Kentucky. GASB Statement 68 should put additional pressure on public plans to make clear their financial condition and to adopt expected rates of return that are realistic. As taxpayers learn more about the health of the plans they support and as jurisdictions that fail to make reforms come under increasing pressure and are forced to cut services, one would expect to see additional states with marginal plans commit to significant changes. Changes in plan design — specifically with respect to benefit levels and risk allocation — where politically feasible, should ensure the survival of at least some of the weaker plans