Evaluating Kentucky State Pension Plans in the 2000s and Best Practices Moving Forward

The Commonwealth of Kentucky sponsors three different pension retirement systems. This includes Kentucky Employee Retirement System, Teacher’s Retirement System, and Kentucky’s Judicial Form of Retirement System. Kentucky has one of the worst funded pension retirement plans and is currently facing shortfalls of about $43 billion (PEW, 2013). Between 1998-2008, Commonwealth of Kentucky’s legislators made many detrimental policy decisions that negatively affected its Pension Retirement System. The most impacting includes: Enhancements of Benefits in the Nineties Changing Final Compensation from the average of five-years to the average of three-years Mandated Yearly Cost of Living Adjustments (COLA) Not requiring the State to make full payments In 2012, the Commonwealth established the Kentucky Public Pension Task Force to help identify why the pension retirement system was tremendously underfunded. The following year, due to the recommendations received by the task force, a new policy was enacted that changed the pension plan from a defined contribution (DC) plan to a cash balance (CB) plan. This would ultimately shift some of the responsibility from the employer to the employees. It would also now require that COLA be paid before benefits were received. In the beginning of the 2000s, the Kentucky Retirement Plan had a funding ratio over 100%. Over the past two decades, the funding amount continued to slowly decline and now has about a 31% funding ratio. Even with the reform in 2013, the Commonwealth still has a lot to accomplish in order to get out of this pension crisis and better fund its pension commitments. Going forward, legislators should consider changing the current new hires plan to a defined contribution and be funding it annual required contribution (ARC). It will need to keep its promises to state and local employees while making those promises more financially sustainable