By RONNIE ELLIS CNHI News Service –

FRANKFORT – A consulting firm tasked with analyzing Kentucky’s unfunded public pension fund crisis says the state could address the problem more quickly if it committed to a fixed-dollar annual contribution similar to a 30-year mortgage.

But that will require a lot more money up front – and painful decisions by lawmakers.

Kentucky’s multiple public pension systems – for state employees, state police, teachers and county and city employees – face aggregate unfunded liabilities ranging from $33 billion to as much as $84 billion depending on assumptions on investment returns.

Part of the problem, according to the PFM Group, has been previous assumptions that state payroll would grow at an annual rate of about 4 percent when in fact state employment and payroll remained static and in some years declined.

Because the legislature makes contributions to the systems based on a percentage of payroll – with the assumption that payroll will grow over time – the system is essentially “back loaded” with higher contributions in future years.

But during a presentation Monday to the Pension Oversight Board that is reviewing ways to address the problem, Michael Nadol of PFM compared that to a home mortgage with the homeowner paying only a percentage of income. He may be hoping his income rises but if it doesn’t he falls farther behind each year, his total debt increasing even as he makes annual payments.

In some years, he said, the fixed percentage contribution system resulted in state contributions less than the interest on future liabilities.

Benefits paid out have exceeded revenue coming in. Since 2005, according to PFM’s review, with the pension systems experiencing a combined negative cash flow of $6.9 billion in that time.

Some of the problem was caused by the great recession which gutted investments, and increased benefits without adequate funding have also played a role. But the biggest culprit has been inadequate funding.

Absent significant reforms, the worst-funded system, which covers state employees, would become insolvent as early as 2022 and the teachers’ retirement system could be insolvent by 2036.

Larger, fixed-dollar contributions would require larger financial contributions from the legislature in the short term but over time would stabilize and eventually begin to decline while shoring up the pension funds more rapidly, Nadol explained.

But that will put additional pressures on the state’s General Fund, squeezing funds for other services and programs.

State budget Director John Chilton estimated the state needs to contribute as much as $700 million more each year than it presently contributes – and that’s on top of significant increases in the current budget recommended by Gov. Matt Bevin and approved by lawmakers.

It’s also still true, he said, after the board of the Kentucky Retirement System last week agreed to assume a zero percent increase in payroll – which by itself will significantly increase the state’s required contribution – and reduce its investment return assumptions.

The present budget continued cuts to many programs and services, including higher education, in order to allow the higher contributions to the pension systems that Chilton and PFM representatives testified Monday are still insufficient.

Bottom line: either the state comes up with a whole lot more money or lawmakers will have to choose between pensions with their promises of retirement income to current and future retirees or things like education and public safety.

Bevin is calling for a special session this fall to enact tax reform along with pension reforms. He’s said tax reform must produce more revenue but many lawmakers are leery of voting for something that might be characterized as a tax increase.

Senate budget chairman Chris McDaniel, R-Taylor Mill, a member of the oversight board, thinks the two issues should be addressed separately with pension reform occurring first so lawmakers will know the extent of the problem and how much funding is needed.

McDaniel said there will have to be changes to the benefit structure, too, at least the kinds of changes permitted by law such as less generous benefits or higher retirement ages for future hires.

But lawmakers and the public will have to confront painful choices under any circumstances, both McDaniel and Chilton said.

“It’s not going to be fun; it’s not going to be easy; and people all over are going to be mad,” McDaniel said.

Ronnie Ellis writes for CNHI News Service and is based in Frankfort. Reach him at [email protected]. Follow CNHI News Service stories on Twitter at www.twitter.com/cnhifrankfort.