Kentucky’s estimated unfunded liability for its retirement systems makes up nearly 80 percent of the Commonwealth’s total debt for Fiscal Year 2018. That’s according to a new data bulletin on debt service released today by Auditor Mike Harmon’s office.
Of the $54.6 billion in total debt Kentucky had during FY 2018, an estimated $43.3 billion of that was due to the unfunded pension and other post-employment benefit liabilities.
“As has been widely known, Kentucky’s unfunded pension liability has grown for many years. But what many people don’t know is that the Commonwealth has additional debts of $11.2 billion in appropriation and non-appropriation supported bonds,” Auditor Harmon said. “As a result, the Commonwealth made more than $1.1 billion in principal and interest payments during Fiscal Year 2018 towards this $11.2 billion of bonded debt.”
Harmon said that $54.6 billion in total debt equates to a burden of $12,261.58 for every man, woman and child in Kentucky, and a burden of $2,535.02 per Kentuckian for the Commonwealth’s $11.2 billion in bonded debt.
Owensboro Certified Financial Planner Heath Greenwell with Align Wealth Management reviewed the auditor’s data bulletin in order to help Owensboro Times readers better understand how this news relates to them financially.
“After reading this and much of the debt being related to pensions, I would say it’s not uncommon for pension plans to be underfunded whether they be in the private or public sector,” Greenwell said. “Where the concern lies, is how much that pension plan is underfunded.”
While Greenwell said many of the variables that determine funding levels can change and skew calculations favorably or unfavorably, he added that a plan that is dramatically underfunded is a big problem without an easy solution except a lot of money and good investment returns.
“If I were a participant in a pension plan, I would take extra steps to shore up my retirement situation just in case things don’t go as planned,” Greenwell said. “Those extra steps really require saving extra — how much to save depends on the entirety of your situation.”
Greenwell said positioning those assets in the right place is important whether they be Roth accounts, 401(k) Plans or Deferred Comp, 529 Plans or just building a solid cash reserve.
“I also know that’s not always easy when you’re working, raising a family, paying a mortgage etc.,” he said. “I would encourage people to seek guidance, plan accordingly, and be efficient with all the dollars they earn. I can’t for sure say pensions will be reduced in the long run, but I am concerned and it’s a discussion I regularly have with clients.”
Of the $9 billion in appropriation-supported debt, Auditor Harmon found the largest amounts of debt are with the State Properties and Building Commission, which has $3.85 billion in outstanding bonds for capital construction projects and financing projects approved by the General Assembly, and $1.81 billion in appropriation-supported debt to Kentucky’s public universities.
The top bonded debt among the $2.25 billion in non-appropriation supported debt is for grants, scholarships, and student loans through the Kentucky Higher Education Student Loan Corporation, which is more than $816 million. Second is the $727 million in bonds for funding construction of the Ohio River Bridges Project through the Kentucky Public Transportation Infrastructure Authority.
“As we saw in our recent examination of the KentuckyWired project, taxpayers ended up being on the hook for at least $1.5 billion over the next 30 years, with no specific legislative approval of the plan,” said Auditor Harmon. “If the KentuckyWired project fails, it jeopardizes the Commonwealth’s entire credit rating, so I believe the General Assembly should establish additional limitations on agency bonding authority, particularly for KEDFA, and stronger oversight of all bonding.”
The data bulletin also points out that of seven states surrounding Kentucky, only Illinois has a worse rating for its General Obligation bonds. Illinois, like Kentucky, has a public pension system that is significantly underfunded. Indiana, Missouri, Tennessee, and Virginia had the highest possible ratings from the three rating agencies for bonds.
The entire data bulletin, “An Examination of The Outstanding Debt and Debt Service of the Commonwealth,” is available for review on the auditor’s website. This is the second data bulletin released by Auditor Harmon’s office, which serves to provide important information to Kentuckians about how their government operates.
Greenwell encourages anyone who wants to understand pension benefits more in-depth visit the Pension Benefit Guaranty Corporation website where they can find more information on funding levels nationally and information on individual plans.