Do states have a legal requirement to fully fund their employees’ pension plans? This is the question at the heart of a lawsuit recently filed by Kentucky’s public school teachers against Governor Bevin and the Kentucky Legislature for underfunding the Kentucky Teachers’ Retirement System (KTRS).
One cause of the current public sector pension crisis is the failure of states like Kentucky to always pay the annual, actuarially determined employer contributions to pension systems (also called the ADEC). Even when this is paid, the ADEC can be based on unreasonable actuarial assumptions, meaning the plan will still be tacitly underfunded.
Fully funding a pension system shouldn’t be optional, and since legislatures have failed to take the steps necessary to honor the benefits promised to retirees, it was only a matter of time before some pensioners began to look for answers through the courts.
This latest filing in Kentucky is the product of a legal effort started in 2014, when teachers sued KTRS. The first case was dismissed and re-filed in federal court in 2015 before being filed again in Kentucky.
The details of the lawsuit are forthcoming, but it’s not without precedent. In New Jersey, public sector union members unsuccessfully sued Governor Christie for withholding payments from the NJ Pension Fund. The US Supreme Court declined to hear the case last February, after the plaintiffs appealed the NJ Supreme Court’s ruling, which found a 2011 statute requiring significant increases in pension funding violated the New Jersey Constitution. In Cincinnati, the American Federation of State, County, and Municipal Employees (AFSCME) settled with the city after suing for underfunding the public pension system.
On the surface, these suits seem like good way to hold municipal, county, and state governments’ feet to the fire. Though the financial crisis delivered a serious blow to pension systems across the country—and the new normal of low investment returns reveals how unjustifiably high most assumed rates of return are—a surefire cause of any pension crisis is a failure to make the (already undervalued) required contributions.
But, one has to ask, where were these lawsuits during the ’90s and ’00s? Because returns were high through the ’90s, pension funds lowered contribution rates to over-funded pension funds by the turn of the century.
The incentive for public employees’ representatives to tolerate underfunding during good times was the same as their incentive to support deferred compensation through pensions rather than a simple pay increase: costs are deferred to future generations. Legislators who increase pensions and other post-employment benefits give employees what they want while shifting the burden to future legislatures who usually can’t cut benefits promised long before they were elected.
This isn’t to pick on public sector unions; supporters of lax lending policies in the lead-up to the financial crisis and those who propose neglecting infrastructure maintenance to pay for other government projects use the same playbook. Politicians are textbook hyperbolic discounters who place a high premium on gains in the short-term, even at higher costs later, lest they lose their next election.
It’s a shame that litigation, instead of democratic accountability, is needed to ensure required contributions are paid in full. But after years of chronic underfunding, KTRS and other systems like it are running out of good options to protect retirees’ pensions.
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