Over the next three decades, Kentucky owes roughly 35,000 state workers more than $15 billion in pension benefits. But it has a little more than $2 billion to make those payments.
That's less than 13 percent of what's needed, making it one of the worst-funded public pension plans in the country.
Wednesday, state lawmakers will likely vote to make it worse.
The legislation would let about 118 quasi-governmental entities — including public health departments, domestic violence shelters and public universities — leave the struggling pension system while paying less than what they owe. Republican Sen. Chris McDaniel, the bill's chief sponsor, said he expects all of them to take the deal.
The retirement system says it could cost the beleaguered system as much as $1 billion — money taxpayers would have to cover. Thousands of employees for those entities would have their benefits frozen.
"The fact is they can't pay what they owe. So we've got to find a financing mechanism to allow them out to pay as much as they can," McDaniel said. "This is the best of the worst options. Because there are no good options."
Wednesday's vote in the state Senate embodies the tough choices facing state governments as they struggle to shore up ailing public pension plans still recovering from the Great Recession of 2008 and a history of underfunding by legislative leaders. Kentucky is so far behind that the retirement system's board of trustees — most of which are appointed by Republican Gov. Matt Bevin — recently required that for every dollar in salary taxpayers give to a state worker they must put 83 cents into the retirement system just to keep it solvent.
State agencies made the payments because the legislature gave them the money to do it. But quasi-governmental entities don't have that luxury. These are independent entities with some connection to state government that allows them to be part of the pension system if they want to. Years ago, when the system was flush with cash, many were eager to sign up. Now that the system is struggling, most of them want out.
That includes the state's local health departments. Department of Public Health Commissioner Jeff Howard said if nothing changes, at least 63 of them will have to close over the next two years.
"Kentucky local health departments can't afford to buy out (of the system). They also can't afford to stay in," Howard said.
McDaniel, the state Senate's budget chairman, says the proposal will pass the state legislature on Wednesday. Republican House Speaker David Osborne says it also has enough votes to pass in that chamber. State retirees are fretting the change will further erode their pension fund, putting their financial future in peril.
"That seems to me to be the wrong thing to do for the nation's worst funded pension system," said Jim Carroll, president of Kentucky Government Retirees. "If you are incentivizing folks to leave without paying off their accrued liabilities, you're weakening the system."
Others say the change is illegal because it would freeze pension benefits for workers in the system, breaking the state's "inviolable contract."
"The bill breaks the pension promise to many of the 9,075 employees currently working at quasi-governmental agencies. And it lowers benefits moving forward," Jason Bailey, executive director of the Kentucky Center for Economic Policies, wrote in a blog post analyzing the bill.
But McDaniel and others say they have no choice. If lawmakers hold the line and require these agencies to make their full required payments, McDaniel said "you'll see a rash of bankruptcies or people just refusing to make their payments."
"Allowing the (quasi-governmental entities) to do this puts a lot of burden onto the retirement system and we will have to overcome that with general funds. There is no two ways about it," McDaniel said. "I think we all recognize the reality of the situation, which is these are agencies that offer services that people expect from their government. We want those agencies to continue."