New Accounting Rules Will Expose Kentucky's Pension Failure
It is commonly known that Kentucky is headed to a pension disaster. Years of underfunding a generous defined-benefit plan have left a hole estimated to exceed $37 billion.
The Pew Center for States estimates that Kentucky's plan is 54% funded, far short of the 80% recommendation and fourth-worst in the country behind Illinois, Rhode Island and Connecticut. (Rhode Island, however, is advancing serious reforms.)
Recently, the Governmental Accounting Standards Board issued new rules governing the accounting practices of state pensions, rules designed to expose soft accounting that allows states to be more optimistic than they should. It will eliminate overly-rosy assumptions of market returns, and force underfunded states to assume that their plans will go broke.
From the NY Times:
The new rules are the result of more than five years of work by the Governmental Accounting Standards Board on one of the most contentious topics the agency has ever tackled. The current rules have been criticized for making pensions look more affordable than they really are and creating incentives for governments to take undue risks with taxpayer money.
In many struggling municipalities, the coming changes, which are expected to be ratified by the board on Monday, could lead to credit rating downgrades, making it more expensive to borrow. The rules do not take full effect until 2015, but some governments are likely to adopt them sooner.
While some economists do not think the rules go far enough, Kentucky's pension system will certainly be exposed.
Mr. Attmore declined to predict which states and cities would bear the brunt of the board's rule changes, but said that, in general, it would be those that had failed, year after year, to set aside as much money as their actuaries instructed. Such plans include those operated by Illinois, New Jersey and Kentucky.
Kentucky's current pension system is unsustainable. The time to reform was years ago, and it's about to be exposed.