KY Pensions… Scary

Detroit, MI is suspending payments on $2 billion of unsecured debt, marketing parking garages and telling retirees to rely on President Barack Obama’s health-care law to avoid a record municipal bankruptcy.

Active and retired city workers would see their pensions reduced under the plan (the general retirement system and police and fire system are underfunded by about $3.5 billion) and the city wants to replace its retiree health-care plan with one relying on federal insurance exchanges under Obama’s patient Protection and Affordable Care Act or Medicare with city supplements, according to the report.

While most cities are not as dire as Detroit it does bring up a common theme that will continue this decade. Government entities will have to address the pension liabilities that are heavily underfunded. We anticipate more cuts in the years ahead.

As an example, just look at the stunning shortfall in the Kentucky Retirement System of $30Billion! There are three choices: the state declares the pension system bankrupt to shed some of it obligations (unlikely to ever happen), or it doubles the sales or income tax (e.g., 12 percent sales tax vs. the current 6 percent) and commits all the added revenue to KRS. Raising taxes that drastically could be a poison pill, though. The most probable is a mix of cuts and taxes.

Consumers have gotten their balance sheets back in order, but our public entities still have a long way to go.