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As we approach a possible special session on pensions and quasi-governmental organizations, let's reflect on how we got here--and specifically the assumption changes the KRS board made in 2017. <thread>
Assumptions are long term & should apply to a ~30 year period. Given that, the pre-2017 assumptions were not way out of line. For KERS NH, the investment assumption was 6.75% (just lowered from 7.5%), nearly the lowest in US at the time & below what plan has earned historically.
The payroll growth assumption of 4% reflected what had happened historically. It’s true that we didn’t hit 4% in the years after the Great Recession—a recession that caused major budget cuts that reduced employment.
But again, these assumptions are long term. Simply dropping the payroll assumption to 0%, as the Board did, *doesn’t* make it correct. Why is that?
Because such a big change at once makes the contribution rate spike (from 49% to 83% in total), & the state didn’t raise revenue to pay for it. Instead, they *cut payroll further* to make the higher pension payment—driving rate of payroll growth down again & below new assumption.
It's like squeezing a balloon--the air just moves to the other side. The contribution rate goes up, helping the system, but the number of employees paying into the system goes down, hurting the system. It doesn't solve the problem.
What dropping assumptions dramatically does is just trigger a crisis. The legislature has already stepped in to address the fallout with CERS by overriding the KRS board assumptions with a 5-year phase-in. Now there’s the quasi crisis.
Assumption changes can & should be made when evidence supports it—and payroll assumption needed to be lowered from 4%. But it should've been done slowly.
Existing liabilities are owed 50+ years into the future. More than a 0.25% change in any one year is unnecessarily drastic. The 2017 changes were ~10 times larger than that.
5.25% is an extremely cautious investment return assumption. KRS consultants predict long term returns of 6.04%-6.3%. Actual return from the past is 8.9%. Causing the paying agencies to go under because they can’t afford such a cautious assumption does more harm than good.
And the payroll growth assumption is all about whether we need public services in the future. A 0% assumption says we will give *no raises* over the next 30 years & freeze the size of the workforce. That may be the hope of some, but it’s not viable for a functioning commonwealth.
