The state of Kentucky, like many other states across the union, is facing a severe crisis in its ability to pay teacher the pensions that they were promised. Years of the state pilfering the funds that should have instead gone to funding teachers pension plans have now led to a situation where the combination of underfunding, raiding retirement funds for other projects and unrealistic actuarial expectations are now threatening to bankrupt the entire state, if radical measures are not taken soon.
Unrealistic discount rates led to rationalizations
For decades, the state’s lawmakers had convinced themselves and their constituents that everything would turn out fine, as long as stocks and bonds continued to perform at historical levels. But since the financial meltdown of 2008, it has become clear to almost everyone watching the unfolding of this multi-state crisis that the discount rates used to estimate market returns are fantastic overestimates. In fact, many analysts today deem the stock and bond markets, both, to be so overheated that any returns at all over the next ten years will be a good outcome for the nation’s public teachers’ pension funds. In the case of the state of Kentucky, this means that the total funding shortfall could amount to as much as $85 billion.
This amount is far more than the state could possibly afford without radically cutting almost all public services. The far more likely scenario will be that, should market returns on pension funds over the next decade end up on the low side, the state of Kentucky will likely end up being forced into bankruptcy proceedings. This would be extremely bad news for pensioners.
Although no state has actually declared bankruptcy, even with government bailouts from the federal level, it is still likely that pensioners would end up losing heavily. One analogue is the bankruptcy of Detroit. The state of Michigan bailed the failing city out, even as bankruptcy proceeded. But many pensioners are now receiving just cents on the dollar.