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Monday, March 23, 2015

State employees game the system

This is the least sad sob story ever.

Meet Vicki Cunigan. Her daddy was a Kentucky state employee. Her mom was a Kentucky state employee. Her husband was a Kentucky state employee. She was a Kentucky state employee. And every one of them is enjoying a killer pension that is, indeed, killing the state budget.

She retired 10 years ago at age 50, after just 27 years on the job, to a lifetime pension of $40,000 a year, the Lexington Herald-Leader reported. But the state pension fund that pays her is going belly up. It is only 21% funded. This puts her $40,000-a-year lifetime pension in jeopardy.

"I'm angry and frustrated," she told the Herald-Leader.

Yes, I see.

Taxpayers are angry and frustrated. But not for the same reason. They likely are wondering how this happened to them. Why are they paying a perfectly healthy, able-bodied woman could "retire" at 50 to a $40,000 a year pension? What public good is served by shelling out $400,000 to a woman in her 50s to do absolutely nothing for the state?

Taxpayer also are wondering why they may soon be asked to float  a $5 billion bond, not to build roads or schools, but to keep Vicki Cunigan's $40,000-a-year pension flowing.

West Virginia heard this same nonsense about borrowing money to fix pensions. In June 2005, shortly after he became governor, Joe Manchin asked voters to borrow $5 billion to bailout out the teachers pension plan. They told Joe to get bent. It was a 3-to-1 rout at the polls.

Voters would have rather voted on cutting those pensions back to something less extravagant.

But Democratic politicians refused to put that on the ballot.

Today, a decade later, West Virginia's pension funds are 64% funded. That's after 20 years of devoting nearly 10% of the state's budget extra toward the pension plan. Cut back on pensions? Why that is blasphemy. Democratic politicians made a promise 40 years ago to state workers -- most of them family and friends of the Democratic politicians. Now we pay.

Or so they think.

From the Lexington Herald-Leader:
Cunigan is paid from a fund called the Kentucky Employees Retirement System (Non-Hazardous). It has only 21 percent of the money it will need for future expenses — compared to 80 percent for the average state retirement plan in this country — and its funding is expected to drop as low as 15 percent in coming months. Starved for revenue, it's cashing out investments to keep payments flowing to retirees like Cunigan.
"I'm angry and frustrated," Cunigan, 60, said in a recent interview. "If something doesn't change to improve the funding, or if we get another recession, then I don't see how we can keep the retirement system going, especially for the younger workers."
Nothing will improve the funding this year for the Kentucky Retirement Systems, which cover 348,123 active, inactive and retired employees of state and local government. (Cunigan's pension fund is one of five under the KRS umbrella.) The 2015 General Assembly, set to end Tuesday, has taken no action to commit additional money to KRS, despite the recommendations of a pension oversight board and state retiree groups.
"Once they get into the next budget, next year, we realize the need for more pension funds is going to be in competition with a lot of other state services. That's why we wanted to get it sorted out now, and before this gets to a truly catastrophic level," said Paul Guffey, president of Kentucky Public Retirees.
These benefits are over-the-top generous. Public employees in Kentucky and other states gamed the system to get jobs for their friends and family, and then to get pensions fit for a king.

She says, well, she paid 8% of her salary into the pension fund, and besides, she does not receive Social Security.

That's because she didn't pay that 6.2% Social Security tax for 27 years. The difference between her pension payment and what the rest of us must pay to Social Security is a whopping 1.8%. But the difference between what she hauls out of the government and what we get from Social Security is enormous.

First, the maximum Social Security benefit is less than $32,000 a year -- not $40,000 a year.

Second, you have to be 70 to get it -- not 50.

Third, no one collects Social Security, which for now is solvent -- not 21% funded like the Kentucky plan.

There is no reason for a 50-year-old bureaucrat -- she was an examiner at the Kentucky Department of Revenue -- to retire to a lifetime pension like that. None.

I can see cops needing an early retirement. I can see firefighters. I can see paramedics. Those are physically demanding jobs. At 50, they should be allowed their choice of a small pension or first dibs on a similarly paying job in state government until they can collect a full pension at 66.

Examiners at the Kentucky Department of Revenue retiring at 50?

Get bent.

Paying her $40,000 a year at 50 is not a pension; it is welfare. The money she put in does not justify such a windfall -- $1 million over 25 years, and her life expectancy was 30 when she retired. This is welfare for a select group of insiders, who parents and spouses all work for state government. They gamed the system to create this program, which is eating the state budget alive.

Taxpayers were never asked if they wanted to make this deal.

The Herald-Leader story went on to blame the politicians for not fully funding the plan, the stock market for crashing, and everything but the real problem: People like Vickie Cunigan retiring after 27 years at age 50. There is not enough money in the world to fund such a plan and still have good roads, schools and prisons -- you know, the actual reasons we set up a state government.


  1. It only looks thirds bad because we all know how badly government handles money. Simplifying a bit, of we presume an average annual salary of 40k with the employee and employer each contributing 8% and invested at the historical 7% average stock market return, the account would have 494k in it at retirement. Paying out the 7% interest it would earn as retirement income would generate 34,580.00 per year. The principal amount of 494k divided out over the anticipated 30 year retirement is a further 16,500.00 per year.

    To summarize, it is not that the numbers can't be justified. The problem is that government squandered the cash. It's what government does best.


    1. Thank you for the information. Puts it in a shade better light.
      Not really sure how you get to a half-million. Don't forget she started far lower than $40,000 a year (if that was her ending salary -- likely more as I doubt she gets 100% of her end salary).
      But this is not the reality we now live in. A deal was cut between state employees and politicians without bothering to consider taxpayers. Most states did this. I have a solution which I will reveal tomorrow

    2. Because local and state government pension funds are typically required by law to take a conservative approach to investing their funds and are limited to how much they can invest in equities, an ROI of 7% is much too high. A more conservative rate of 4%, but no more than 5%, should be used, and with that kind of return the numbers for those very generous worker payouts usually don't work out. As it happens, the inflated 7% figure is the discount rate lots and lots of local governments were using prior to 2008 in order to minimize their annual contributions to their pension obligations, which is why so many government pensions became badly underfunded. For years the politicians kicked the can down the road...until the economy collapsed in 2008 and the pension funds looked like they were going to collapse. These days, a responsible pension fund will use a lower ROI and require a larger annual contribution from the employer.

    3. One further comment: Federal bonds are a substantial component of the investment portfolios of many pension funds, and since the Federal Reserve has been keeping interest rates extremely low for years now in order to facilitate the Obama administration's reckless deficit spending and borrowing, the ROI of those local government pension funds has suffered accordingly. The interest rate on US treasuries has not been anywhere close to 7% recently, which means a 7% investment return is way out of line for those pension funds that may be required by law to hold a substantial part of their assets in government bonds or bond funds.

    4. Yep, bonds are not your friend. I am 100% in Vanguard's S&P Index -- however only because I have Social Security as a fallback.

    5. The problem with the X rate of contribution to Y rate of average return is that you can round and round with millions of scenarios to no effect to the problem.

      Firstly they should be completely private where you and you employer contribute to a plan of your choice approved by the state and you have control of those funds. Invest in bonds, invest in a more aggressive mutual fund. If this woman actually had a private account with $500k due to actual rate of return no one would care what she did or when she retired.
      Secondly, government unions should be outlawed as you are not actually allowing the 'owners' to negotiate contracts, the taxpayer.

  2. "Third, no one collects Social Security is solvent..."

    Don, this needs a rewrite, to add words until it makes sense. Your brain-fingers-eyes connection must have hiccuped there.

    There are a number of guilty parties involved, most of whom are protected by the statute of limitations. Invalid assumptions, inadequate funding, collusion between unions and legislators.

    1. Third, no one collects Social Security, which for now is solvent -- not 21% funded like the Kentucky plan.

    2. I still don't understand the sentence. What does "no one collects Social Security" refer to?

  3. Purpose of state government? Play the rubes to take care of the connected.
    Believe the evidence, not the rhetoric.

  4. You wrote this from the employees perspective, not the employers. The employer must contribute an additional 6.2% for Social Security. The total Social Security load is (6.2% + 6.2%) / (100% + 6.2%) or 11.7% of the total compensation paid to the employee. Therefore, Vicki compensation is "taxed" (11.7% - 8%) or 3.7% less than employees under Socialism Security. Vicki's pension load of 8% is about one-third less than the shlubs she supposedly served AND, (as you pointed out,) she got to collect more MUCH sooner.