FRANKFORT — A researcher for the PEW Center on the States says Kentucky could potentially save more than $1 billion and lock in future payments to its employee pension system to prevent lawmakers from shirking their financial obligations to the system.

John Draine on Tuesday told a legislative task force looking at ways to shore up Kentucky’s underfunded employee pension funds that “issuing $1.37 billion in bonds would reduce the value of future contribution costs by about $1.38 billion” under current actuarial forecasts.

Even if more pessimistic forecasts are used, Draine still estimates “the value of savings to be $1.19 billion.”

Kentucky’s State Employee Retirement System has about $12 billion in unfunded liabilities. But the KERS system is just one part of the state’s pension system. When systems for state police, county employees and teachers are combined, the total unfunded liability is more than $30 billion.

Part of the problem has been underperforming investments during the recession, but an equal contributor has been the failure of the General Assembly to fully fund the system on an annual basis for the past several years.

Draine presented the task force with three options to reduce the liability: issuing bonds; raising employee salaries while at the same time charging those employees a higher contribution to the pension system; and taxing retirement benefits (which are currently exempt under Kentucky’s tax laws) and using the revenue to fund the retirement system.

Rep. Brent Yonts, D-Greenville, likes the bonding option because it prevents future legislatures from skipping required payments to the system or using any increased tax funding for other expenses.

“You’ve got to guard against future legislatures stealing the savings,” Yonts said. “Otherwise, we’ll be in the same fix in a few years. The best way to prevent future legislatures from raiding the savings or increased revenues is to lock it in through bonding.”

Draine said his analysis indicates putting future employees under a different system, requiring them to pay for more of their retirement costs, will have only a small impact on the overall financial health of the system. That has been the proposal of the Republican Senate during the past few sessions.

“Changing benefits for new employees will not get rid of the funding gap,” Draine told the task force. “There is no easy fix that exists to eliminate Kentucky’s funding challenges. Even under an aggressive approach, Kentucky taxpayers will need to dedicate a substantial amount of revenue to closing the funding gap.”

Without some solution to the growing pension costs, however, more and more of the state budget will be consumed by pension costs and limit funding for other services such as education.

Representatives of local governments told the task force that’s already happening in their cities and counties.

Mike Buchanon, Warren County judge/ executive, said his county spent $398,000 or 3.5 percent of its budget in 2003 and 2004 for employee pension contributions. But in 2008, that had grown to $1.19 million or 7.8 percent of the budget.

Campbell County Judge/Executive Steve Pendery said his county had to reduce full-time employment by 12 percent to help pay its growing pension costs. And the uncertainty about pension costs is hurting local governments and the state in another way, he said.

“Businesses have started to ask about whether pension fixes are in place because they don’t want to move somewhere where taxes are likely to go up (to pay for pensions),” Pendery said.

The judge/executives and Louisville Metro Mayor Greg Fischer suggested the county employee pension system be separated from the state plan because local governments have continued to make their full payments to the system as required by statute, and it doesn’t face as great of a funding gap.

Task Force Co-Chair Rep. Mike Cherry, D-Princeton, said such an option has been discussed in the past but poses questions about higher administrative costs and governance. But the biggest problem, he said, was trying to determine how to divvy up the combined assets of the two systems.

The task force is expected to receive draft recommendations from PEW and the Laura and John Arnold Foundation at its Oct., 29 meeting, but Cherry said the task force won’t act on those. Instead it will review and analyze those before making its own recommendations in November.

Ronnie Ellis writes for CNHI News Service and is based in Frankfort. Reach him at rellis@cnhi.com. Follow CNHI News Service stories on Twitter at www.twitter.com/cnhifrankfort.