Kentucky’s pension crisis has been drawn out by years of underfunding. Across Kentucky’s five public pension funds, $25.1 billion in liabilities remain unfunded.
As a result, Gov. Andy Beshear signed House Bill 551 to help fund those shortfalls. HB 551 legalized online and retail sports betting in Kentucky.
Beshear campaigned on expanding Kentucky gambling. But it didn’t hurt him politically when the legislation dedicated 97.5% of sports betting tax revenue to Kentucky’s pension fund.
However, the estimated $23 million annual sports betting tax revenue won’t significantly affect Kentucky’s $25.1 billion of unfunded pension liabilities.
Kentucky sportsbooks will barely make a dent in pension fund
Kentucky is the first state to use sports betting for pension funding. On the other hand, governments have tried this method before and the numbers don’t work in those situations either.
In May 2022, Chicago’s City Council approved a casino to fund police and fire pensions.
The casino is estimated to cover only 9% of Chicago’s $2.3 billion pension liability. That comes to a $207 million contribution, nine times the amount Kentucky expects to generate from sports betting.
Even online casino legalization wouldn’t solve Kentucky’s pension shortfalls. Pennsylvania and Michigan are among the largest online casino industries in the US. In fiscal year 2022, Pennsylvania iGaming generated about $341.7 million in state tax revenue. Michigan iGaming tax revenue totaled $289.2 million in 2022.
Neither amount would be a meaningful dent in Kentucky’s unfunded portion of its pensions.
In other words, Kentucky would need 121 of the largest online casino markets to fully fund its state pension liabilities. Moreover, there isn’t enough sports betting revenue to solve the pension crisis.
Touting sports betting to address Kentucky’s shortfall meaningfully is insincere.
Solving Kentucky’s pension crisis
Gambling won’t solve Kentucky’s pension crisis, and there’s no easy solution to solving it, either.
In 2015, S&P downgraded Kentucky’s credit rating from AA- to A+ because of Kentucky’s pension crisis. Thus, it is more expensive for Kentucky to borrow money for public projects.
The Kentucky Chamber of Commerce offered vague policy recommendations that same year. These included additional audits and calls for oversight. The most specific recommendations were increasing funding from the General Assembly and reducing retirement benefits for “retirees hired after January 1, 2014,” whose pension plans can be reduced.
Avoiding cuts to essential services
In their book, Nothing Is Too Big To Fail, former Washington Mutual CEO Kerry Killinger and former Vice Chair of the Federal Home Loan Bank of Des Moines Linda Killinger identify unfunded pensions as a concerning debt bubble. They argue that states will have to “(reallocate) funds away from essential services” to fund pension benefits protected by state law.
Further, they raise concerns about Kentucky’s future tax base. Its residents are seeking lower state and property taxes, “high-tax Kentucky is facing outmigration to low-tax Tennessee.” Consequently, Kentucky’s population could decrease in the coming years.
Taxes are only one factor influencing the decision of Kentuckians to leave, but an outflow decreases the number of residents paying taxes. Over time, Kentucky could find itself cutting public services to fund pension benefits, reducing the desirability of Kentucky residents, and cutting the pool of taxpayers in a vicious cycle.
In a statement emailed to PlayKentucky, the National Conference on Public Employee Retirement Systems (NCPERS) raised concerns about Kentucky’s rate of economic growth compared with the rate of tax revenue:
“Per NCPERS recently updated research, pension expenditures by state and local governments do not crowd out funding for education or other public services, such as health care and public safety. The same study examined state and local revenue systems and found them to be out of sync with the economy in Kentucky.”
States can offer pension plans without compromising essential services. However, states like Kentucky do poorly allocate tax revenue to long-term pension expenses.
Kentucky’s ticking clock
Kentucky has areas of its economy that are being undertaxed. The state doesn’t have to cut essential services now. However, generating substantial new revenue will prevent it from one day confronting the possibility of cutting essential services.
Kentucky’s pension woes are a long-term challenge. Therefore, no single policy change will solve it. And no part of the sports betting or gambling industry contains an easy answer.