Why cities and counties still don’t know if they must cut jobs to pay for pensions

Kentucky’s local governments may get relief from the massive increases in pension payments the Bevin Administration warned they might have to pay starting July 1.

Senate Bill 1, an omnibus pension overhaul bill filed Tuesday, did nothing to lower the steep increases — some as much as 60 percent — that cities and counties would have to pay into the retirement system covering city and county employees, but legislative leaders say they plan to file a separate bill soon to deal with the issue.

The proposal would cap annual increases in payments at 10 percent for at least four years, said House Speaker Pro Tempore David Osborne. After that, local governments would have to pay the full amount required by the Kentucky Retirement Systems.

“It’s going to take about five or four and a half years to get to the full amount,” Osborne said.

Without relief, some cities, counties and school boards would likely have to lay off employees, officials have said.

“A lot of our counties are really strapped for funds as it is,” said Christie Dutton, director of public relations for the Kentucky Association of Counties. “With this sort of increase, it would completely blow their budgets. Our smaller counties are really struggling right now.”

J.D. Chaney, deputy executive director of the Kentucky League of Cities, said cities and counties have limited options for raising taxes, which makes lay offs the most viable option to raise cash for pension payments.

“It could be devastating,” Chaney said. “They are going to have to cut their payroll because in most cases that’s 75 percent of their budget.”

Chaney said local governments have been promised by legislative leaders that a separate bill will be filed to cap payment increases for local governments.

“We are thankful that they are going to introduce the bill,” Chaney said.

In September, local governments were told their payments to the County Employees Retirement System could increase dramatically from the prior year, primarily due to changes in assumptions made the KRS Board of Trustees adopted earlier this year. Overall, local governments were told they would have to come up with an additional $345.5 million in the fiscal year that starts July 1.

The board had previously assumed a 7.5 percent rate of return on investments, but that was lowered to 6.25 percent based on what KRS was actually seeing in its investment portfolio. The board also assumed a payroll growth rate of 4 percent, but it cut that to 2 percent to reflect stagnant government salaries and declining numbers of public workers.

Based on the new assumptions, the unfunded pension and insurance liabilities of CERS — which covers 229,205 people — rose from $7.4 billion to $9.5 billion. If lawmakers allow local governments to pay less than the amount requested by pension officials, that unfunded liability will likely grow larger.

The County Employees Retirement System (Non-Hazardous) was funded at 52.8 percent as of June 30, 2017, down from 59 percent in 2016. That system is much healthier than the main pension fund for state workers, which was only 13.6 percent funded on June 30. KRS actuaries showed if cities and counties made the full payment set by the board, CERS would be funded at 78 percent by 2036.

Karen D. Roggenkamp, executive director of the office of operations for KRS, said the system hasn’t determined the exact impact a “phase-in” option would have on CERS’ unfunded liability. But any phase-in “of the expected CERS pension contribution rate would ‘slow’ the rate of reduction in the unfunded liability and decrease the funded ratio improvement,” Roggenkamp said. “Certainly KRS would like to see the funding status improve for all our plans. However, we will administer as required by the statutory requirements.”

Under the rates set by the KRS board, Lexington’s merged government would have to pay an additional $10.3 million, bringing its total payment to $29.9 million. If the legislature approves a bill that caps the increase at 10 percent, the city’s payment would be $21 million.

Susan Straub, a spokeswoman for Lexington, said staggering the pension increase over several years will help the city’s finances.

“Lexington is monitoring all the pension related bills, and is very interested in any phase-in legislation,” Straub said. “The phase-in proposal will be a major driver as we build the 2019 budget.”

Without relief, the Fayette County Board of Education’s payment, currently $10.3 million, would leap by $5.2 million. (Teachers are in a separate retirement system, but other school staffers are part of CERS.)

Richard Thomas, city manager for Richmond, said he has been watching the pension issue closely because the city is starting to put together its budget for the fiscal year that begins July 1. Without knowing how much money the city will ultimately owe the pension system, it’s hard to build a budget, he said.

Under the rates set by the pension board, Richmond would have to pay an additional $1.5 million into the retirement system, a more than 50 percent increase. That’s money the city doesn’t have, Thomas said.

“Payroll is 70 percent of our budget,” he said. “That’s the place we would have to look.”

This story was originally published February 22, 2018 at 3:51 PM with the headline "Why cities and counties still don’t know if they must cut jobs to pay for pensions."