An independent consultant recommended sweeping changes Monday to the pension systems that cover most of Kentucky’s public workers, creating the possibility that lawmakers will cut payments to existing retirees and force most current and future hires into 401(k)-style retirement plans.
Echoing a message often repeated by Governor Matt Bevin, the PFM Group told the Public Pension Oversight Board that lawmakers must make dramatic changes to fix one of the worst-funded pension systems in the country.
“This is the time to act,” said Michael Nadol of PFM. “This is not the time to craft a solution that kicks the can down the road.”
The group, which was hired by Bevin, offered only recommendations. Any changes to the pension system would come during a potential special legislative session in October.
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If the legislature accepts the recommendations, it would effectively end the promise of a pension check for most of Kentucky’s future state and local government workers and freeze the pension benefits of most current state and local workers. All of those workers would then be shifted to a 401(k)-style investment plan that offers defined employer contributions rather than a defined retirement benefit.
PFM also recommended increasing the retirement age to 65 for most workers.
The 401 (k)-style plans would require a mandatory employee contribution of 3 percent of their salary and a guaranteed employer contribution of 2 percent of their salary. The state also would provide a 50 percent match on the next 6 percent of income contributed by the employee, bringing the state’s maximum contribution to 5 percent. The maximum total contribution from the employer and the employee would be 14 percent.
For those already retired, the consultant recommended taking away all cost of living benefits that state and local government retirees received between 1996 and 2012, a move that could significantly reduce the monthly checks that many retirees receive. For example, a government worker who retired in 2001 or before could see their benefit rolled back by 25 percent or more, PFM calculated.
The consultant also recommended eliminating the use of unused sick days and compensatory leave to increase pension benefits.
Kentucky State Police and other state workers in hazardous jobs would get to keep their existing pension plan, though the consultant recommended lifting the retirement age to 60 years old, instead of the current 25 years of service. Officers could still retire before they turned 60, but would not be eligible for the full benefit package.
Future teachers and many university employees would be shifted to a combination of Social Security and a 401(k)-style retirement plan.
Existing teachers would continue in their current pension plan, though the age to retire with full benefits would be raised to 65. The consultant also recommended stopping teachers from using unused sick days to boost their pensions and suspending all cost of living adjustments for retired teachers until the pension plan is 90 percent funded. The plan is currently 54.6 percent funded.
Nadol said changing the benefits of current employees and retirees is the only way to significantly reduce Kentucky’s pension liability.
“All of the unfunded liability that the commonwealth now faces is associated with folks that are already on board or already retired,” he said. “Modifying benefits for future hires only helps you stop the hole from getting deeper, it doesn’t help you climb up and out on to more solid footing going forward.”
State Sen. Jimmy Higdon, R-Lebanon, said he the only positive recommendation he saw was a proposal to offer state workers voluntary buyouts of their accrued benefits under the pension plan, which would let those employees manage their own assets.
“At least there was one positive recommendation,” Higdon said. “I want to point that out.”
In addition to the proposed changes, State Budget Director John Chilton said Kentucky will need to find an extra $1 billion a year to keep its pension systems afloat. If lawmakers don’t take action to raise additional revenue, the state would have to cut funding for K-12 schools by $510 million and slash spending at most other agencies by at least 16.8 percent to make up the difference, Chilton warned.
The state’s public pension systems have a combined shortfall of at least $37 billion. The primary state pension fund, known as the Kentucky Employees Retirement System (Non-Hazardous), has only 13.81 percent of the money it is expected to need in coming years. It covers 122,145 active state workers and retirees.
“It’s going to take at least 30 years to satisfy these obligations and it’s going to be painful,” Chilton said. “It’s not going to be fixed in the short term.”
Many of the state workers and retirees who packed into the Capitol Annex Monday to hear the consultant’s report didn’t leave happy.
Nicolai Jilek, the legislative representative for the Kentucky Fraternal Order of Police, said expecting first responders to work until they are 60 is problematic given the physical requirements of the job.
“We’re very grateful that PFM is just offering recommendations … that they are not lawmakers because his plan would be horrible for first responders,” Jilek said.
Stephanie Winkler, president of the Kentucky Education Association, shared a similar sentiment.
“The PFM had some pretty drastic recommendations that we think are not what’s in the best interest of public school employees and public school students,” Winkler said.
Jim Carroll, president of Kentucky Government Retirees, said his group would likely sue if the legislature proceeds with PFM’s recommendation to roll back the cost of living adjustment that retirees received between 1996 and 2012.
“We think its very clear that the cost of living adjustments that were granted to us are ours as long as we are retirees in the system,” Carroll said.
Lawmakers were quick to stress that Monday’s presentation was a recommendation, not a plan. Members of the Kentucky House of Representatives are scheduled to hold a closed-door meeting Tuesday to discuss potential legislation on the issue.
“This is a complex, multi-faceted problem,” said House Speaker Jeff Hoover, R-Jamestown. “We, as a state, simply cannot financially sustain the current system. Changes need to be made, but what those changes are, or how we address them, right now we are not sure.”
Gov. Matt Bevin, who has spoken several times about the severity of the pension crisis but offered few specific solutions, was scheduled to answer questions from state workers and teachers about Kentucky’s retirement systems on his official Facebook page beginning at 8 p.m. Monday.
“This latest report from PFM further confirms the need for urgency as we resolve Kentucky’s pension crisis,” Bevin said in a statement issued Monday afternoon. “Change is necessary. Time is not our ally — we must act now to get our financial house in order. There is no other viable option.”