The Kentucky Senate is getting a bill that would split the Kentucky Retirement Systems in two, spinning off the better-funded local government pension funds while letting the struggling state pension funds face an uncertain future alone.
With no debate, the Senate State and Local Government Committee voted unanimously Thursday to approve Senate Bill 226 and advance it to the Senate floor.
The bill, sponsored by committee chairman Joe Bowen, R-Owensboro, would allow the County Employees Retirement System, which covers about 230,000 local government workers and retirees, to depart KRS. This new pension agency would be run by a nine-member board, with three members elected by workers and retirees, and six chosen by the Kentucky League of Cities, the Kentucky Association of Counties and the Kentucky School Boards Association.
Bowen compared linking local and state government pensions to tying the future of Toyota to the coal industry.
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“We need to let them go their own way,” Bowen told his colleagues. “You know, we don’t exactly have a stellar track record in managing pension systems in Frankfort.”
Local governments want to leave KRS for obvious reasons: The $8 billion CERS pension funds closed fiscal year 2016 with 59 percent of the money they are expected to need to honor their future commitments.
By contrast, for the $2 billion Kentucky Employees Retirement System pension funds in KRS, which cover about 130,000 state workers and retirees, the overall funding level stood at 19 percent, among the worst for any public pension system in the country. The $207 million State Police Retirement System, which covers 2,565 active and retired troopers, stood at 30 percent.
Cities and counties say their pension contribution rates soared over the last two decades as the state underfunded its own pensions, dragging down KRS for everyone. They have compared it to “being tethered to the Titanic.” Some have sued KRS, alleging “illegal and imprudent investments” as it sought to make up for inadequate state funding by entering hedge funds that lost money. Meanwhile, some “quasi-public” agencies have asked to exit KRS and set up private pension plans.
The time has come to say farewell, local government leaders told the Senate panel Thursday.
“We want you to help us get out of the way so you can address the real issue, which is KERS, the state plans,” said Bryanna Carroll, governmental affairs manager for the Kentucky League of Cities.
However, state retirees don’t welcome the prospect of being isolated in what would remain of KRS. Some fear their retirement benefits could be reduced, despite their inviolable contract with the state, if KRS is made to appear otherwise unmanageable.
Gov. Matt Bevin has ordered a comprehensive audit of KRS, which is underway, with a special session of the legislature expected to address the pension shortfall later this year, said Jim Carroll of advocacy group Kentucky Government Retirees.
“Any radical change for the state’s largest public pension system is therefore premature,” Carroll said after the committee vote.
David Eager, interim executive director of KRS, told the senators that he wanted to correct a misunderstanding that some critics have. KRS separately manages state and local government pension funds, with administrative fees assessed based on how many people are enrolled in each fund, Eager said. The poor health of one fund should not impact how well another fund does, he said.
Eager asked senators for a delay before they passed Bowen’s bill, which would take effect July 1. He said he can’t currently predict how much it would cost to establish a new pension agency with a separate staff, its own set of investment management fees and other expenses that parallel what KRS already does.
“On and on, there are a variety of issues that we’d say we need the answers to before we could form an opinion one way or the other,” Eager said.
However, Bowen said his 376-page bill allows for “an orderly transition.” Although the new pension agency would be established this summer with an independent board, it could contract with KRS over the next four years for various professional services that it might need. The new agency could borrow rooms in the KRS office building in Frankfort until next year.