'Better than most.' Bevin touts 401(K) plan for future public workers.
They don’t have a bill to share with the public yet, and there still isn’t a date for a special legislative session, but Republican Gov. Matt Bevin and GOP legislative leaders on Wednesday unveiled a summary of their proposed long-term solution for Kentucky’s public pension crisis.
Bevin said today’s public retirees and employees would get to keep most of the benefits they expect, including defined-benefits pensions with payments guaranteed to last for the rest of their lives. And there would not be a “clawback” of cost-of-living adjustments from state retirees that pension consultants recommended in August.
Over the next three decades, he said, Kentucky will commit to paying off the tens of billions of dollars it owes in unfunded pension liabilities to school teachers and state and local government retirees with a “level dollar” funding model that fully covers costs, rather than the old model of relying on a percentage of the state’s declining payroll.
“Keeping the promise is really the crux of what we are doing here today,” Bevin said.
However, teachers and government workers would have to kick in 3 percent of their salaries to shore up their retiree health care funds — a de facto pay cut. Retired teachers would forfeit their cost-of-living adjustments for the next five years. Additionally, future retired teachers wouldn’t get a cost-of-living adjustment until five years after they retired.
Those parts of the proposal immediately drew protests.
“We’re concerned that that particular portion is not legal,” said Tim Abrams, executive director-elect of the Kentucky Retired Teachers Association. “And we hope we will get the opportunity to talk to the governor and legislative leaders about it.”
“We cannot support this plan, which is a further reduction of benefits,” said Louisville firefighter Brian O’Neill, a member of the Kentucky Public Pension Coalition. “A 3 percent pay cut to all employees to pay for benefits that were promised is unacceptable. Our firefighters took this job for less pay than they could get in the private sector because of the promise of a pension and good retiree benefits.”
The biggest change would be for the future: Teachers and government employees hired after July 1, 2018, no longer would get pensions. Instead, they would get defined-contribution plans, like a private sector 401(k) account, that they and their employers would contribute into, Bevin said.
Although Kentucky’s future teachers wouldn’t get pensions, they also wouldn’t be enrolled in Social Security, just as they aren’t now, Bevin said.
“Turns out they (teachers) don’t really want to participate in Social Security,” Bevin said. “So they’re not going to.”
As future teachers’ sole retirement income, the defined-contribution plan would let them invest up to 12 percent of their salary with a 6 percent employer’s match. Four percent of that match would come from the state government; two percent would come from school districts — a new expense for the districts, which do not currently contribute toward retirement benefits.
Future state and local government employees, who will be enrolled in Social Security, would be able to invest up to 9 percent of their salary with a 5 percent employer’s match.
For all public employees, a menu of investment options — most likely, mutual funds — would be made available, selected by the Kentucky Retirement Systems or the Teachers’ Retirement System of Kentucky, which are the state’s two major pension agencies.
Critics have warned Kentucky against moving its pensioned public employees to 401(k)-style accounts, arguing that senior citizens easily can outlive their savings, especially if their incomes were low or their investments didn’t perform well.
“For roughly the same amount of upfront cost from the employer, teachers would receive a significantly inferior benefit,” said Jason Bailey, executive director of the liberal-leaning Kentucky Center for Economic Policy in Berea. “Future Kentucky teachers will be among the few Americans without the security of any kind of defined-benefits (plan), since Social Security is a type of defined-benefits plan.”
But Bevin said Wednesday that Kentucky will be offering “a very, very good plan” to its employees.
“When you see the generosity of the employer match that the commonwealth of Kentucky is going to put into people’s retirement plans, you will be — I would encourage you to compare it to the one you have wherever you work. You will find that it will be a very, very good plan ... ,” Bevin said.
“As a guy who has worked in that world, I would take in a heartbeat the DC plan that we’re going to be rolling out over the alternative. I really would,” Bevin said. “It’s a better plan, it’s a richer plan in terms of what it will do for an individual at the end of a career.”
Most currently employed teachers and government employees will retain their defined-benefits pensions, with the exception of state employees hired after January 2014, who already are enrolled in “cash-balance” plans rather than pensions. Those so-called “Tier 3” workers will be rolled into defined-contribution plans next year, Bevin said.
Retirement age for current public employees wouldn’t change, Bevin said. But as of next July, they would face a choice after 27 years of service: Retire with your pension, or keep working but close the pension account and start contributing to a defined-contribution account. At present, some public employees work beyond 27 years, which boosts their pension benefits when they finally do retire.
Under the proposal Bevin shared Wednesday, teachers who have met the 27-year threshold next July would get three additional years to keep working and contributing toward their pensions — a one-time reprieve to avoid an exodus of teachers in 2018.
And the proposal would set new limits on how teachers and public employees can use their accumulated sick days to enhance their retirement benefits.
Groups representing teachers and school boards took a wait-and-see approach Wednesday, because all they had was a list of bullet points to review, not detailed legislation.
“The press conference this morning only gave us a small glimpse into what our futures might hold,” said Kentucky Education Association President Stephanie Winkler. “There is still no bill to comment on. We look forward to seeing the actual bill language and continuing our conversations with leadership.”
Kentucky Government Retirees, a Facebook-based advocacy group, objected to Bevin’s proposition, saying it appears to violate the inviolable contract rights of state retirees with “proposals to arbitrarily limit the accrual of benefits.”
“We will be conveying our opposition in our outreach to legislators throughout the review process,” said Jim Carroll, spokesman for the retirees group. “We hope that, in anticipation of the 2018 session, leadership will soon begin seriously considering revenue measures that will help address pension funding while upholding the legally secured rights of Kentucky Retirement Systems members.”
Bevin said he expects to call a special legislative session to approve a pension reform bill soon, but he does not yet have a date to announce. Lawmakers on hand Wednesday said the session should not last more than five days when it does happen.
The next regular session of the General Assembly begins in January.
State officials said they don’t yet have a price tag for the changes proposed to the pension systems, but they expect actuarial advisers for those systems to have cost estimates prepared by the start of a special legislative session.
State budget director John Chilton warned an oversight panel last month that the next two-year state budget would need $5.4 billion to pay down unfunded pension liabilities and keep pension checks flowing to retirees. It’s likely that figure could drop by several hundred million dollars if the pension proposals are adopted, state officials said.
Still, 2018 will be “a brutally difficult budget session,” Bevin said Wednesday. Lawmakers will have to find the money every year to paying the full actuarial recommended contributions to both of the state’s pension systems, he said.
“This is at least a $60 billion hole, and I think even there we’re being generous with some of the assumptions,” he said. “But let’s just say that it’s a $60 billion hole. That $60 billion hole is not going to be fixed $1.2 billion at a time and then we can think that we’re done.”