Kentucky’s regional universities and community college system could opt out of the state’s troubled pension system under a new legislative proposal, but it could be a very expensive proposition for them.
House Bill 358, filed by Rep. James Tipton, R-Taylorsville, would allow Eastern Kentucky University, Kentucky State University, Morehead State University, Murray State University, Northern Kentucky University, Western Kentucky University, the Kentucky Community Technical College System, and the Kentucky Higher Education Student Loan Corporation to opt out of the Kentucky Employees Retirement System.
To do so, they would have to pay the full cost of current and retired employees in the system, along with the cost of actuarial studies that would determine the amount owed.
Employees who wished to stay in KERS could do so under the proposed legislation, but the schools would have to pay all their costs, either in lump sums or in installments over 25 years with 5.25 percent interest.
The schools would have to create their own alternative retirement programs, which would have to a voluntary defined-contribution plan similar to a 401(k), as opposed to a defined-benefit plan, “which can have an unfunded liability,” according to the bill’s language.
The University of Kentucky and the University of Louisville already have their own defined-contribution retirement systems and are not affected by the bill.
House Bill 358 would affect only those institutions who wish to leave KERS.
At most state universities, faculty have chosen to be in the Teachers Retirement System of Kentucky, which is in much better financial health than KERS. TRS has about 57.7 percent of the money it needs to provide promised pensions, compared to 16 percent for KERS.
Many university staff employees belong to KERS. Because the system is so underfunded, participating employers must pay increasingly large sums of money to keep it afloat.
Those sharply escalating costs have panicked numerous schools already reeling from a decade of state funding cuts. Right now, the regional universities and community colleges must pay the equivalent of about 50 percent of each employee’s salary into the pension system; on July 1, that will soar to 83 percent.
For example, Eastern Kentucky University paid $13.2 million to KERS this fiscal year, according to a campus email sent by President Michael Benson Thursday morning. Next year, it will be $22.8 million. Eastern has 478 employees in KERS.
“Given our current budget constraints and funding forecast, this is an unsustainable amount,” Benson wrote. “Meaningful pension reform must be enacted.”
Western Kentucky University, like EKU, has spent the past couple of years cutting programs and employees. WKU’s payment to KERS will increase by $7 million next year. The university has already created an alternative retirement program, known as ORP (Optional Retirement Plan).
WKU President Tim Caboni spoke in favor of the bill in a campus-wide email sent Wednesday night.
“Most importantly, the proposed legislation protects current participants in KERS,” he said. “It does, however, provide a choice. Employees, both vested and non-vested, will have the option to remain with KERS and to accrue retirement benefits for the remainder of their WKU employment. For those employees who believe it to be in their best interest to cease participation with KERS, they will have the option to change to the ORP. This option could especially be of interest to employees having less service in KERS.”
How much each school would owe to exit KERS would depend on the number of employees currently in KERS and how many wish to leave.
Northern Kentucky University currently has the most employees — about 700 — in KERS due to a decision made when NKU was first established in the 1970s.
This year, their pension payment is $18 million; next year it would be $31 million under the current plan, said Adam Caswell, NKU’s assistant vice president for government affairs.
Caswell said no university could currently afford the hundreds of millions of dollars it would cost to exit the state pension system with a lump sum payment, so he expects most will choose the 25-year repayment plan.
“This shows what a collaborative approach to a problem can do,” he said. “We worked together to acknowledge a shared responsibility ... this is a piece of legislation we can all get behind.”
Universities would have to make a decision about staying or going by Dec. 31, 2019.
David Eager, executive director of the Kentucky Retirement Systems, was not immediately available for comment.