Politics & Government

‘Pension relief’ bills could save local agencies, at a high cost to Kentucky taxpayers

Without a freeze in pension contribution rates, 42 county health departments will close in the next year, and 22 more will close in the year following that, the Kentucky Health Departments Association warns.
Without a freeze in pension contribution rates, 42 county health departments will close in the next year, and 22 more will close in the year following that, the Kentucky Health Departments Association warns. Kentucky Health Departments Association

Kentucky lawmakers face a tough choice this winter as they try to ease the huge pension costs facing regional state universities, local health departments, mental health nonprofits, rape crisis centers and other publicly funded institutions that are technically outside state government.

The officials running these places say they need help in order to keep serving Kentuckians.

“Without a (pension contribution) reprieve, 42 county health departments stand to close their doors in the next 12 months, and an additional 22 are likely to in the next 24 months,” said Allison Adams, president of the Kentucky Health Departments Association.

In response, several “pension relief” bills working their way through the legislative process would cap at 49 percent of payroll the level at which these institutions must pay into the Kentucky Retirement Systems. Lawmakers approved a 49 percent cap for the same institutions last year, even as the pension contribution rate for state government has soared to 84 percent, up from 39 percent a decade ago.

In letters to KRS last month, actuarial advisers warned that this pattern of generosity means that state government — supported by state taxpayers — will have to make up the considerable difference, starting with an additional $121 million in Fiscal Year 2021. To keep the other institutions at 49 percent, state government should be prepared to contribute 96 percent of its payroll to pension costs, the advisers said.

Another measure, House Bill 358, would let the regional universities immediately exit KRS by no longer enrolling new employees and paying off their pension liabilities on a 25-year installment plan rather than one lump sum. KRS’ advisers warned this “will result in substantial sustainability risk as other employers lobby for the enactment of similar type legislation to reduce their pension cost.”

Kentucky faces a total public pension shortfall of $37 billion. Every dollar of pension relief granted to an outside entity is a dollar the state’s General Fund must make up, at the cost of something else state government needed to do, said state Senate budget chairman Chris McDaniel.

State Sen. Chris McDaniel LRC Public Information

On Tuesday, McDaniel’s committee gutted most of the language from House Bill 268, a budget measure that included pension-relief language, among other items. Although McDaniel acknowledged that pension relief is likely to make it into law this winter one way or another, he pledged that this would be the last time.

“To freeze (the pension rates) this year will have to involve a fix, because I’m simply not for continuing to kick this can down the road,” said McDaniel, R-Latonia. “The whole reason we got the pension system into the problem we have right now is people kicked the can down the road for decades and didn’t make decisions. The time to make those decisions is now.”

McDaniel said one answer, in his opinion, would involve the other institutions finding additional revenue on their own or reducing their future pension liabilities by placing new employees in defined-contribution retirement accounts. Several mental health nonprofits already have made that switch so new employees are no longer enrolled and accruing liabilities in KRS, McDaniel said.

“I hope to keep working with them to find the best solution for their path forward,” McDaniel said.

For health departments, which have 2,474 employees enrolled in KRS, the ideal solution would be lawmakers dedicating one or more new revenue sources to cover pension costs for the public institutions that need relief, said Adams, who also is public health director at the Buffalo Trace District Health Department in Maysville.

But it’s possible the health departments will be forced into their more pragmatic Plan B, which is slashing their staffs by 35 percent, Adams said. Currently, payroll size is what determines pension contributions, so a smaller staff means an agency owes less, she said.

“It’s not much of a solution, and it’s not really a win for the entire pension system, because it would mean fewer people paying in. But it would reduce our liability,” Adams said.

“And obviously, for our communities, a lot of things will fall through the cracks,” she continued. “Response time will slow. Inspections will take longer to complete. Ultimately, as our health departments can’t do all of the work they once did, the responsibility falls back on the Cabinet for Health and Family Services by statute.”

For state employees nervous about the security of their retirements, however, continued pension relief seems like a well-intentioned effort that could leave them the last occupants of a sinking lifeboat, said Jim Carroll, spokesman for Kentucky Government Retirees, a Facebook advocacy group.

“It’s not sustainable,” Carroll said. “This just makes a bad situation worse. Someone has to pay that ARC (actuarial required contribution), and if the quasi-public agencies don’t have to do it, then it’s all going to fall on the state. The system can’t afford for anyone to walk away from their obligations.”

John Cheves is a government accountability reporter at the Lexington Herald-Leader. He joined the newspaper in 1997 and previously worked in its Washington and Frankfort bureaus and covered the courthouse beat.