Senate president says public employees must realize pension system is ‘broke’
A bill that would provide relief from rapidly growing pension costs for some Kentucky universities and quasi-governmental agencies faltered Thursday, just hours before lawmakers lost their ability to override a gubernatorial veto.
The House of Representatives rejected the Senate’s changes to House Bill 358 Thursday afternoon, which would have created a mechanism for a group of seven colleges and quasi-governmental agencies, such as local health departments, mental health nonprofits and rape crisis centers, to leave the Kentucky Retirement Systems. The House’s original bill only applied to universities.
The decision to not concur, which was greeted with a round of applause from some House members, sent the bill back to the Senate, which must decide whether to recede from their changes or send the bill to a conference committee to negotiate changes with the House.
The Senate took no action on the bill Thursday but can consider it again on March 28, the final day of this year’s legislative session.
Whatever lawmakers decide is likely to have a deep impact on the agencies, their employees and the state’s $37 billion unfunded pension liability.
“It affects every community and there’s no absolute win in this,” Sen. Chris McDaniel, R-Taylor Mill, said Thursday morning. “I have no doubt, the House is full of good people, they’re going to grapple with the same tough issues that we’re all going to grapple with, but at the end of the day I think we’ll all come out on the right side of this.”
To McDaniel, the right side is creating a mechanism for the quasi-governmental agencies and universities to leave Kentucky Retirement Systems. He authored the Senate changes to the bill, which would allow the agencies to pay off their full debt to KRS over several decades rather than in a lump sum payment.
The groups would have the opportunity to stay in the state’s retirement system if they can pay their full annual contributions. If they can’t, they’d be kicked out and would have to pay their current contribution rate, which would increase 1.5 percent each year, until their existing pension obligations are paid off. Interest on the debt would be 5.25 percent a year for pension costs and 6.25 percent per year for retiree health costs.
The plan would be costly. An actuarial analysis provided for the bill estimated the plan could add $1 billion to the state’s unfunded pension liability, which is already one of the worst in the country.
But simply capping the pension contributions of the agencies involved at 49 percent of payroll, as lawmakers did last year, at a time when state government is paying 84 percent of payroll, would also be expensive.
In a February letter to KRS, actuaries estimated that if lawmakers keep the agencies at 49 percent of payroll, state government would have to increase its contribution to 96 percent of payroll — an additional $121 million in the fiscal year that starts July 1.
But if no relief is provided, the Kentucky Health Departments Association has estimated that 64 county health departments could close their doors within the next two years.
The Senate-version of the bill would give university employees, most of whom are staffers at regional universities, the ability to stay in their current pension plan. For employees of the other agencies, it would freeze their retirement benefits. That provision has caused concern that the bill might violate the inviolable contract that protects retirement benefits of employees, which could lead to a lengthy legal battle.
House Speaker David Osborne, R-Prospect, said members of the House and Senate were working on a compromise Thursday, but that they couldn’t come to an agreement in time.
“I think they’re pretty close, but didn’t feel like they were close enough to get all the details worked out and get something through,” Osborne said.
Osborne said the House couldn’t concur with the Senate’s changes because their members had heard from quasi-governmental agencies that wouldn’t be able to afford the changes McDaniel proposed.
“They asked us to go back and try to find a little better option for them or a different option for them that would allow them to stay open,” Osborne said.
Finding agreement could be challenging. When McDaniel was asked if he would accept a bill that simply froze the contribution rate at 49 percent of payroll and didn’t create a mechanism to remove the quasi-governmental agencies and universities from KRS, he responded with a curt “no.”
Jim Carroll, president of the Kentucky Government Retirees group on Facebook, has talked about another solution: a tax increase to help pay the full amount owed by quasi-governmental agencies.
That solution does not seem to be on the table for lawmakers, who approved a tax bill Wednesday that would cost the state $105 million a year.