Gov. Matt Bevin on Tuesday vetoed the Kentucky General Assembly’s last-minute effort to offer pension relief to the state’s regional universities and dozens of “quasi-public” agencies, such as county health departments and mental health nonprofits, by letting them keep their contribution rates much lower as they gradually buy their way out of the state retirement system.
In his veto message for House Bill 358, Bevin said he will call a special legislative session by July 1 to give lawmakers another chance to address the soaring pension costs facing these institutions.
“I truly do appreciate the good intentions of the General Assembly in enacting HB 358,” Bevin wrote Tuesday. “However, it, and we, can do much better.”
However, special sessions can be a gamble. To Bevin’s frustration, a special session he called in December quickly adjourned after lawmakers failed to agree to changes that he proposed for the state’s pension systems. He later scolded lawmakers for lacking “the intestinal fortitude” to tackle the pension debt.
Under the vetoed bill, the universities and agencies could have remained in the Kentucky Retirement Systems and begun paying a staggering 84 percent of their payroll as their share of pension contributions, which is what the rest of state government paid this year.
Or they could have left KRS by July 2020 and paid off their pension liabilities, either with one lump sum or starting at their current rate of 49 percent of payroll and gradually increasing by 1.5 percent a year until they were finished.
Bevin said in his veto message that the bill as written would have added too much to the strain of the state’s public pension shortfall, which already stands at an estimated $37 billion. Among other flaws, he said, were the ways that the universities and agencies would have been allowed to calculate their pension liabilities before exiting KRS, as well as the open-ended payment schedule that could have dragged on for more than 30 years.
According to an analysis by KRS advisers, Bevin wrote, 74 of the 118 quasi-public agencies eligible under the plan would not have been able to pay off their liabilities within 30 years, and some never could have afforded it.
Another objection Bevin raised: The bill would have allowed the Kentucky Finance and Administration Cabinet to take over the management of universities or agencies that defaulted on their pension liability payments to KRS for more than 30 days.
In the event of such a takeover, pension checks and health coverage would not have continued for retirees until payments resumed, and all employees would have been bumped into defined-contribution retirement accounts, permanently losing their right to continue with defined-benefits pensions at KRS.
Bevin called this section “unacceptable.”
However, doing nothing and letting the health departments and other agencies continue to struggle with pension costs — and perhaps even close their doors in some cases — won’t be allowed, Bevin added.
“I believe strongly that we must protect our important quasi-government entities, such as our regional universities, our rape crisis centers, our domestic violence shelters and local health services agencies, from potential insolvency due to the onset of significantly higher employer pension contributions,” Bevin wrote.
“These entities provide critical services throughout the commonwealth,” he wrote. “It is paramount that their services remain uninterrupted.”
Asked for comment on Bevin’s veto, legislative leaders late Tuesday said they were still reviewing it.
“I just know there is a veto,” said Senate President Robert Stivers, R-Manchester.
House Speaker David Osborne, R-Prospect, said in a statement later Tuesday that legislators “spent exhaustive amounts of time meeting with stakeholders” before passing the bill.
“We sent the Governor a bill that we believed provided stability for the employers while keeping the state’s commitment to the retirement futures of our employees,” he said. “I am hopeful that the Governor will begin meeting with us immediately to find a solution that ensures this balance. It is critical that we do this before calling another special session without a solution in hand.”
Kentucky Democratic Party spokeswoman Marisa McNee issued a statement criticizing Republicans for the expense the special session will create.
“Gov. Bevin’s administration appointed the KRS board that worked to spike pension obligations of state agencies, including the quasi-government agencies affected by the governor’s veto. This is a crisis of their own making and it will continue to cost Kentuckians,” she said. “Now, Bevin, who just last month said he wouldn’t call a special session, claims he will do just that. This $65K a day guessing game has to stop. Bevin isn’t just playing politics; he is playing with people’s pensions and their lives. ”
Other observers on Tuesday praised Bevin’s veto, although some said they hope lawmakers in special session will provide universities and agencies with another one-year “cap” in their pension payment contributions at the current level of 49 percent. Without a freeze in contribution rates, 42 county health departments will close in the next year, and 22 more will close in the year following, the Kentucky Health Departments Association has warned.
“I thought there were problems with the fix the legislators had. We had been pushing as an advocacy agency to give the quasis a freeze on rates by July 1,” said Sheila Schuster of the Kentucky Mental Health Coalition. “I am hopeful a special session can set this all straight.”
Kentucky Government Retirees, a Facebook advocacy group that closely monitors the pension debate in Frankfort, said it strongly opposed the vetoed bill for leaving KRS in even worse shape.
The bill would have cost the state’s primary pension fund an estimated $799 million, resulting in a 5.3 percent increase in what the rest of state government would have to pay for its pension contributions next year, according to an actuarial analysis prepared for KRS by GRS Retirement Consulting.
“We commend Governor Bevin for vetoing a bill that attacked employee contract rights, exposed Kentucky Retirement Systems to unjustified risk, and incurred actuarial substantial costs,” Kentucky Government Retirees said in a prepared statement.
“The governor’s veto provides an opportunity for a genuine collaboration among representatives of all stakeholders,” the group said. “The path forward must include a funding solution that provides relief to quasi-government agencies while not fiscally damaging the nation’s most vulnerable state pension plan.”