The Kentucky General Assembly is making an unusual summertime appearance in Frankfort. Here is what you need to know:
Why is the legislature coming back for a special session Friday?
Gov. Matt Bevin is asking lawmakers to pass a bill that could end state pensions for thousands of people working at Kentucky’s regional universities; its community and technical colleges; and its quasi-public agencies, including county health departments, mental health nonprofits, domestic violence shelters and rape crisis centers. (The universities of Kentucky and Louisville have defined-contribution retirement plans and would not be affected.)
These nearly 120 employers are enrolled in the Kentucky Retirement Systems, which faces $23.5 billion in unfunded pension liabilities due to two decades of inadequate state funding and unrealistic assumptions about investment returns and payroll growth.
To deal with the massive shortfall, state government pays the equivalent of 84 percent of payroll to KRS for its employees’ pension contributions. For example, for a state employee with a $50,000 salary, the state’s additional pension expense is $42,000 a year.
But until now, the universities, colleges and quasi-public agencies have been spared that full burden. They’re only paying 49 percent, which is still more than many comfortably can afford.
However, Bevin and other Republican state leaders in Frankfort say it’s time these employers either pay the full cost of participating in KRS — something that would financially cripple most of them — or leave KRS and transfer their employees to less generous defined-contribution retirement plans, such as a 401(k) account.
Bevin has proposed a plan to let employers decide next year whether to stay in KRS at full cost or exit. Departing employers would have to pay off their pension liabilities, covering what would be due their current retirees and future retirees whose pension benefits would be frozen next year. The payoff could be in one lump sum or over 30 years, starting at the current 49 percent rate and increasing by 1.5 percent a year.
Employers who opt for a “soft freeze” — leaving KRS but allowing individual employees to remain enrolled so they continue accruing pension benefits until retirement — would face stiffer payoff terms, likely to discourage most from considering it.
The universities and colleges, which can issue bonds to raise a lot of money fast, are leaning toward the lump sum option for a speedy retreat, while the cash-strapped quasi-public agencies would need the long-term installment plan to settle their pension liabilities.
Bevin’s plan also would grant the employers a final year of pension relief by extending the 49-percent contribution rate one last time.
Didn’t the legislature already pass a “pension relief” bill for these employers last winter?
Bevin cited a number of problems with HB 358, from typos and inaccurate dates to larger, conceptual issues. One was a provision allowing the Kentucky Finance and Administration Cabinet to take over management of departing employers that defaulted on their pension liability payments to KRS. In that event, pension checks and retiree health coverage would have been stopped.
“I truly do appreciate the good intentions of the General Assembly in enacting HB 358,” Bevin said in April when he vetoed the bill. “However, it, and we, can do much better.”
Bevin’s office spent the last few months negotiating new terms with Republican House and Senate leaders that they believe could pass in a special session. Time is short. When the state’s new fiscal year began July 1, the pension contribution rate for the universities, colleges and quasi-public agencies shot up to 84 percent because special relief language included for them in the last state budget expired.
Is everyone happy with Bevin’s pension proposal?
No. An estimated 9,000 Kentuckians work at the employers now under pressure to quit KRS, providing health care to families, caring for abused children and running community college campuses. Many were counting on a state pension when they retired, not a 401(k) plan just opened a few years earlier.
Because of previous pension changes, so-called “Tier 3” public employees who were hired after Jan. 1, 2014, already are enrolled in hybrid cash-balance accounts, not pensions. But nearly three-fourths of those 9,000 employees are in Tiers 1 and 2. They would be moved into less generous defined-contribution accounts next year, no longer accruing state pension benefits.
“Tier 1 and Tier 2 employees stand to lose a massive amount of retirement income if they are taken out of the system and their pensions are frozen,” the nonprofit Kentucky Center for Economic Policy warned in May.
“There are 6,700 Tier 1 and Tier 2 employees at the quasi agencies. Employees with 10 to 20 years of service will lose the majority of their defined benefit pension and many will be out well over $100,000 in net lifetime income,” the center said.
There could be lawsuits challenging Bevin’s proposal if the legislature passes it. Groups like the Kentucky Public Pension Coalition call the governor’s plan illegal for breaking the “inviolable contract” that guarantees certain benefits, like pensions, to public employees.
Another concern: The employees in question make up one-fourth of the people enrolled in the primary state pension fund at KRS. Active and retired state workers worry that a mass exodus could further destabilize a pension fund that only has about 12 percent of the money it needs to cover future payments.
In a July 3 letter to KRS, actuarial advisers GRS Retirement Consulting said the departing employers would take several hundred million dollars in pension contributions along with them. GRS called the loss “significant” and noted that contribution rates for the rest of state government would rise as a result, especially if the departing employers’ rates are kept artificially low. Bevin’s plan also has hundreds of millions of dollars in additional costs related to incentives offered the departing employers to get them to leave, GRS said.
“KRS is essentially being asked to become a bank extending credit to the quasis over many years,” said Jim Carroll, spokesman for the advocacy group Kentucky Government Retirees. “Can you imagine any pension system in the country in a worse position than ours to underwrite people paying off their liabilities over decades? That’s just bad funding policy.”
Without the universities, colleges and quasi-public agencies in the mix, the beleaguered state pension fund would depend entirely on state workers at the Cabinet for Health and Family Services, the Justice and Public Safety Cabinet and the Transportation Cabinet, among other, smaller state government bureaucracies. All of these cabinets have faced budget cuts and job losses in recent years, putting the burden for sustaining the retirement system on far fewer people.
Is Bevin’s proposal the only one on the table?
No. The House Democratic minority offered an alternative pension plan earlier this month, although Bevin swiftly dismissed it as “immoral” and narrowly tailored his call for a special session to include the language of his own proposal. The House speaker’s office did not respond to a question this week asking whether GOP majority leaders will allow the Democratic plan to be considered.
Democrats and several public employee groups said they want a fair and open debate on all ideas, not just the governor’s bill.
“Hopefully, House leadership will allow democracy to work the way it’s supposed to. Because if you give us the freedom, we think we can come up with something that’s better for everyone,” said state Rep. Joe Graviss, D-Versailles, co-sponsor of the Democratic plan.
The Democratic proposal would keep everyone currently enrolled in KRS in their pension plan, to continue accruing benefits. It would freeze the universities, colleges and quasi-public agencies in KRS at the 49 percent contribution rate for the next 25 years. This would require higher contribution rates for the rest of state government, at least in the near future, to offset the loss to KRS of about $121 million.
Also, for the next five years, the Democratic plan would shift about $130 million in “excess” retiree health insurance fund payments at KRS into the pension fund, which needs it more. Democrats say this would be paid back in future years by higher annual payments to the health insurance fund. (GRS Retirement Consulting, the actuarial advisers, this month told KRS the retiree insurance fund is only 37 percent funded, and it did not recommend further under-funding it.)
Originally, the Democrats temporarily would have set more optimistic assumptions for payroll growth at public employers and investment returns at KRS, automatically shrinking the size of the contributions considered necessary to shore up the pension fund. However, they decided to drop that section last weekend.
Bevin and others attacked that last idea as a reckless numbers game, arguing that overly rosy assumptions — counting on better investment income than KRS actually gets, for example — helped dig Kentucky’s pension hole in the first place. Under Bevin, KRS has adopted lower but more realistic assumptions, boosting the size of the contributions required of state and local governments.
The universities and colleges seem inclined to flee KRS under one plan or the other. But some quasi-public agencies want to protect the pensions of existing employees so they don’t suddenly lose their most experienced workers, who might quit for better-paying jobs once they no longer are accruing pension benefits.
Owen Nichols, president of NorthKey Community Care, a mental health nonprofit in Northern Kentucky, recently asked lawmakers to consider a compromise between the Democratic plan and Bevin’s.
“It is also true that (the Democratic plan) creates some additional short-term expense for the Commonwealth of Kentucky. However, it protects critical services for thousands of citizens in Kentucky,” Nichols wrote in a letter to the legislature’s Public Pension Oversight Board. “I sincerely believe a compromise of (the two plans) could create a viable long-term solution to our pension crisis. This would allow all of us to focus on other issues that need our attention.”