The Kentucky House of Representatives on Monday narrowly approved a bill sought by Republican Gov. Matt Bevin that would provide financial incentives for regional universities, community and technical colleges, county health departments, mental health nonprofits and other quasi-governmental agencies to exit the state pension system.
The House voted 52 to 46 to approve House Bill 1 and send it to the Senate, where swift passage during this special legislative session is likely. Republicans hold overwhelming majorities in both chambers.
“Ladies and gentlemen, there are no good choices to the dilemma that we and these agencies find ourselves in,” state Rep. James Tipton, R-Taylorsville, sponsor of HB 1, told his colleagues. But without the bill’s offer of pension relief, Tipton said, some agencies that provide critical services to Kentuckians might have to close their doors.
Under HB 1, the public employers would decide next year whether to stay in the Kentucky Retirement Systems and face a near-doubling of their pension contribution rates or agree to leave.
The bill offers several incentives to the public employers if they agree to freeze their employees’ pensions and transfer them into a defined-contribution retirement account, such as a 401(k) plan. An estimated 7,000 public employees would be affected, many of them middle-aged and well into their careers.
Republican supporters of the bill said public employers need to be able to leave a pension system they no longer can afford to support, paying off their existing pension liabilities in one lump sum or over 30 years.
KRS faces unfunded pension liabilities of $23.5 billion, and contribution rates have soared. State government is paying the equivalent of 84 percent of its payroll into KRS for pensions. The rate for the regional universities and other quasi-governmental entities had been capped at 49 percent until the new fiscal year began July 1.
The chamber’s Democratic minority and a handful of Republicans voted against HB 1, including former House Speaker Jeff Hoover of Jamestown and Rep. R. Travis Brenda of Cartersville, who said the health departments in Madison, Rockcastle and Garrard counties urged him to vote “no” because the bill has no viable path forward for them.
Opponents raised several concerns in the House on Monday. One was whether freezing pensions and offering a less attractive retirement benefit would violate the “inviolable contract” rights of public employees, generating legal challenges. Republican supporters of the bill say they don’t believe employees of the quasi-governmental agencies are covered by the inviolable contract, but they acknowledge that lawsuits probably are likely.
Another concern is the financial security of the employees themselves, who could lose hundreds of thousands of dollars in retirement benefits if they are moved into less generous 401(k) plans with no guarantee of an employer match, some lawmakers said.
Rep. Mary Lou Marzian, D-Louisville, told her colleagues about the valuable work the employees do in their communities at health departments, rape crisis centers and domestic violence shelters, often for little pay. They were counting on retiring on decent state pensions, which their employers promised them, Marzian said.
“These are our friends, they’re our neighbors. These are taxpayers,” Marzian said. “We’re talking about them like we’re just gonna stick them out in the cold with this bill.”
Other Democrats warned that if the legislature passes a law allowing one group of public workers to lose some of their existing retirement benefits, then others — including teachers, police officers and firefighters — will be next.
A financial analysis of HB 1 raised a similar concern, observing that other public agencies within KRS might want the same right to freeze their workers’ pensions and leave the system if it meant saving money.
“Legislation providing a cessation window with the use of alternative provisions may create a precedent for other participating employers to lobby for the enactment of similar legislation on a temporary or permanent basis. Enactment of any such similar legislation could result in continual increased cost and risk for the remaining participating employers in those systems,” GRS Retirement Consulting wrote last week.
After the House vote, Speaker David Osborne dismissed the Democrats’ warnings as “fear-mongering.”
“A lot of hyperbole in there,” said Osborne, R-Prospect. “Certainly, we’ve been talking about pensions for the last several years. ... I think that absolutely we will continue to discuss other items in regards to pensions. But I think that we have taken a very deliberate look at these things. And I think that any assertion that this is a sign of something else to come or symbolizes something else is probably irresponsible.”