J Smith — his first name is just one letter, his grandfather’s middle initial — earned $45,000 in 2004 as a shift coordinator at the Corning Inc. glass plant in Harrodsburg. But Smith’s degree was in public health. That’s what he wanted to do. So he took a pay cut to $31,000 to work as an inspector at the Garrard County Health Department, keeping area residents safe at their homes, schools and restaurants.
His new job came with a state pension. These pensions are modest — $21,587 on average — but guaranteed for life. After Smith was enrolled in the Kentucky Retirement Systems, he contributed 5 percent of his paycheck. The health department that first year matched it with the equivalent of 5.89 percent of his salary.
Pensions are the most attractive part of the state employment package, Smith said.
“We all understood the pay would be low,” he recalled Wednesday in his office just outside Lancaster. “But you don’t take a state job for the pay. The good pay is in the private sector. What we were promised was a secure retirement we didn’t have to worry about. We could always count on that.”
“Always” ended Wednesday, shortly after Smith spoke.
Republican Gov. Matt Bevin signed into law House Bill 1, passed by the General Assembly during a five-day special legislative session. The GOP House and Senate majorities supported the bill; every Democratic legislator and a handful of Republicans opposed it.
The law puts a tough choice before 118 public employers known as “quasi-governmental entities” — local health departments like Smith’s, regional universities, community and technical colleges, mental health nonprofits and others. Do they stay in KRS and face pension contribution rates that have exploded to 83 percent of payroll? Or leave KRS under a protective cap of lower rates, agreeing to pay off their existing pension liabilities either in one lump sum or over the next 30 years?
Public employers that quit KRS will be encouraged through financial incentives to freeze their employees’ pensions so they accrue no further benefits. Instead of a pension, employees will be transferred into a riskier defined-contribution retirement plan, such as a 401(k), with a balance that rises and falls with the stock market, and that retirees can outlive if their money runs dry.
What happens next will affect the futures of roughly 7,000 public workers like Smith. Some could lose hundreds of thousands of dollars in anticipated retirement benefits if their pensions are frozen mid-career.
Bevin and other GOP backers of HB 1 say it was needed because KRS faces a $23.5 billion pension shortfall. Until July 1, the state was helpfully capping pension contribution rates at 49 percent of payroll for the “quasis,” as Frankfort officials call the health departments and other agencies partly funded by state government but with their own governing boards. Going forward, however, any employer staying in the pension system must pay the full cost, supporters of HB 1 said.
“This bill doesn’t by any stretch resolve the pension crisis in Kentucky. No one has presented it as doing so,” Bevin said at the signing ceremony in the Capitol. “But it is a remarkably responsible and appropriate next step in moving toward financial solvency.”
HB 1 worries the employees of the Garrard County Health Department. All seven of them are “Tier 1,” among the 63,547 state workers who joined KRS before Sept. 1, 2008. They have the most vested. Some are within a decade of retiring. Under the state pension formula, the final decade on the job is crucial to maximizing their monthly retirement checks.
Cathy Stapleton, a nurse at the health department, is 55 with plans to retire at 62. She doesn’t want her pension to be frozen and replaced with a 401(k) account that would have seven years — not the usual 30 to 40 — to build wealth through compound interest. One ill-timed market crash could sink her.
“It means a lot when you come into a pension. It means you have a retirement where you can count on having that income every month,” Stapleton said Wednesday. Getting a new 401(k) plan at age 55 “would be a lot different,” she said.
Smith, who is now the public health director of Garrard County, said he will recommend to his governing board that the department swallow hard, budget the extra cash and stay in KRS. Telling middle-aged people who devoted their lives to public service that they’re suddenly going to risk financial insecurity in their senior years is not a viable choice, he said.
“We’re not going to opt out,” he said. “If we opt out, to me, we’re screwing our employees here. Some of my people have got just a few years left. We expect to get what we were promised. We were promised a pension.”
No good choices
Smith understands the pain his health department — and by extension, the county of 17,523 people that it serves — will suffer by staying in the state pension system.
For fiscal year 2020, which began July 1, the department’s $937,374 budget had to absorb the roughly $110,000 cost of the pension contribution hike, from 49 percent of payroll to 83 percent. To do so, it laid off its emergency preparedness coordinator and a front desk clerk and officially eliminated a third position, Smith’s old job, which he still does in addition to being director.
That means he splits his time between inspecting schools, businesses, septic tanks and the like for safety and cleanliness and managing the department.
“I’ll admit, our response time is slower now because of it,” Smith said. “When people used to call in for a site evaluation, we usually could get out there the same day. Now it might take us a week. It’s just — I’m sorry, we don’t have the people we used to.”
The department also trimmed thousands of dollars in contracts, such as getting rid of a blood pressure machine in the lobby and reducing the frequency of laundry pickup. On the service front, family planning isn’t provided anymore. Health education activities in the community were cut back.
Pension costs aren’t the only problem. State Medicaid funding and block grants for various programs have been reduced, and the Garrard County Fiscal Court has been unwilling to raise the department’s property tax rate above where it’s been for decades — 4 cents per $100 of assessed value.
Because of soaring pension costs, the Kentucky Department of Public Health last winter urged local health departments to scale back their services and focus on the “core areas” required by law, such as enforcing local health codes and administering the Women, Infants and Children supplemental nutrition program. The austerity message has been received by local health officials slashing their budgets.
“The only reason we came in under budget this year is because of all the cuts we made. But we can’t keep doing that, we’ve done all we can do there,” Smith said. “I told our Board of Health that if we want to keep the services we have left, we’re going to have to have a tax increase.”
Smith hopes that if his department can afford a few years of excruciating pension payments, those costs soon will drop, as shown in a 30-year actuarial analysis prepared for KRS in which the pension fund slowly recovers, requiring less money each year from employers. By the mid-2030s, in about 15 years, the steadily dropping pension costs for public employers staying in KRS will fall below the steadily rising costs for those who left KRS and are having to repay their liabilities over 30 years, according to this analysis.
“I’ve seen some figures on opting out that suggest it’s gonna cost you as much or more as staying in,” Smith said.
“Over 30 years, you’re still gonna have to pay at least as much money, but it will just be spread out more toward the back end. And then, on top of that, you’ve got to pay someone to set up whatever 401(k) you’ll need. So it’s not really a cost savings for you in the long run,” he said. “And also, you don’t have pensions anymore.”
‘Quite a loss, isn’t it?”
Elsewhere around Kentucky, other “quasi” employees watched the legislature pass HB 1 and anxiously did the math. What will they lose if their state pensions are frozen next year and replaced with a defined-contribution plan?
“I can tell you, the difference for me between 16 years in the system and 24 years is roughly $10,000 a year in lost retirement benefits, every year, for the rest of my life. That’s quite a loss, isn’t it?” asked John Boston, 56, a senior financial analyst with the Kentucky Higher Education Student Loan Corporation in Louisville.
Boston, who has an M.B.A., said he would have to put $19,000 into a 401(k) up front and earn an annualized 10 percent return to make up for his pension losses. (By comparison, KRS assumes its investments will earn 5.25 percent a year.) That could be tricky on a $58,207 salary. Even if he had the spare cash, one “market correction” too close to his retirement could spell disaster for him, he said.
“A 401(k) can be great if you get started when you’re young. It’s not so great if you get started when you plan to retire in eight years, which is the situation a lot of us are in,” he said.
Boston said he fumed watching lawmakers on television talk about how HB 1 was necessary because of the pension shortfall. For most of two decades, he said, lawmakers from both parties short-changed the pension system, putting into the state budget only a fraction of what the KRS Board of Trustees recommended.
“I blame the legislature completely for this,” Boston said. “The pension system didn’t just collapse on its own. KRS made some mistakes in their assumptions, but the state deliberately under-funded it for years and used that money to spend on other things. But they don’t want to talk about that now.”
Chris Whitsell, director of child and family services at the Adanta Group, a mental health nonprofit based in Somerset, isn’t sticking around to see how this all plays out. Only 48 years old, with 25 years in the pension system, Whitsell said he is moving his retirement date up from 2021 to now.
His soon-to-be $33,600 pension would have been $8,300 more had he spent 27 years in the system and retired on time, as he originally intended, he said. But it doesn’t look like he’s going to get those two final years, anyway, so it’s better to leave while he’s certain he can claim a pension, Whitsell said.
“Because of all the anxiety around this, I’m moving ahead,” Whitsell said.
“It’s very concerning to me to see how the community mental health centers are going to fare under these changes,” he said. “We’re going to be losing a lot of experienced people. There is going to be a significant drain from the workforce. Who will help the families we’re working with? But my great anxiety is that we just don’t know what’s happening to us next.”