KY lawmakers urged universities, public agencies to leave pension system. None have.
At the urging of then-Gov. Matt Bevin, the General Assembly struggled for much of the last two years to craft a plan that forced regional universities and dozens of quasi-public agencies like local health departments either to leave the Kentucky Retirement Systems or start paying the full skyrocketing cost of their employees’ public pensions.
On Thursday, lawmakers heard that nobody is showing much interest so far in exiting the pension system under House Bill 1, the solution that emerged from a special legislative session last summer. The deadline for agencies to decide is April 30.
The buyout costs — the sum that departing employers must pay to KRS to clear their pension liabilities, either up front or in installments — are proving to be more than agencies can swallow.
“We can’t afford to stay in and we can’t afford to get out. I mean, we’re between a rock and a hard place,” said Aaron Thompson, president of the Kentucky Council on Postsecondary Education.
Just for the six regional universities, the community and technical college system and the state’s nonprofit student loan agency, the estimated buyout costs range from a combined $931 million to $1.47 billion, depending on which of four exit paths the schools were to choose, according to testimony by KRS to the House budget subcommittee on higher education.
For Eastern Kentucky University in Richmond, for example, the estimated buyout costs range from $196 million to $301 million, depending on whether the school paid its liability in one lump sum or installments and also on whether or not it allowed some existing employees to remain in KRS and continue accruing their pension benefits.
EKU had to slash $25 million from its budget two years ago because of rising pension costs, cutting 200 jobs and closing several programs, David McFadden, EKU’s interim president, told the House panel. There is no cushion left to absorb a massive pension buyout expense, McFadden said.
“Those are pretty staggering numbers to look at,” McFadden said. “I would argue that the pension liability is probably the greatest threat to our institutions and the greatest threat to our commonwealth as a whole.”
At this point, Morehead State University does not consider it financially viable to quit the pension system, school president Jay Morgan told lawmakers.
“It would probably cost us as much to stay in as it would to get out,” Morgan said. “So flip a coin and decide one way or the other.”
An estimated 9,000 Kentuckians work at the affected agencies. Many expressed concern last year about the possibility of losing much of their pension’s value if their employers quit KRS and transferred them into a less generous defined-contribution retirement account, like a 401(k), while they are in the middle of their careers.
“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,” Garrard County public health nurse Cathy Stapleton said last summer.
Under last summer’s HB 1, the regional universities and quasi-public agencies had been scheduled to face a huge increase in their pension contribution rates in Fiscal Year 2021, from the current 49 percent of their payroll up to 93 percent. Until HB 1, the state government had been subsidizing the agencies enough to help them avoid the full pension costs that state agencies were paying.
The pension fund for state workers at KRS has an unfunded liability of $14.2 billion, with only 13.4 percent of the assets it’s expected to need to meet future obligations.
In his budget proposal unveiled Tuesday, Democratic Gov. Andy Beshear offered these employers partial pension relief with budget language that would cap their pension contributions at 67 percent instead of 93 percent. For that to become law, however, the Republican-controlled legislature will have to leave it in the budget bill it passes.
The education leaders warned lawmakers Thursday that their campuses will suffer under either rate.
“We’re appreciative of the attempt to mitigate the impact of the 93 percent. But 67 percent is still going to be a very difficult road for us to go down. It’s going to cost us millions of dollars more into the system,” McFadden said.
There are 113 agencies eligible to exit KRS under HB 1, including the regional universities, local health departments, regional mental health nonprofits, rape crisis centers and others.
Only 57 agencies have requested a report showing their buyout costs, said KRS executive director David Eager, indicating that the other half of them have no interest in even considering a departure from the pension system. So far, no agency has formally applied to leave KRS under HB 1, and few are expressing serious intent, Eager said.
This story was originally published January 30, 2020 at 3:59 PM.
