Beshear’s budget would mean tens of millions less than expected for KY pension fund
Gov. Andy Beshear’s budget plan would result in Kentucky Retirement Systems getting tens of millions of dollars less in pension contributions than it had expected during each of the next two fiscal years, aggravating the state pension system’s $14.2 billion unfunded liability, KRS officials told lawmakers Thursday.
KRS Executive Director David Eager put the shortfall at $83 million a year in his public testimony. Later, the governor’s office challenged that estimate and said the correct shortfall would be $25 million a year.
Senate Majority Leader Damon Thayer, R-Georgetown, said lawmakers will study this part of the governor’s budget plan in coming days.
“This is obviously something we’ll have to look at,” Thayer said. “We don’t want to accidentally under-fund the pensions.”
Beshear’s budget would cap at 67 percent of payroll the Fiscal Year 2021-22 pension contribution rates for regional universities and dozens of agencies that provide public services on state contract, such as local health departments and regional mental health nonprofits. Their pension contribution rates were scheduled to explode from a previously capped 49 percent to the 93 percent that state government will be paying.
Beshear included roughly $100 million in the two-year budget to help subsidize partial pension relief for these public employers, most of which are struggling just to cover their existing pension costs. The General Assembly last summer passed a law to encourage these agencies to quit the pension system, but so far, none are applying to do so.
At the state pension system, the difference between these agencies paying for thousands of employees at 67 percent and at 93 percent would be $83 million a year, Eager told the House budget subcommittee on higher education at a hearing on Thursday.
“That would be $83 million a year that is not going into the retirement system. So at some future date that would probably have to be made up?” state Rep. James Tipton, R-Taylorsville, the panel’s chairman, asked Eager.
Eager agreed. He said that GRS Consulting — the pension system’s actuarial consultants — already has warned KRS that past years of subsidizing the regional universities and other agencies to keep their rates artificially lower have left a hole in the unfunded liability that forces rates to go that much higher for the rest of state government.
If the legislature adopts Beshear’s idea for continued partial pension relief for these agencies, Eager said, the actuarial consultants will insist that state government must pay even more to make up the lost collections.
“They will adjust the 93 (percent) rate,” Eager said. “My understanding is they will come back in writing and say the rate should be higher than 93.”
In a brief statement later, the governor’s office said Beshear included enough money in the two-year budget — that $100 million, plus $10 million more for a small set of other public employers — to cap the agencies’ contribution rates at 67 percent while effectively providing 84 percent funding on their behalf to KRS.
The agencies would pay the 67 percent; the state would cover the rest.
So the actual contribution gap would not be between 67 percent and 93 percent, it would be between 84 percent and 93 percent, which is $25 million each year, the governor’s office said.
“Under Gov. Beshear’s plan, $110 million more for the (agencies) is going to the Kentucky Employees Retirement System in each of the next two years compared to the last budget,” said Beshear spokeswoman Crystal Staley. “The governor’s plan will result in an 84.41 percent employer contribution rate, which is about $25 million shy of the 93.01 percent rate, but is much greater than the 49.47 percent being contributed now.”
However, the governor’s partial pension relief might not even be included in the final budget bill approved by lawmakers before they adjourn April 15.
After Thursday’s hearing, Tipton said he’s sympathetic to the regional universities and other agencies facing “unaffordable” pension contribution rates. But there’s a limit to how much longer the General Assembly can keep capping their contribution rates at lower levels, he said.
“That’s not a good option, either,” Tipton said. “The bottom line is, we have a large unfunded liability that needs to be paid. So who is going to pay it and when? If we keep freezing rates for people, that doesn’t really seem to be solving the problem.”
This story was originally published January 31, 2020 at 11:01 AM.
