‘A cloud hanging over all of us.’ NKU plans to exit Kentucky’s state pension system.
Northern Kentucky University plans to become the state’s first regional university to exit the Kentucky Retirement Systems, hoping to cut pension costs that have mushroomed to $16.4 million a year and threaten to nearly double.
The NKU Board of Regents last week approved a resolution to leave KRS, which provides retirement benefits for local and state government employees.
KRS is one of the nation’s worst-funded public pensions systems, with more than $25 billion in unfunded pension liabilities, due primarily to the failures of state leaders over two decades. As a result, skyrocketing contribution rates in recent years have been bleeding dry its participating employers.
“This has been a cloud hanging over all of us,” wrote NKU president Ashish Vaidya and board chairman Andrá Ward in a message to employees.
“This recommendation is as much an investment into our people as it is a path to ridding ourselves of the shackles of an underfunded system,” the officials wrote. “And it is a belief that attracting, supporting and retaining the most capable and motivated individuals will drive and sustain the change needed to thrive in an increasingly volatile, uncertain, complex and ambiguous world.”
Under NKU’s plan, its 411 so-called “Tier 1” and “Tier 2” employees — those with more seniority, who were enrolled in KRS before Jan. 1, 2014 — would stay in the state pension system. The university would owe $277 million to KRS as a buyout price to cover the liability for those employees’ pensions, said NKU spokesman Atley Smedley.
For the 321 “Tier 3” NKU employees hired since 2014 and for those hired in the future, Smedley said, the university would provide a defined contribution retirement plan rather than a traditional pension.
The change wouldn’t be cheap. Total net debt service on that buyout would be about $442 million, with annual payments due of $14.8 million. Throw in the university’s estimated contributions of $1.3 million a year for the new retirement plans and the annual cost comes to $16.1 million.
But that’s still $300,000 less than what NKU is paying each year to KRS, Smedley said.
And that assumes that state pension costs won’t rise further, which is not an assumption anyone in Frankfort is making.
As it stands, lawmakers have agreed to temporary pension relief for regional universities and “quasi-public” nonprofit agencies enrolled in KRS that is keeping their contribution rates artificially low. Without that relief — which can end whenever lawmakers stop feeling generous — NKU would owe $14 million more a year.
In 2015, the General Assembly created a liability buyout process for public employers that want to leave KRS. Only a handful of agencies so far have been able or willing to swallow the hefty cost, including Commonwealth Credit Union, Kentucky Employers’ Mutual Insurance and the Council of State Governments.
So far, no other Kentucky university has asked to quit KRS. Together, the universities have 2,987 employees participating in the state pension system, collectively making them one of the largest KRS employers outside of state government, alongside local health departments and mental health nonprofits.
The universities of Kentucky and Louisville offer their own defined contribution plans, but the other seven are in KRS, including the Kentucky Community & Technical College System. On Friday, Eastern Kentucky University’s president recommended to the Board of Regents that his school remain in KRS for now after requesting data on what a buyout would cost.
Instead of exiting KRS, some universities have tried a more controversial maneuver: eliminating paid positions on campus that had been enrolled in KRS and then bringing those same employees back the next day through private contractors, such as Sodexo or Aramark, that don’t offer pensions or other traditional benefits.
By outsourcing hundreds of jobs to contractors, state universities have managed to reduce their payrolls, which is what helps decide their state pension liabilities. But KRS sued over the legitimacy of outsourcing in a case involving Western Kentucky University, arguing that it left the pension system illegitimately weakened.
The outsourcing litigation is still pending, KRS executive director David Eager said Monday.
As for NKU’s plan to leave the state pension system, Eager said that should not pose a problem since the school is going to cover the future costs of pensions for its employees who remain enrolled.
“We feel we’ve been amply protected against any risks once they depart,” Eager said.
This story was originally published December 14, 2020 at 12:18 PM.
