KY’s state pension system is short $14 billion. This bill would change who owes what.
Kentucky lawmakers want to change the formula for who owes how much of the state pension system’s $14 billion unfunded liability, with some public employers paying less than they presently do and others paying more.
The new model would charge state agencies, regional universities, local health departments and other public employers based on their share of the system’s accrued liability, rather than continuing to charge everyone the same flat rate every year — currently, a whopping 85 percent of their payroll.
If House Bill 8 becomes law — the House passed it unanimously Feb. 10, sending it to the Senate with momentum — there would be winners who have a lot more spending money, and losers who have a lot less.
Winners would include the nonprofit Kentucky Coalition Against Domestic Violence, in Frankfort, which is projected to save $450,000 a year once its required pension contribution shrinks to 27 percent of payroll starting July 1.
The coalition joined the Kentucky Retirement Systems many years ago, when contribution rates were relatively cheap, because it wanted to offer its modestly paid employees a quality retirement incentive to keep them on the job, said Angela Yannelli, executive director. It currently has 18 employees enrolled in KRS.
As the pension system’s unfunded liability mushroomed, thanks largely to 20 years of inadequate funding by the state’s elected leaders, so did the cost to public employers enrolled in KRS.
The coalition found itself plowing hundreds of thousands of dollars into rising pension contributions that could have gone to safety planning, housing assistance and medical and legal services for its clients.
House Bill 8 is the coalition’s last chance to wrestle its pension burden into submission, Yannelli said.
“This is do or die for us,” Yannelli said. “Without a solution to this problem, the people that we serve will not get the services that they need. We can equate this to lives.”
‘The math doesn’t work’
Among the losers would be NorthKey Community Care, a regional mental health nonprofit based in Covington. NorthKey’s pension contribution would explode to a jaw-dropping 2,301 percent of its payroll, adding a few million dollars a year to its recurring costs.
Chief executive Owen Nichols said he finds the huge increase to be unbelievable. Nichols suspects that NorthKey and other public service nonprofits in the pension system are getting saddled with part of the state government’s financial obligations because of Frankfort’s own poor retirement planning.
“The math doesn’t work,” Nichols said. “They can’t substantiate what they’ve done with the money that has been paid in by NorthKey.”
However, KRS officials say NorthKey isn’t a victim, it’s a prime example of why House Bill 8 is necessary.
To shrink its payroll and, by extension, its pension bill, NorthKey began to outsource its labor a decade ago. Today, it has only three employees still enrolled in KRS and contributing to the pension system. There are 300 more whose services are leased through Erigo Employer Solutions, a local human resources contractor.
With a couple of hundred retirees drawing pensions, and more expected to join them in coming years, it’s grossly inadequate for KRS to charge NorthKey 85 percent of a shrunken payroll of $135,991 for those last three remaining employees, pension system officials said. NorthKey owes a projected $57 million in accrued pension liability.
“They are the poster child for the problem that has created the need for House Bill 8,” said KRS executive director David Eager.
“And I should add, what they’re doing is perfectly legal,” Eager said. “They’re just taking advantage of a system that allows them to do this. If you or I ran a state agency or a university or a mental health nonprofit and we faced these pension costs, we probably would do it, too.”
Agencies cut jobs
The current pension model is broken, according to backers of House Bill 8.
Every fall, KRS crunches the latest numbers, determines how large the unfunded liability is and recommends a percentage of payroll that public employers should pay to keep the pension system viable for another year.
The primary state pension fund is badly under-funded, holding $2.3 billion, or just 14 percent of the $16.3 billion it’s expected to need in coming years. More than 47,000 retirees of state government and other public employers draw a pension from it.
There are two worrying trends apart from the massive pension debt.
One, as the pension system’s unfunded liability has grown, so has the annual contribution rate. That 85 percent of payroll that public employers are expected to pay into the system this year was as low as 38 percent less than a decade ago. Every dollar spent on pension contributions is a dollar not spent on education, health care or law enforcement, to name just a few of the public services reduced as a result.
Two, as the contribution rate grew, many public employers responded like NorthKey, by slashing their payroll — often outsourcing jobs to private contractors who don’t provide state pensions and don’t pay into KRS. For every $1,000 they eliminate from their payroll this year, they spare themselves $850.30 more in pension costs.
Consequently, over the past decade, the number of public employees actively enrolled in the state pension fund has plunged from about 46,000 to about 31,000. State government budget cuts also played a role in that decline.
While that saves the public employers money today, it stiffs the pension system on the cost of tomorrow’s retirees, who will expect all of the benefits they’ve accrued even if fewer and fewer people are contributing to KRS.
Under House Bill 8, cutting payroll would barely dent a public employer’s pension obligation because most of its contribution cost would be determined by its share of the pension system’s liability as of June 30, 2019. It no longer could significantly reduce what it owed this year simply by privatizing jobs.
“We need to stop the incentives of people to get out of the system,” state Rep. Jim DuPlessis, R-Elizabethtown, told the House State Government Committee on Feb. 4, urging it to support House Bill 8.
“This system is not healthy. At all,” said DuPlessis, one of the bill’s sponsors. “This will be the final bill that we have to do to address this going forward.”
Pinching health departments
To help craft House Bill 8, KRS asked its actuarial advisers, a firm called GRS Retirement Consulting, to determine what every public employer in the state pension fund owes toward the $16.3 billion accrued liability, based on each of their enrollment numbers.
If pension contributions were decided by what employers really owed, rather than asking the same flat rate from everyone, the firm reported, then costs on average would drop for regional universities, county attorneys, the state’s judicial branch and social service nonprofits, such as rape crisis centers and domestic violence shelters.
In essence, these employers currently subsidize the pension system, paying more than they owe.
But costs on average would increase for local health departments, regional mental health nonprofits and the state’s executive and legislative branches. These employers don’t pay as much into the pension system as their employees expect to collect in benefits, GSR concluded.
This is not good news for the Cumberland Valley District Health Department, based in Manchester. GSR determined that of the pension system’s $16.3 billion in accrued liability, $89.9 million belongs to Cumberland Valley.
Under House Bill 8, Cumberland Valley would owe $5 million a year in pension contributions instead of its current obligation of $1.4 million. That would be 300 percent of its payroll.
Beleaguered local health officials say they can’t even conceive of that large a debt.
“There’s a certain point in the game where it’s just not manageable anymore,” said Christie Green, the district’s public health director. “Not realistically.”
Green said her agency has been shrinking since 2014 because of pension expenses, reducing its offerings to the core health services required by the state. Programs like family planning and sexually transmitted disease prevention now look almost like luxuries, she said.
“We know that STD rates are rising. We would love to return to pre-pension crisis levels where we could offer STD screening services,” Green said.
Sponsors of House Bill 8 say they plan to add money to the state budget this winter to help defray the additional cost for the bill’s losers. The state already subsidizes regional universities and public service nonprofits to keep their pension rates appreciably lower than the 85 percent of payroll that state government pays.
“The final number is still being worked out,” DuPlessis said this week. “But if House Bill 8 passes, it is the intent to have money in the budget to help those entities. The budget committee will put that dollar figure in the budget bill once the final number is decided.”
That said, DuPlessis cautioned, the financial aid might not be enough to spare everyone pain.
“Some health departments may have to increase their payments more than they are now even with a subsidy,” he said.
