FRANKFORT — The state Senate passed a controversial bill on Friday that would end guaranteed pensions for new state and local government employees to resolve the public pension funds' growing liability.
Kentucky needs to stay ahead of the multibillion-dollar pension liability problem that is forcing tax hikes and painful spending reductions in other states, said Republican senators backing the bill.
"It is just not affordable to go forward with our current plan, for state government or for local governments," Sen. Damon Thayer, R-Georgetown, told his colleagues.
From a fairness perspective, taxpayers in the private sector struggle with layoffs, stagnant wages and benefits cuts, yet they're expected to support generous public pensions far better than anything they will get to enjoy, he said.
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The Republican-controlled Senate voted 24-13, along party lines, to send Senate Bill 2 to the Democratic-led House, where its future appears grim.
SB 2 would close the current Kentucky Retirement Systems to new state and local government employees on June 30, 2012.
Instead of getting a pension from retirement to death, new employees could join a defined-contributions plan, like a private-sector 401(k). The governments would offer matching funds to participants, but the responsibility for having adequate retirement accounts would fall on employees, not on taxpayers, Thayer said.
House Democratic leaders on Friday said they don't expect to address the pension issue this legislative session, which is scheduled to end on March 22. Lawmakers passed some pension reforms in 2008 that should be given more time to work, such as requiring new state employees to work longer and contribute more to their pensions, they said.
But Senate President David Williams said on Friday that the 2008 reforms fell short. Last year alone, the state government retirement plans added more than $1 billion in unfunded liability, and the local government plans added $796 million, said Williams, R-Burkesville.
"We're in a hole, but we're gonna stop digging it any deeper than it is. We have a plan," Williams told the Senate State and Local Government Committee, which met to approve the bill before the full Senate vote.
Williams offered a substitute version of SB 2 with a sweetener to win the support of local governments. The measure would allow them to contribute just 85 percent of what actuaries say is necessary for their pension fund's solvency, rather than the full amount.
"An 85 percent funding level is still exceedingly healthy," Williams told the Senate committee.
Paying less to the pension fund would give cities a much-needed break, said Kentucky League of Cities executive director Jonathan Steiner. Next year, the cities expect to see a $17 million increase in their pension obligations over this year, Steiner said.
"It may well be the solution that our cities are looking for," Steiner said of the Senate bill.
But Mike Burnside, executive director of the Kentucky Retirement Systems, warned the committee that both the state and local pension funds face worrisome unfunded liabilities. The local pension fund is in better shape — it's 65 percent funded, compared to the state pension fund's 38 percent — only because the local governments give at higher levels than the state, Burnside said.
"Lowering those contributions is not something I've heard other states or other systems talk about as a healthy thing to do," Burnside said.
The Kentucky Retirement Systems board of trustees previously decided that it did not support SB 2, after the Senate first proposed it in January, because of the anticipated costs, Burnside said.
A financial analysis of the bill predicted it could cost governments many billions of dollars more over the next 15 years as the existing pension funds had to support a rising number of retirees without any incoming workers to make contributions.
Williams said he doesn't dispute that SB 2 has short-term costs, but around the year 2026, his plan would become cheaper than the existing system. About 20 years from now, the state's unfunded pension liabilities would be all but gone, he said.