Gov.-elect Matt Bevin said Friday he hopes to present to state lawmakers in the upcoming legislative session a plan to implement a 401(k)-style retirement plan for new state government employees.
Bevin, speaking to about 400 people at the annual Kentucky Association of Counties conference at the Lexington Center, called the state’s public retirement systems the “most critical” challenge his administration faces. The Republican businessman from Louisville takes office Dec. 8.
He later told reporters that his goal is to address the pensions problems “as expediently as possible” but that he will be as thoughtful and methodical as possible.
If it can be done in the 2016 Kentucky General Assembly that begins in January, “it will be done in this session,” he said.
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His comments on the state’s retirement systems came after reports this week that the public pension fund for more than 120,000 state government workers and retirees ended the 2015 fiscal year on June 30 with only 19 percent of the money it’s expected to need to pay future bills.
It also was reported this week that the total pension and retiree health insurance liability of the Kentucky Retirement Systems, which operates multiple pension funds for state and local governments, was $35.8 billion on June 30. KRS had $16.1 billion in assets, or just 45 percent of what is needed for future benefits.
Bevin noted that the pension fund covering most state workers ranks among the worst in the nation.
Kentucky has “a legal and moral obligation to current and retired employees” to maintain their benefits, he told the county officials.
But he quickly added that new employees should expect a new retirement system based on defined-contribution plans, much like the 401(k) plans used by many employees in private-sector jobs.
“We have to change the system for people not yet in it,” Bevin said.
Keeping the current system will require cutting the budget of every state program, from filling potholes to paying emergency personnel, Bevin said.
He has said defined-benefits retirement plans, which guarantee monthly pension checks until a worker dies, are not viable.
Bevin also has said he would allow current public employees to transfer their vested assets from a traditional pension plan to a 401(k) plan if they want.
The advocacy group Kentucky Government Retirees, which says it has 6,260 members, opposes Bevin’s idea for a 401(k)-style plan, said co-founder Jim Carroll.
Shifting new employees to a 401(k) would divert their paycheck withholding and employer contributions from the existing pension funds that still must support tens of thousands of retirees.
“We regard with concern Gov.-elect Bevin’s proposal to increase short-term costs in the nation’s worst-funded pension plan by transitioning to a 401(k)-style plan,” Carroll said. “We hope he will shelve this idea for a future time so that all implications can be thoroughly studied.”
Carroll added that he appreciates that Bevin does not want to make changes involving current and former state employees.
Asked what should be done, Carroll said one idea is an “incremental” bond issue of $250 million a year.
Bevin and many Republican legislators oppose the idea of “bonding” to address the problem. Under that plan, Kentucky would borrow money on the bond market to pay down its pension liabilities, hoping that the retirement systems could make more on investments from that money than the state would owe for interest on the bonds.
The legislature last winter rejected a Democratic proposal to issue a $3.3 billion pension bond for teachers as too risky, but another push is expected in 2016.
Bevin acknowledged that his plan would not be an immediate fix.
“It will take a generation at least to climb out of this,” he said.