A legislative task force has recommended the state fully fund pension contributions and move new public hires, judges and legislators into a cash-balance retirement plan not as generous as the current one.
Rep. Mike Cherry, D-Princeton and co-chairman of the Task Force on Kentucky Public Pensions, said the panel’s final proposal, passed by a vote of 11-1 with Democratic Sen. Joey Pendleton of Hopkinsville the lone dissenter, reflects a compromise that can pass the General Assembly when it convenes in January.
“It’s got a lot of compromise in it,” Cherry said during the task force’s meeting Tuesday.
“Everyone should understand that there are some things that some of us would like to have in this recommendation that aren’t there, and that works across the board for House and Senate and party labels too.”
The task force’s proposal, if adopted, could create some tense budget negotiations soon.
Fully funding the amount recommended by the Kentucky Retirement Systems’ actuary would cost the state more than $1.7 billion in the next biennium budget, according to figures presented by Cavanaugh MacDonald Consulting. That amount is $934 million in the current two-year budget.
About 70 percent of contributions to KRS come from the General Fund, while quasi-governmental agencies in the pension system pay the remaining 30 percent, Cherry said.
Sen. Damon Thayer, R-Georgetown and the panel’s other co-chairman, said fully funding the actuarially required contribution was the first agreement reached while negotiating the proposal. Both Thayer and Cherry said they realized the gravity of the costly recommendation.
“We understand how difficult that’s going to be, but we just cannot keep ducking that issue,” Cherry said after the meeting. “… To fail to do this would be to essentially kick the can down the road further.”
“We’re talking about potential insolvency for the KRS within five years if some steps aren’t taken,” Thayer said. “We recognize that difficult decisions are ahead for the General Assembly in future years.”
Cities and counties are already required by law to fund the actuarially required contribution for the County Employees Retirement System.
Finding ways to pay for higher contributions to KRS will be up to Gov. Steve Beshear and the legislature if the task force recommendations are approved, Cherry said.
But Rep. Derrick Graham, D-Frankfort, a member of the task force, said he would have liked to see some sort of funding mechanism tied to the proposal.
“It’s easy to say we want to fully fund the ARC (actuarially required contribution), but how are we going to fully fund the ARC?” Graham said after the meeting.
“That’s the key. That’s the bottom line. It can’t just be coming from the executive branch.”
Graham is concerned with other provisions in the task force’s recommendations, such as repealing cost of living adjustments and the composition of the KRS Board of Trustees. Graham would have liked to see the legislature consider cost of living raises on a yearly basis and the KRS board have a more regional makeup.
When asked the likelihood that the task force’s proposal passes the General Assembly as written, Graham said, “Nothing in this place passes as recommended.”
Aside from fully funding the actuarially required contribution in the next biennium budget, the task force’s proposal includes:
>Moving new hires to a cash-balance pension plan that is less generous and splits investment risk between the state and employees.
Employees would pay 6 percent into a retirement account – 5 percent for pensions and 1 percent for health plans – while the state would pay 4 percent and guarantee a 4 percent return on investments. Seventy-five percent of returns above 4 percent would go to employees while the state would take the remaining 25 percent under the plan.
Accrued benefits would remain protected in the proposal, but the legislature could change future benefits depending on financial circumstances.
>Stopping cost of living adjustments that aren’t pre-funded.
>Implementing a two-year break for retirees seeking re-employment.
>Resetting the amortization period for unfunded liabilities facing KRS, most recently at $19.2 billion total, to a new 30-year period.
>Closing the retirement plans for legislators and judges to new participants and putting them in the cash-balance pension plan for state employees.
>Adding two appointed trustees to the KRS board, giving the governor five appointees on the board. Three of those must be chosen from lists provided by the League of Cities, Kentucky Association of Counties and Kentucky School Boards Association.
Retiree groups immediately decried the proposal.
Jim Carroll, of Kentucky Government Retirees, said he was “appalled” by the task force’s recommendation to not include future hires in an inviolable contract.
“The General Assembly created the current crisis by consistently failing to provide the annual required contribution,” Carroll said in an email.
“This legislative neglect should not be a basis for creating two classes of employees – those whose retirement benefits are guaranteed and those whose benefits can be changed at the whim of the legislature.”
The Kentucky Public Pension Coalition questioned numbers presented by the Pew Center on the States and used to recommend the cash-balance plan, saying in a press release the plan is significantly underpriced.
The task force’s proposal would be “a terrible and costly mistake for Kentucky’s taxpayers and for its nurses, police officers, librarians, trash truck drivers and other public employees,” the coalition said.
Thayer said he planned to prefile the proposal as a bill for the upcoming legislative session. Cherry, who is retiring and won’t be part of the next General Assembly, said he would cosign the bill.
The State Journal edited this story to correctly identify ARC as actuarially required contribution.