The House and Senate overwhelmingly passed sweeping legislation to reform Kentucky’s beleaguered public pension system Tuesday, opting to move away from the defined benefit plan offered to public employees since the 1950s.
The House and Senate passed two bills – Senate Bill 2 and House Bill 440 – by wide margins on the session’s final day. The bills were sent to Gov. Steve Beshear for his signature or veto.
Beshear, who played a pivotal role in negotiations, has said he would not veto any pension reform compromise.
Pension reform was a, if not the, top priority in this year’s short 30-day legislation session. Lawmakers negotiated behind closed doors in recent weeks, hoping to reach an accord and avoid a special session.
Beshear and legislative leaders touted the bills as the result of bipartisan consensus during a press conference shortly after both chambers approved the plans.
“This spirit of cooperation and thoughtful discourse has allowed us to reach a bipartisan agreement, which solves the most pressing problem facing our state: our monstrous pension liability and the financial instability of our pension fund,” Beshear said.
SB 2 places new state and municipal workers, judges and legislators hired or elected after Jan. 1, 2014, into a hybrid cash balance plan and fully pays actuarially required pension contributions, which were among several recommendations by a bipartisan legislative task force.
Teachers and current public workers will not be added to the hybrid cash balance plan, which will establish individual accounts administered by the Kentucky Retirement Systems with benefits based on contributions and investment returns with a minimum 4 percent annual return guaranteed.
SB 2 also includes aspects of pension reform that cleared the House, such as creating a Public Pension Oversight Board and providing annual cost-of-living pay increases for retirees only when there are ample funds available or the General Assembly provides funds.
The legislation was lauded in the Senate, which passed SB 2 by a 32-6 vote. Senate Majority Leader Damon Thayer, a Georgetown Republican and the bill’s sponsor, said SB 2 will “avert a fiscal crisis” and protect KRS, which faces some $18 billion in unfunded liabilities, from insolvency.
“This is indeed one of the greatest policy achievements of this body and this General Assembly in recent memory,” Thayer said after voting for the bill.
The House also passed SB 2 by a wide margin – 70-28 – but the legislation sparked some debate with a number of lawmakers vehemently opposed to the hybrid plan.
Rep. Derrick Graham, D-Frankfort, said Tuesday marked one of his most difficult days as a legislator. SB 2 is a “patchwork” bill, he said, and future legislators will have to readdress the issue of fully paying pension contributions.
“I hope … that it works out in the way that we’re telling (Kentuckians) tonight, but I have some grave concerns,” Graham said during a speech on the House floor.
House Speaker Greg Stumbo, however, said the proposed plan would protect state workers and retirees currently vested in the defined benefit program by putting more cash in KRS.
The hybrid plan has a number of critics, but Stumbo, D-Prestonsburg, said lawmakers will be proud of their decision when reflecting on the difficult task of pension reform and finding money to pay for it, something other states have not done.
House Democrats had advocated for maintaining the defined benefit plan along with a number of other recommendations. Stumbo said “two and a half out of three” of the House’s proposals were included in the final version of SB 2.
“I’m proud of what I saw here tonight,” he told reporters during a news conference.
HB 440, the funding bill, calls for reducing a personal tax credit from $20 to $10, closing a number of tax loopholes and using federal tax changes to make actuarially required pension contributions expected to cost an extra $100 million in General Fund money in fiscal year 2015 alone.
In all, the funding proposal is expected to generate $95.7 million in fiscal year 2015 and $99.9 million in fiscal year 2016. The plan includes a trade-in credit for new car purchases, which would take an estimated $34 million annually from the Road Fund.
Some – including Jim Carroll, co-founder of the Facebook group Kentucky Government Retirees – questioned the Legislature’s decision to not specifically earmark revenue from HB 440 for KRS.
“For the sake of all taxpayers, it is critical that future legislatures honor this financial commitment so that such a fiscal crisis is not repeated,” Carroll said in a statement.
Senate President Robert Stivers, R-Manchester, said bond-rating agencies are more concerned with budget integrity as a whole rather than a dedicated revenue source. Funding streams can also be problematic when there are shortfalls and surpluses that require alternative plans, he said.
“We made sure people knew there was sufficient funding in the streams out there that could take care of the problem,” Stivers said.
Those representing public workers and retirees were unhappy with Tuesday’s result.
Steve Barger, coordinator of the Kentucky Public Pension Coalition, took issue with the process of crafting SB 2 because pensioners and public workers were not included in talks as lawmakers hashed out a compromise in the session’s final week.
“We hope that people were acting in good faith,” Barger said. “We think that they were. We just don’t think there was enough time and enough thought put into it, particularly when you leave out 340,000 retirees and public employees.”