Bevin vetoes bill to phase in pension payments for local governments

04/05/2018 02:49 PM

FRANKFORT- Governor Bevin has vetoed a bill meant to help local governments with increasing pension payments.

House Bill 362 would have phased-in pension contributions for city and county governments, as well as school districts while also creating a way for entities to withdraw from the pension system through “buy-outs”.

Bevin said he supports the phase-in provision, but vetoed the bill because the buy-out provision was “very problematic.” In his veto message, Bevin encouraged the General Assembly to restore the phase-in provision during the remaining days of the session.

His full veto message reads:

“House Bill 362 contains two major provisions. First, it provides important relief to cities and counties by phasing in the increased contributions necessary to shore up the CERS pension plans. Second, it provides a window for participating employers to withdraw from KERS and CERS plans under terms that are much more favorable than the current law permits.

I support the phase-in provisions for CERS employers in the context of reforming our pension systems. Cities and counties have always funded the contributions required by law, despite the fact that those required contributions consistently underestimated the true liability due to decisions made by prior KRS boards to adopt unrealistic and inaccurate assumptions with respect to investment returns, inflation, and payroll growth. These bad assumptions are the primary reason the CERS plans are less than 60% funded. The current KRS board is committed to using realistic and honest assumptions to ensure that retirees will continue to receive pension checks. This phase-in provision provides cities and counties an increased ability to budget for the necessary increased contributions. To be clear, although this provision is part of the bill I am vetoing, I support and encourage the Kentucky General Assembly to restore this provision in the remaining two days of the 2018 Session.

It is the buy-out provisions contained in House Bill 362 that are very problematic and the basis for this veto. I am concerned that the buy-out provisions will be viewed as “credit negative” by rating agencies if not changed. According to the actuarial analysis of the bill, requiring KRS to finance the ceasing employers’ annual installments with a 0% interest rate is a significant benefit to those withdrawing employers and could potentially be a $2.0 billion subsidy that must be financed by the remaining participating employers in the systems. For example, the potential subsidy for employers ceasing participation in the KERS Non-Hazardous System alone is $1.7 billion and could result in a 6% to 8% increase in the actuarially required contribution (“ARC”) for the remaining participating employers, including the Commonwealth itself. Additionally, there is increased dfinancial risk to KRS and CERS that member entities may become financially troubled or cease exsistence before they have completely financed all their unfunded liability (this is referred to as increased default risk).

Under House Bill 362, the buy-out payments for most employers would bot see any annual increases over a 30 to 40-year period. The actuary for the KERS and CERS plans have suggested changing the installment period to ten years, which would require higher annual payments. The Executive Director of KRS has additional recommendations that could significantly reduce nagative cash flow and other imminent risks to the stability of the pension plan. The legislature should implement recommendations that will help protect the remaining employers from unnecessary and inappropriate financial burdens and high likelihood of increases in their ARC payments.

In their current form, the buy-out provisions are well-intended, but provide too much risk to the solvency of both the KERS and CERS systems. these provisions, as currently written, will lead to cash flow issues and shift even more of the pension burden to future taxpayers.

Therefore, for the sake of fiscal responsibility, I must veto House Bill 362, while reiterating that the General Assembly should work to quickly reenact the phase-in portion of the bill.”

House Bill 362 was a revision of the original phase-in bill, Senate Bill 66.

Michon Lindstrom

Michon is a producer for Pure Politics. Michon comes to Kentucky from Springfield, Illinois where she served as the statehouse reporter for the NBC affiliate. During her time in the Land of Lincoln she covered the state’s two year budget impasse and the largest school funding overall in Illinois history. Pure Politics airs weeknights at 7 and 11:30 on Spectrum News. Follow Michon on Twitter at @MichonLindstrom or reach her by email at michon.lindstrom@charter.com

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