Bonding and increased contributions top Pew recommendations for Ky. Retirement System

Kentucky lawmakers will have to move quickly to begin easing the more than $30 billion unfunded liability in state’s retirement system and could start with a combination of selling bonds and increasing what employees — and the state — pay into the fund, the Pew Research Center told legislators Monday.

The Pew Center outlined several packages of reforms to members of the Pension Task Force. Representatives from the center told the group of lawmakers that if they don’t consider selling a bond, which means taking on more debt, they would likely have to make up the difference through state money. That likely would lead to diverting spending from other programs and eliminating the retirement income tax exclusion by 2015.

The Pension Task Force will meet again on Nov. 20. The goal is to get a consensus and pick an approach to fix the problems before a vote is called. If the members of the Task Force agree on recommendations, they would form the basis of bill in next 2013 General Assembly.

Sen. Damon Thayer, R-Georgetown, the co-chair of the Pension Task Force told Pure Politics he is not in favor of selling a bond or increasing taxes as a way to pay for the unfunded liability. He said he would weigh the options before the next meeting.

“I’m not enthused about a tax or bond solution I think taking on debt to pay off debt is not a really good idea,” said Thayer.

Thayer said he would talk with the co-chairs of the budget committee and look into the full funding solution moving forward.

The first package the Pew Center listed as a comprehensive reform was:

. Increasing employees’ contributions into the fund over four years and making full actuarial contributions by fiscal year 2017.
. Changing the current the amortization period to pay off the unfunded liability by 2044
. Issuing $780 million in bonds and put proceeds into the Kentucky Employee Retirement System Non-Hazardous plan
. Increasing employee contributions to a total of 6 percent of pay for pensions and 1 percent of pay for retiree health benefits – (increasing two percentage points for those hired between 2008 and one percentage point increase for those hired after 2008)
. Reducing the $41,110 tax exclusion to $25,000 and benefits earned before 1998 will be taxed
. Eliminating automatic Cost of Living Adjustments, which were aimed at helping pensions keep up with inflation. And if the legislature wants to offer COLAs before the pension plans are fully funded, they should be paid for by employees.
. Implementing governance changes, including ending the practice of double-dipping in which a retiree drawing a pension returns to a state government job and earns a salary as well.

The second package the Pew Center offered is similar to the first but has two differences: the ramp up to full funding is delayed to occur over six years instead of four and the amortization schedule is untouched.

The third package does not include any bonding or tax changes to benefits earned before 1998. To make up the difference Kentucky would have to immediately begin paying the full required contribution and the income tax exclusion would be eliminated.

All of the packages are designed to give the Commonwealth options to close the funding gap. Task Force members can still design their own plan to act on. With the packages there would still be large pension costs, and legislators would still need to find additional revenue to close the funding gaps.

The Pew Center also recommended that the type of retirement plan change to a cash balance plan or a stacked hybrid plan.

Cash-balance plans allow workers to get an individual retirement account that employee and workers contribute to, and the benefits of the plan are based on what is in the account at retirement. The Pew Center said these plans pool risk among workers and employers.

A stacked hybrid plan would allow workers to get a defined benefit based on the final salary, and workers get an individual retirement account. Workers who switch careers can often end up doing better with a hybrid plan.