In this game of pension risk, cost isn't the only thing lawmakers are considering

03/03/2013 07:45 PM

The House version of reforms to Kentucky’s public employee pension system is slightly cheaper over the next two decades.

In fact, the latest actuarial report on the House changes to the Senate’s pension reform bill shows the state and local governments would save $206 million over 20 years, as first reported Saturday by the Kentucky Center for Economic Policy , a progressive think tank.

So the argument about which one should pass the General Assembly should be simple, right?

Not so. There is one other big factor to consider that is putting the fate of pension reform in this session at risk: risk, itself — as in, who should bear the brunt of it during hard times?

The major difference between the House’s version of reforms and the Senate’s is how to structure the benefits for future hires. (No one is talking about changing benefits for current workers).

House Democrats want to keep it the way it is now, in which an employee’s pension check is calculated using the highest three salaries he or she earned and the number of years of service.

The Senate version, passed on Feb. 9 by a 33-5 vote, adopts a legislative task force recommendation to move to a “hybrid” or cash-balance plan. The employee would kick in 5 percent of his or her pay and the state or local government, as the employer, would put in 4 percent. Then the person would be guaranteed a return of at least 4 percent but much higher during good times, depending on investment performance of the Kentucky Retirement System funds.

Jason Bailey of the Center for Economic Policy said actuarial reports put the median return at 8.1 percent, which is higher than the 7.75 average income return estimate for the system. That, he said, could drain money from the fund.

The employer (the state and local governments) and workers (in this case yet-to-be-hired employees) both need the money they put into the Kentucky Retirement System fund to multiply through investments in order for the system to sustain itself over the long haul.

And if the market tanks for a substantial stretch like the way it did in the Great Recession starting in 2008, either the employer is going to have to pay more into the system to keep it from losing more money than it brings in or the employees see their retirement checks shrink. And that’s the impasse that emerged last week during debate over the House changes.

Rep. Brad Montell, R-Shelbyville, spoke out on the House floor last week saying that the hybrid plan included in the original Senate version is meant to insulate the state from higher payouts when the Kentucky Retirement System misses its investment mark. And Rep. Brent Yonts, D-Greenville, countered that such a move “shifts the risk off of government and puts it onto the working person.” Watch their exchange:

County and city governments mostly have sided with Montell on the hybrid versus defined benefit debate. They’ve seen their share of pension costs increase to more than 20 percent of a workers’ salary. And still, their system is only 60 percent funded. That’s partially because investment income took a hit during the recession but also because county and city governments required payment rates still haven’t been as high as they could have been to account for rising health care benefits for retirees and unfunded cost of living adjustments.

But progressives and state workers groups are on Yonts’ side. Here’s what Bailey, of the Center for Economic Policy, said on Pure Politics in an interview last month about the risk, the hybrid plan and what’s necessary to really fix the pension system.

As for existing retirees, they’re mostly concerned with making sure the state pays its full share into the Kentucky Retirement System each year — something it hasn’t done since 2002. Jim Carroll, co-founder of the Kentucky Government Retirees, issued a statement last week blasting both versions of SB2, the pension reform bill. He said the House version opens the possibility of changing benefits for future workers because it outlines a situation in which the Kentucky Retirement System could raise contribution rates.

“We call upon the House to vote down SB 2 in any form and concentrate its efforts on addressing the real pension issue – the unfunded liability,” Carroll said.

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