Lawmakers face tough decisions in grappling with pension crisis

08/28/2017 06:56 PM

FRANKFORT — Members of the Public Pension Oversight Board heard findings and recommendations from a audit performed by the PFM Group on Monday about what can be done to fix the pension crisis, and board members learned that the proposals may be hard to implement.

State Budget Director John Chilton estimated that the state’s ailing pension systems for public workers need an additional $1 billion per year to be fiscally responsible and gave the following options to raise that money: cut spending, increase taxes or adjust benefits.

PFM Managing Director Mike Nadol told board members that the recommendations work only as the framework and that there are no easy answers.

One recommendation was the state switch to a 401(k)-style defined-contribution retirement benefit for future hires in the Kentucky Employees Retirement System, County Employees Retirement System and Judicial Form Retirement System with a mix of employer and employee contributions, including a mandatory employee contribution of 3 percent of their salary and a base employer contribution of 2 percent.

“Then they would have the opportunity for participating employees to contribute up to an additional 6 percent of salary on an optional basis with an employee match of half of that amount for each ratchet of additional contributions that a participating employee makes,” Nadol said.

Nadol also suggested retaining the current cash-balance structure for hazardous plan participants, but also moving the eligibility retirement age for all future police officers and firefighters to 60, with no provisions for retirement at any age based on years of service.

Another recommendation was to shift future teachers to a combination of Social Security participation and a defined contribution benefit plan. Teachers would be eligible for retirement at age 65, as opposed to the current 27 years of service.

Nadol also proposed a number of recommendations affecting current plan participants, which include an optional buyout for the actuarial value of accrued service.

“That would give those employees that wish to have that flexibility the opportunity to have everything kind of in one bucket and it would get the commonwealth the opportunity to take out some of the actuarial risks with the old structure of the original plans,” Nadel said.

Gov. Matt Bevin issued a statement on the report saying that it “further confirms the need for urgency as we resolve Kentucky’s pension crisis.”

“Change is necessary,” he said. “Time is not our ally—we must act now to get our financial house in order. There is no other viable option.”

Bevin went on to say, “I am convinced we can get this done and am committed to doing so. For those now retired, for those still working and for those yet to come: we will save the public retirement systems.

“We will not kick the can down the road any longer. We were elected to fix this problem and we will. The fiscal abuse of Kentucky’s retirement systems is over.”

House Speaker Jeff Hoover, R-Jamestown, released a statement saying, “The pension crisis affecting Kentucky is so dire it affects every single facet of funding of state government, from educating our children to protecting our citizens, to providing services for our most needy.”

Hoover added that “for several weeks, we have been involved in intense weekly meetings, each meeting lasting four to five hours, regarding this issue. This is a complex, multi-faceted problem. We, as a state, simply cannot financially sustain the current system. Changes need to be made, but what those changes are, or how we address them, right now we are not sure.

“We are committed to meeting our legal obligations with regard to our pension system. I promise you we will continue to work hard, listen, gather facts, and make the best decision possible. I know that is what is expected and deserved and that is what we will do.”

State Auditor Mike Harmon said in a statement, “Today’s meeting confirms what I have been saying for years as a legislator, and now as Kentucky’s Auditor of Public Accounts, which is that we can no longer kick the can down the road on addressing the serious issues with funding our public pension systems.

Harmon added, ‘“the recommendations made today by PFM are just that, only recommendations. But they do provide a starting point for discussions on how best to move forward. It will be up to Governor Bevin, and the leadership in the House and Senate led by Speaker Hoover and Senate President Stivers to develop legislation that will fund the system and honor the inviolable contract with our retired and active state employees.”

The Kentucky Public Pension Coalition expressed disappointment with the recommendations in a statement saying that the elimination of “years of service” retirement eligibility would cruelly move the goalposts of retirement for so many hardworking current public employees and would force some, who are just months away from retirement, to work an additional 10, 12, even 15 additional years without any increase in benefits.

Ron Richmond of the Kentucky Public Pension Coalition expressed his criticism of the recommendations.

“This report was put together by an organization that puts political agendas over data,” Richmond said. “As a state, we must take their recommendations with a grain of salt – their math doesn’t even add up. Other states have made this mistake before and faced the consequences. In the early 1990’s West Virginia switched to a 401(k)-style system for their newly hired teachers after years of underfunding, only to make the situation worse. So much so that they moved teachers back to a defined benefit pension in the mid-2000’s. How PFM could make this recommendation is astounding.”

But Republican Party of Kentucky Chairman Mac Brown said the report shows that the state’s pension systems, which various estimates have said have unfunded liabilities ranging from $37 billion to $64 billion, are “at a breaking point.”

“We are fortunate to have Governor Matt Bevin and Republican majorities leading the General Assembly,” he said in a statement. “They understand the depth of the crisis and are willing to make the difficult decisions necessary to bring long-term solvency to the system while avoiding the potential of massive cuts to education, public safety and infrastructure spending. We applaud their efforts to swiftly enact fiscally responsible solutions to this crisis.”

Kentucky Democratic Party spokesman Brad Bowman also weighed on the Monday’s recommendations.

PFM Consulting suggested increasing retirement age for law enforcement, implementing buy outs into a 401(k)-style system without any dedicated revenue streams and moving new-hire Kentucky teachers to Social Security – at a cost to local school boards,” Bowman said.

“Cutting earned benefits of our hard-working public servants guts our middle class and reduces our future economic viability. Tax reform must be coupled with any serious look at pension reform. Kentucky’s middle class pays 10.5 percent in taxes while the state’s top earners only pay 6 percent. Cutting education and shifting costs to the local level excuses the state from its responsibilities while forcing state workers to seek employment elsewhere.”

The next Public Pension Oversight Board meeting is scheduled for Sept. 25.


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