Pension reform plan calls for current benefit caps after 27 years, 401(k)-style accounts for most future public workers in Kentucky

10/18/2017 11:23 AM

UPDATED WITH REACTIONS FRANKFORT — Gov. Matt Bevin and top legislators rolled out an outline of the pension reform proposal that will be considered by the General Assembly during a special session later this year on Wednesday, which will cap benefits under the current defined-benefit plan for many government employees after 27 years of service and put most new and recently hired public workers in defined-contribution plans.

Bevin said the bill, which is being finalized, will not alter pension and health benefits offered to retirees as the state grapples with unfunded liabilities estimated by some at more than $64 billion.

The governor said the plan will be seen as “a model for the nation” as other states and municipalities face an estimated $4 trillion to $5 trillion in combined unfunded pension liabilities.

“The reality is it is a problem bigger than anybody has the dollars to pay for unless we make similar structural changes,” Bevin said during a news conference at the Capitol.

The “Keeping the Promise” proposal, which will take effect July 1 if passed into law, will allow government employees, teachers and judges in the current defined-benefit systems for non-hazardous workers to continue building their pensions in those plans until they reach 27 years of service. At that point, they will be enrolled in a defined-contribution plan, with an option of transitioning into the 401(k)-style accounts beforehand.

Teachers eligible to retire by July 1 will be granted an additional three years to accrue current benefits before transitioning to defined-contribution plans.

“We have about 14,000 teachers who are currently eligible for retirement in Kentucky,” said House Speaker Jeff Hoover, R-Jamestown. “We were concerned about teachers thinking they did not want to go to a (defined-contribution retirement plan) starting July 1 of next year, and so we have made provisions and we will make provisions for those teachers that are 27 years or more, they will have a three-year window in which they can remain in the defined-benefit plan that we have now.

“I believe that alleviates any concern. There’s no rational argument for any teacher to now say, ‘I need to retire next July,’ because for three years nothing is changing.”

For those hired into non-hazardous government jobs in the future and those non-hazardous workers enrolled in the hybrid cash balance plan, they will be automatically enrolled in defined-contribution accounts.

Hazardous-duty employees, such as police and firefighters, will not see their current and future benefits altered.

“This is out of recognition of what they do, the fact that they wake up and go on their shift, be it in the morning, the evening or whenever, they know that they may come back injured, hurt or potentially having an ultimate sacrifice and having lost their life,” Senate President Robert Stivers said.

Stivers, R-Manchester, said legislators will see more drastic changes to their retirement benefits in the proposal.

Lawmakers will have their current defined-benefit plans stopped and transitioned into defined-contribution plans, and those enrolled in the current system and retired legislators will have their retirement calculations based solely on their pay as members of the General Assembly, according to documents released Wednesday.

That would end the practice of tabulating pension benefits for former lawmakers based on any government salaries received and reduce retirement payouts earned for ex-legislators who also served in higher-paying government job.

“We are not going to have the rich benefits system that we should have never had,” Stivers said. “We have complained about that for many years in the legislature but did not have individuals who wanted to join us in this mission.”

It’s unclear exactly how much the proposed changes will affect how much state and local governments pay into the ailing pension systems.

The proposal calls for a level-dollar amortization funding formula — which would divide Kentucky’s unfunded pension liabilities, plus assumption rates adopted by the Kentucky Retirement Systems and Kentucky Teachers Retirement System, over a 30-year period — rather than the current system of calculating payments based on percentages of payrolls. Bevin said local governments will have a four-year phase-in for higher pension contributions.

For non-hazardous workers in the Kentucky Employees Retirement System and County Employees Retirement System, they’ll be required to pay 3 percent of their pay into the 401(k)-like plans plus up to 6 percent more, with the state contributing 2 percent of pay and 50 percent of any additional payments from employees.

Teachers, who will not be enrolled in Social Security in the future, will be required to pay 9 percent of their salaries with the option of chipping in an additional 3 percent, with the state and school districts on the hook for 4 percent and 2 percent of salaries, respectively, according to outlines released Wednesday.

Government workers will also contribute an extra 3 percent of their salaries toward retiree health care, and retired teachers will see their 1.5 percent cost-of-living adjustments suspended for five years. Future retired teachers will begin receiving COLAs five years after they leave the classroom.

The proposal also allows quasi-governmental agencies, nonprofits and universities to opt out of the Kentucky Retirement Systems and Kentucky Teachers Retirement System during a two-year window once full actuarial costs are paid. The KRS board of trustees will also have jurisdiction of pension funds for legislators and teachers, according to documents released Wednesday.

Bevin said he will call a special session, expected to last the minimum five days to pass a bill into law, once the legislation is finalized.

With lawmakers hoping for further details on the proposal, Hoover says the House will hold informational hearing on the bill.

A breakdown of how the proposed changes will affect each system can be downloaded here: Keeping The Promise_Pension Decisions.pdf

Reactions to proposal vary

Organizations representing groups affected by the proposed changes offered varied responses to the plan Wednesday.

David Smith, president of the Kentucky Association of State Employees, said he’s “really excited” that policymakers are addressing the state’s pension crisis with “an excellent advocate” in Bevin.

But for him, “the devil’s going to be in the details” of the actual bill that’s introduced in the special session. His two primary interests are how the state plans to finance increased pension contributions and the plan’s impact on recruitment and retention in state government.

“Are there some areas of concern? Absolutely,” Smith said in a phone interview. “The one issue that really stands out to us in particular our organization is we’re still not having any mention of how this is all going to be funded and how that’s going to take place, and without having where that money’s going to come from, it’s great that this is what we’re going to do, but how are they really going to go about doing it?”

“Truly top talent, and that’s who you really would want to have in state government, who are willing to sacrifice a little bit as far as money that they initially make to come into state government and actually have a call for service like millennials tend to do, we anticipate they’re not going to tolerate it,” he continued. “They’re going to look at this as a last-resort-type place and a very, very temporary spot, if at all, to stay.”

Concerns of recruiting and retaining a quality public-sector workforce were echoed by Democratic leaders, with Kentucky Democratic Party Chairwoman and state Rep. Sannie Overly calling the proposal evidence of “the war on the working class and public education.”

House Minority Floor Leader Rocky Adkins, D-Sandy Hook, said members of his caucus need additional information on how the plan will impact government workers and the state’s unfunded pension liabilities.

“We know that the pension system that we have has been an attractive system,” he told reporters in his Capitol Annex office. “It has attracted quality teachers into the classroom because of that, and it’s attracted quality employees across state government into different agencies to have the kind of expertise we need basically in the classroom and within these agencies. A lot of us are deeply concerned about the recruitment of that quality in the future if we head down a path that is less attractive.”

Like KASE, the Kentucky School Boards Association and Kentucky Retired Teachers Association are taking wait-and-see approaches once the final bill is released.

KSBA praised elements such as the three-year window for current teachers to continue accruing benefits under the current pension setup and not rescinding COLAs for retired teachers, saying those provisions aren’t as severe as those laid out by the PFM Group and “may alleviate concerns about a mass exodus of experienced teachers from the classroom.”

“As we continue to analyze the framework, however, several issues will need to be clarified in more detail so that we can know how the entire plan will impact school districts,” KSBA said in a statement.

“Among them, district leaders will need to know the total contribution required at the local level toward both retiree health care and toward future pension benefits for new teachers and support staff. It will also be necessary for us to carefully review the bill language itself, when it is finalized, to ensure no unanticipated negative consequences to education would result.”

KRTA said in a statement that the group appreciated policymakers’ attention to its concerns as the pension reform plan was crafted.

“However, it is unclear how the proposed reforms could possibly be enacted in a way that is legal and financially sound,” the group said. “Based on the outlined provided, the math just doesn’t seem to add up. KRTA has not taken any position on any possible reforms. Once a full proposal emerges, we look forward to working with lawmakers to provide our input.”

Kentucky Public Retirees President Larry Totten said he was happy to see that retirees would not see any changes to their pension checks in the plan, but moving some public workers to defined-contribution plans still raises some questions for the group.

“We express some concern over the seemingly involuntary switch of some active employees to a defined contribution plan as a violation of the spirit, if not the letter, of the inviolable contract,” Totten said. “We must emphasize, however, that the plan revealed today means very little if the necessary funding is not found to deal with the unfunded liability that threatens the financial fabric of the Commonwealth, not only for the next two years, but for the thirty years that this plan requires to succeed.”

The Kentucky Public Pension Coalition expressed “major concerns” with the framework presented Wednesday, saying it will cost the state more to transition to defined-contribution accounts and public workers more in increased contributions.

“Public employees will not fare well if this plan is enacted and it will cost the state even more money in the long run,” KPPC’s Ron Richmond said in a statement. “Before lawmakers vote on this type of plan, they should realize how badly this will hurt their constituents.”

Reactions from policy groups monitoring pension reform were also mixed.

The Pegasus Institute said it was pleased with the framework laid out by policymakers that would fix Kentucky’s “antiquated and broken” defined-benefit pension systems.

“A move to a defined contribution system for new workers provides stability for the public, and flexibility for state employees,” the group said in a statement. “There is no more important policy change that can be made to our system and we are pleased that our legislature is willing to make this shift.

“Many states are grappling with this issue. This plans puts Kentucky in position to be a national leader with changes that can be replicated by any state in America, and positions our own state to modernize our state government.”

But both the Kentucky Center for Economic Policy and the Bluegrass Institute opposed the proposal for different reasons.

Jason Bailey, executive director of KCEP says it goes too far and “makes very harsh cuts to benefits that will deeply reduce the retirement security of future workers and teachers” while the Bluegrass Institute says the plan doesn’t go far enough to fix Kentucky’s troubled pension systems.

“The message out of Frankfort is that we the taxpayers have no say in this matter and will be forced to continue to pay for these lavish benefits while also funding the increases that will come with forcing a level-dollar approach on payments,” Jim Waters, the Bluegrass Institute’s president, said in a statement. “Hardworking, taxpaying Kentuckians – many of whom already struggle to pay their bills and find decent benefits – also will be asked to believe this is “reform,” even if it means more money for government and less for their families.”

The Kentucky Education Association could not be reached for comment on the pension reform plan.


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