State budget director tells employers to brace for heftier pension contributions in upcoming biennium

09/15/2017 04:12 PM

State Budget Director John Chilton warned employers in the Kentucky Employees Retirement System to expect higher pension contributions, some as much as 84 percent of payroll, in the upcoming budget in a letter Friday.

The letter comes as Gov. Matt Bevin and lawmakers grapple with reforming the state’s pension systems for public employees and teachers in a yet-to-be-called special session this year amid unfunded liabilities estimated between $37 billion and $64 billion and follows the Kentucky Retirement Systems’ decision to adopt more realistic actuarial assumptions for its troubled funds earlier this year.

Participants in KERS, which covers most state workers, are budgeted to pay $857 million in employer contributions in the current fiscal year, a number that increases to a projected $872 million in fiscal year 2018, the final year of the current biennium, according to a spreadsheet included in Chilton’s letter.

But employers’ shares in KERS contributions will spike to an estimated 70 percent in fiscal year 2019 to $1.5 billion, the letter says. Lawmakers will write the biennial budget, covering fiscal years 2019 and 2020, during next year’s legislative session.

KERS non-hazardous employers’ contributions as a percent of payroll will jump from 50.4 percent currently to 84.1 percent in fiscal year 2019 while those in the KERS hazardous plan will increase from 21.8 percent to 41.1 percent, according to Chilton’s letter.

Employers in the State Police Retirement System will see the most substantial uptick as their contribution rates are expected to hit 154.1 percent of payroll in fiscal year 2019 from 80.7 percent currently.

Chilton wrote that six of the state’s underfunded pension plans would have been terminated and had their benefits frozen if they existed in the private sector, adding that “the need for significant reform is evident to anyone looking at the health of the Commonwealth’s plans within that larger context.”

The state needs “long-term” commitments from participating employers in order to “rebuild the financial foundations and that allow a path to fully sustainable fiscal health,” he said in the letter.

“To address budgetary implications to the Commonwealth and to all employers, priorities must be set and choices must be made. Unfortunately, the choices are not happy choices – make structural changes to the pension plans and/or reduce other spending,” Chilton wrote. “Governor Bevin and the members of the General Assembly are considering, but have not decided upon, changes to each of the plans.

“The PFM report identified changes to benefit structures that would reduce the cost of each of the eight plans. These need to be considered and some of the suggested options should be implemented. I urge you to consider options that will put the financial condition of the plans and employer organizations on a sustainable path forward.”

Chilton’s letter can be downloaded here: Chilton Letter to KERS Employers.pdf


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