By Jason Bailey
The two pension bills introduced last night in the hastily-called special session (House Bill 1 and House Bill 2) include many of the benefit cuts that target future and current teachers and employees included in Senate Bill 151, the sewage bill. The bills do not include an actuarial analysis as required by law. But given the similarity to SB 151, they are expected to have an immaterial impact on the system’s fiscal health.
Major provisions of the proposals include:
Deeper cuts to teacher benefits
Like SB 151, HB 1 moves newly-hired teachers into a less-secure hybrid cash balance plan and ends the inviolable contract for those teachers (protecting only what they accumulate in their cash balance accounts). The bill caps sick leave current teachers can use to calculate retirement benefits to what they have accumulated by the end of 2018 – or 12 days from now. And in a new twist, HB 2 ends the higher 3 percent benefit factor used to calculate pension benefits for each year a teacher remains in the classroom beyond 30 years. That benefit will count only for years before July 1, 2024. That cut was not in SB 151. The existing higher benefit factor doesn’t just cost the system money — it also saves dollars (and improves expertise in classrooms across the commonwealth) by incentivizing teachers to teach for a longer period of time.
Costs shifted to school boards
HB 1 shifts about a third of the cost of the hybrid cash balance plan from the state to local school boards, as was included in SB 151. That will continue the trend of the state shedding responsibility for funding schools.
No conflict of interest provision that was included previously
Although HB 1 reenacts most of SB 151, it noticeably leaves out strengthened conflict of interest provisions included in the original bill. SB 151 prohibited legislators, state officials, pension board members and employees from having a financial interest in pension system business for five years following employment or service.
Same cut to state and local employees
Like SB 151, HB 1 shifts further risk to employees in the cash balance plan established for state and local workers just five years ago. It shifts from guaranteeing workers a 4 percent rate of return in their investments to a 0 percent rate of return. They receive 85 percent of investment returns above that amount rather than 75 percent, but the net result is a benefit cut.
Phase-in for local governments included, even though it is already law
In addition to ending the 3 percent benefit factor, HB 2 also reenacts a measure capping the increases in pension contributions from local governments to 12 percent a year. But that cap is already law, as it was part of House Bill 362 that passed in the 2018 regular session. Some concerns have been raised that HB 362 may be unconstitutional because it was passed in the same manner as SB 151, but the cap and phase-in can easily pass as a stand-alone bill during the regular session given broad support in the General Assembly for avoiding the unnecessary rate increases local governments face. It doesn’t have to be attached to a special session bill to cut teacher benefits.
Some unnecessarily harmful measures taken out
A few unnecessary, harmful changes in SB 151 were taken out of the new proposal. HB 1 doesn’t require Kentucky Retirement System employees hired between 2003 and 2008 to contribute 1 percent more of pay to retiree healthcare, since those systems are already very well funded. The bill doesn’t unnecessarily burden the budget in the short term through “level-dollar” funding of the teachers’ plan. And HB 1 doesn’t include a 401a defined contribution option that would divert needed payments from the existing KRS defined benefit plans.
Funding schedule adjusted
HB 1 leaves out a dollar-based contribution schedule to the KRS plans that was in SB 151 and it doesn’t reset the 30-year amortization period for either KRS or TRS. Resetting eases pressure on the current budget and can be a sensible part of a long-term funding plan, and a dollar-based allocation is likely needed for the KERS non-hazardous plan to remove an incentive that now exists to reduce contributions by outsourcing employment.
Jason Bailey is executive director of the Kentucky Center for Economic Policy.