By Jason Bailey
The General Assembly adjourned for the veto period without providing relief from soon-to-spike pension costs to quasi-governmental organizations like regional universities and community mental health centers. The legislature can still prevent an unaffordable increase on the session’s final day — March 28 — but must reject attempts to attach harmful pension changes that would set Kentucky back.
In their version of House Bill 358, the Senate proposed tying relief to breaking the inviolable contract for up to 9,000 current employees at these institutions. That illegal plan would immediately freeze their pension benefits and move them to a 401k-style defined contribution plan for the remainder of their service. For a mid-career employee, the result is a massive loss in retirement income.
In addition, both that proposal and the House version of HB 358 would further weaken the Kentucky Employees Retirement System (KERS) non-hazardous plan by moving new employees out of the system and into inferior defined contribution plans. Pension systems need a mix of employees of different ages, with contributions being made from and on behalf of younger workers who won’t need those benefits for decades to come. HB 358 also allows those agencies to pay their liabilities on terms less costly to the institutions but more costly to KERS non-hazardous. By starving the retirement system of resources, it would further stress the severely underfunded plan and increase costs to the state.
There is a better way that eases the pain to quasi-governmental agencies, protects the livelihoods of their employees and decreases the risk to the non-hazardous plan. It requires understanding how we got to this point.
The cost spike facing quasi-governmental agencies is not a story of “saving” the pension system, but of manufacturing a crisis to exert pressure for ending pensions as we know them.
After years of failing to make the full actuarially required contribution (ARC) to the state plans, Kentucky finally began doing so in 2015 (and in 2017 to the teachers’ plan). Those additional monies stabilized KERS non-hazardous, and some dollars were appropriated above the ARC in the 2017-2018 budget. While the situation was still expected to be challenging for the KERS non-hazardous plan for a number of years, actuarial projections showed that continuing along that path — with regular tweaks and extra dollars when needed — would improve its health over time.
However, the governor subsequently expanded the size of the Kentucky Retirement Systems board, which proceeded to drop the actuarial assumptions to the most cautious in the country. That’s what is making pension contributions leap from 49 percent of pay to 83 percent. Included in that high number is an unnecessary 12 percent of pay for retiree health plans, even though most states just fund those on a more affordable and reasonable pay-as-you-go basis.
The 2018 General Assembly shielded quasi-governmental agencies from the increase for one year. Many of those agencies — ranging from domestic violence shelters to health departments dealing with the Hepatitis A outbreak — simply do not have revenue options that allow them to make the higher payment. They have also endured a decade of state budget cuts while attempting to maintain services our communities rely upon.
Because state government is now contributing 83 percent of pay to KERS non-hazardous for its own employees starting last July, the plan has positive cash flow even before taking into account any investment returns the system earns on its $2 billion in assets. The numbers suggest the quasi-governmental agencies could continue to pay an ARC of 49 percent and the retirement plan will still show improvement.
On top of that, we should make both state and quasi-governmental contributions easier by cleaning up the tax code to generate much-needed new revenue. Instead, the General Assembly just gave away $106 million in tax breaks to banks and other special interests.
Because there is only one day left in the session, the governor could veto a plan he disagrees with and the contribution spike will go into effect a few months later. Look for an effort to tie pension changes that hurt employees and make the retirement system’s problems worse to relief for these agencies.
Hanging in the balance on the session’s last day are the retirement security of thousands of Kentuckians, the solvency of our pension systems and the viability of critical local services.
Jason Bailey is executive director of the Kentucky Center for Economic Policy.