By Lorie Hailey
FRANKFORT, Ky. (Feb. 6, 2013) — A proposal to reform Kentucky’s pension system received initial approval today by state lawmakers.
Sen. Damon Thayer introduced Senate Bill 2 today. The Senate State and Local Government Committee unanimously passed the pension reform plan, which would create a 401(k)-like hybrid plan for new government employees.
Thayer’s bill mirrors the recommendations of the bipartisan Task Force on Kentucky Public Pensions, which last year reviewed Kentucky Retirement Systems (KRS). The pension system is underfunded by more than $30 billion — more than $3 billion last year alone.
The pension reform proposal also repeals cost-of-living increases for retirees who already are receiving benefits.
Under SB 2, pension benefits for new hires would be calculated in a hybrid shared-risk plan. New employees would be guaranteed a four percent annual return on contributions, while a quarter of returns over four percent would go to the state’s funds.
The bill also demands that the state begin paying its full contribution beginning next fiscal year, which means lawmakers would need to find about $250 million a year in additional funds for the system. The state currently is scheduled to pay 61 percent of the actuarially required contribution in 2015.
The higher level of funding is needed to sustain the pension system long-term, Thayer said.
“For us, the math quite simply doesn’t add up,” the Senate Majority Leader said. “If we don’t do something our pension system is going to be insolvent in as little as four years.”
The measure now goes to the full Senate for consideration. Thayer told news agencies that bill could come to the Senate floor for a vote as early as Thursday, but said the chamber may wait until next week.
Kentucky’s pension situation has worsened significantly because successive administrations and legislatures have been shorting appropriations to the pension systems for more than a decade, cutting the financial feedstock that was to compound for investment.
A recent Pew Center on the States study describes the state’s pension situation as unsustainable because of the unfunded liability and because the system is paying out more than it is taking in.
Critics of Thayer’s bill say it will not achieve meaningful reform without a dedicated funding stream to pay for the changes, the Louisville Courier-Journal reported. Repealing benefit adjustments and changing the plan for new hires could hurt current employees and retirees, critics allege.
Supporters of the hybrid cash balance plan say the option is more predictable and sustainable than the defined benefit plan currently provided to public employees and retirees.