Revised bill removes 401(k)-like hybrid plan for new state workers
FRANKFORT, Ky. (Feb. 26, 2013) — Democrats on the House State Government Committee made big changes Tuesday to Senate Bill 2, which reforms the underfunded state pension system, according to the Kentucky.com.
The committee, which voted 17-1 in favor of the changes, sent the revised pension reform bill to the full House for consideration. Ten Republicans on the committee did not vote, the newspaper reported.
The original bill proposed the creation of a 401(k)-like hybrid plan for new government employees. The revised bill allows future state workers to remain on a defined-benefit pension plan.
A proposed funding plan for the policy reportedly was scheduled to be presented to the House budget committee Tuesday. The revised pension reform plan would rely on money from expanded instant racing at horse racetracks from a new game operated by the Kentucky Lottery, the Herald Leader reported, and by online gaming. (In Kentucky, slot machines are banned, but two horse tracks have installed the Instant Racing machines that allow people to wager on the outcomes of past horse races.)
The revised bill and funding plan might reach the House floor for a vote on Wednesday.
The amended version of SB2 represents an effort “to do as much as we can within this bill to ensure that the ARC (actuarial required contribution) is funded,” said House State Government Chair Brent Yonts, D-Greenville. State law requires the ARC be paid by the Kentucky General Assembly, which Yonts said has underfunded the contribution to the state retirement systems for 13 years by suspending the law.
“The system we need to put in place needs to provide certainty, needs to be humane in its treatment of people, and it needs to be something that will be doable. We can’t do the impossible,” Yonts said.
The proposed changes to SB 2 would:
♦ Require the state pay the full ARC to the public pension systems (except the teachers retirement system, which is funded separately) at a cost of over $100 million to the state General Fund in the next budget cycle. Where the funding would come from is not addressed in the proposed changes, said Yonts, adding it will be addressed in a separate bill.
♦ Instead of repealing cost of living raises — or COLAs — for retirees as proposed by the Senate, the bill would allow a 1.5 percent COLA if surplus funds are available and authorized by the General Assembly, or the General Assembly pre-funds the COLA.
♦ Provide the defined benefit plan available to those now in the state’s public pension systems for new employees entering the system as of July 1, 2013, instead of switching to a hybrid cash balance plan as proposed by the Senate.
♦ Allow the General Assembly to modify for new employees hired as of July 1, 2013, provisions that require the state to provide retirees and employees a pension based on the retirement benefit factor, contribution rates, and eligibility requirements set in current law.
♦ Ensure that any change in the employee contribution rate to the public pension systems shall depend on the state, or the employer, paying the full ARC for the previous five years. This is “another guarantee that the full ARC will be paid,” Yonts said.
♦ Require hazardous duty workers in the state pension systems who retire at 25 years to start drawing their pension at age 50, and change the period of time for calculation of final compensation (two changes that Kentucky Retirement System officials told the committee would save the state money.)
Other changes made to SB 2 by the committee would address “spiking”— in which an employee receives a bonus or “career advancement” to boost their pension as they near retirement — by allowing the pension systems to determine whether increased cost is from a bona fide promotion or a career advancement, and set up an 11-member statutory oversight panel that Yonts said would give the General Assembly broad oversight on pension benefits, investments, funding, law and other pension areas.
Kentucky Retirement Systems (KRS), the state pension system, is underfunded by more than $30 billion — more than $3 billion last year alone.
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.
KRS is in bad shape for a wide variety of reasons beyond underfunding. The reasons include: diversion of funds due KRS by elected officials; questionable investments; investment underperformance and losses from a stuttering economy; reduced tax revenues; and unfunded mandates (e.g., cost of living raises). It all adds up to chaos in the KRS.
A state employee’s pension is a legal contract with the state: They pay into the system to get specific benefits when they retire – a defined-benefits model. The state – and its taxpayers – is obligated to pay at the rate the contract promised.
Commitments made by governors and legislators are legal obligations to state residents collectively, including the liabilities. Taxpayers owe the money needed to shore up the system. For over a decade, the legislature has not put the money into KERS that it was supposed to, spending tax revenue on other projects and obligations. The debt owed by law to KERS grew.
Lawmakers need to find $23 billion for Kentucky’s retirement systems to put them in good health – in addition to the current streams of revenue. That would provide enough capital to let KRS’ investments generate returns and move it further toward stability. With a $9 billion annual budget of revenues under legislative control, $23 billion is going to be tough to find, but it’s owed legally.
When asked what he would most like to see the legislators do this year, KRS Executive Director William Thielen said, “There are three things: First, have them do what the recent task force told them they should do – pay KRS all it’s due each year. Second, suspend the cost-of-living adjustments and any other increased benefit payouts. Third, find some extra money and work harder toward making the system whole again.”
Many say there essentially are two solutions: the state declares the pension system bankrupt to shed some of it obligations (unlikely to ever happen), or it doubles the sales or income tax (e.g., 12 percent sales tax vs. the current 6 percent) and commits all the added revenue to KRS. Raising taxes that drastically could be a poison pill, though.
SB 2 as amended by the committee now goes to the full House for its consideration.
(Portions of this story are from “Kentucky’s Bankruptcy Bomb,” The Lane Report’s February cover story by Frank Goad.)