Jim Carroll, with Kentucky Government Retirees, and Kentucky Education Association President Stephanie Winkler voice concern about proposed changes to Kentucky's public pension plans on Monday, August 28, 2017. Jack Brammer jbrammer@herald-leader.com
Jim Carroll, with Kentucky Government Retirees, and Kentucky Education Association President Stephanie Winkler voice concern about proposed changes to Kentucky's public pension plans on Monday, August 28, 2017. Jack Brammer jbrammer@herald-leader.com

Politics & Government

Huge pension changes proposed for Kentucky’s public workers

By Daniel Desrochers

ddesrochers@herald-leader.com

August 28, 2017 3:21 PM

Frankfort

An independent consultant recommended sweeping changes Monday to the pension systems that cover most of Kentucky’s public workers, creating the possibility that lawmakers will cut payments to existing retirees and force most current and future hires into 401(k)-style retirement plans.

Echoing a message often repeated by Governor Matt Bevin, the PFM Group told the Public Pension Oversight Board that lawmakers must make dramatic changes to fix one of the worst-funded pension systems in the country.

“This is the time to act,” said Michael Nadol of PFM. “This is not the time to craft a solution that kicks the can down the road.”

The group, which was hired by Bevin, offered only recommendations. Any changes to the pension system would come during a potential special legislative session in October.

If the legislature accepts the recommendations, it would effectively end the promise of a pension check for most of Kentucky’s future state and local government workers and freeze the pension benefits of most current state and local workers. All of those workers would then be shifted to a 401(k)-style investment plan that offers defined employer contributions rather than a defined retirement benefit.

PFM also recommended increasing the retirement age to 65 for most workers.

The 401 (k)-style plans would require a mandatory employee contribution of 3 percent of their salary and a guaranteed employer contribution of 2 percent of their salary. The state also would provide a 50 percent match on the next 6 percent of income contributed by the employee, bringing the state’s maximum contribution to 5 percent. The maximum total contribution from the employer and the employee would be 14 percent.

For those already retired, the consultant recommended taking away all cost of living benefits that state and local government retirees received between 1996 and 2012, a move that could significantly reduce the monthly checks that many retirees receive. For example, a government worker who retired in 2001 or before could see their benefit rolled back by 25 percent or more, PFM calculated.

The consultant also recommended eliminating the use of unused sick days and compensatory leave to increase pension benefits.

Kentucky State Police and other state workers in hazardous jobs would get to keep their existing pension plan, though the consultant recommended lifting the retirement age to 60 years old, instead of the current 25 years of service. Officers could still retire before they turned 60, but would not be eligible for the full benefit package.

This proposal would put new state hires in 401(k)-style retirement plan

Public pension consultant Mike Nadol presents a proposal for new state workers on Monday, Aug. 28, 2017, that would place them in a 401(k)-style retirement system.

Jack Brammer jbrammer@herald-leader.com

Future teachers and many university employees would be shifted to a combination of Social Security and a 401(k)-style retirement plan.

Existing teachers would continue in their current pension plan, though the age to retire with full benefits would be raised to 65. The consultant also recommended stopping teachers from using unused sick days to boost their pensions and suspending all cost of living adjustments for retired teachers until the pension plan is 90 percent funded. The plan is currently 54.6 percent funded.

Nadol said changing the benefits of current employees and retirees is the only way to significantly reduce Kentucky’s pension liability.

“All of the unfunded liability that the commonwealth now faces is associated with folks that are already on board or already retired,” he said. “Modifying benefits for future hires only helps you stop the hole from getting deeper, it doesn’t help you climb up and out on to more solid footing going forward.”

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State Sen. Jimmy Higdon, R-Lebanon, said he the only positive recommendation he saw was a proposal to offer state workers voluntary buyouts of their accrued benefits under the pension plan, which would let those employees manage their own assets.

“At least there was one positive recommendation,” Higdon said. “I want to point that out.”

Finding common ground on pension reform won't be easy, lawmakers predict

State Rep. James Kay, D-Versailles, and state Sen. Jimmy Higdon, R-Lebanon, react to a consultant's proposed changes to Kentucky's public pension systems on Aug. 28, 2017.

Jack Brammer jbrammer@herald-leader.com

In addition to the proposed changes, State Budget Director John Chilton said Kentucky will need to find an extra $1 billion a year to keep its pension systems afloat. If lawmakers don’t take action to raise additional revenue, the state would have to cut funding for K-12 schools by $510 million and slash spending at most other agencies by at least 16.8 percent to make up the difference, Chilton warned.

The state’s public pension systems have a combined shortfall of at least $37 billion. The primary state pension fund, known as the Kentucky Employees Retirement System (Non-Hazardous), has only 13.81 percent of the money it is expected to need in coming years. It covers 122,145 active state workers and retirees.

“It’s going to take at least 30 years to satisfy these obligations and it’s going to be painful,” Chilton said. “It’s not going to be fixed in the short term.”

Many of the state workers and retirees who packed into the Capitol Annex Monday to hear the consultant’s report didn’t leave happy.

Nicolai Jilek, the legislative representative for the Kentucky Fraternal Order of Police, said expecting first responders to work until they are 60 is problematic given the physical requirements of the job.

“We’re very grateful that PFM is just offering recommendations … that they are not lawmakers because his plan would be horrible for first responders,” Jilek said.

Stephanie Winkler, president of the Kentucky Education Association, shared a similar sentiment.

“The PFM had some pretty drastic recommendations that we think are not what’s in the best interest of public school employees and public school students,” Winkler said.

Jim Carroll, president of Kentucky Government Retirees, said his group would likely sue if the legislature proceeds with PFM’s recommendation to roll back the cost of living adjustment that retirees received between 1996 and 2012.

“We think its very clear that the cost of living adjustments that were granted to us are ours as long as we are retirees in the system,” Carroll said.

Lawmakers were quick to stress that Monday’s presentation was a recommendation, not a plan. Members of the Kentucky House of Representatives are scheduled to hold a closed-door meeting Tuesday to discuss potential legislation on the issue.

“This is a complex, multi-faceted problem,” said House Speaker Jeff Hoover, R-Jamestown. “We, as a state, simply cannot financially sustain the current system. Changes need to be made, but what those changes are, or how we address them, right now we are not sure.”

Gov. Matt Bevin, who has spoken several times about the severity of the pension crisis but offered few specific solutions, was scheduled to answer questions from state workers and teachers about Kentucky’s retirement systems on his official Facebook page beginning at 8 p.m. Monday.

“This latest report from PFM further confirms the need for urgency as we resolve Kentucky’s pension crisis,” Bevin said in a statement issued Monday afternoon. “Change is necessary. Time is not our ally — we must act now to get our financial house in order. There is no other viable option.”

.@RepLinderKY: It's worth noting, there will be no emergency clause on reforms we pass. Employees will be able to review and make decisions

— KET Public Affairs (@PubAffairsKET) August 28, 2017

Pension consultants do not recommend separating CERS from other systems.^JB

— Bluegrass Politics (@BGPolitics) August 28, 2017

The consolidation would only pertain to administration of investments, not the investments themselves.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

PFM also suggests consideration of combining KERS & KTRS under one board

— Ronnie Ellis (@cnhifrankfort) August 28, 2017

In terms of @freeCERSky, the recommendation from PFM says it would increase costs by $3.6 million per year of CERS separates from KRS.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

KY budget director John Chilton says he does not expect a rush of state workers retiring. Some state workers in audience laugh. ^JB

— Bluegrass Politics (@BGPolitics) August 28, 2017

Sen Jimmy Higdon, R-Lebanon,says he keeps reminding himself pension plan is 'only recommendations.' Says bright spot is voluntary buyouts^JB

— Bluegrass Politics (@BGPolitics) August 28, 2017

They don't have to wait until 60 to retire, but couldn't get full benefits until then. Currently they can retire after 25 years of service.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

For hazardous employees of CERS and KERS, state police, they recommend retaining primary benefits for current tier, but raising age to 60.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

Recommended changes for teachers includes freezing all future cost of living increases until the system reaches 90 percent funded. pic.twitter.com/mblfAjC3JG

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

4 Eliminate portion of benefit payments from cost of living adjustment granted between 1996-2012 that were not part of inviolable contract.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

2 an optional buyout for the actuarial value of accrued service

3 Eliminate application of unused sick and compensatory leave toward pension

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

Recommendations for current retirees and employees:

1 freezing accrued benefits under existing pension tiers.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

Next recommendation is to shift teachers to social security (both university and non-university). They'd be eligible for retirement at 65.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

That also applies to State police retirement fund. Some in the audience scoffed when Nadol mentioned lifting the retirement age to 60.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

Recommends to retain the cash balance for people in hazardous KERS and CERS jobs. But would lift retirement age to 60.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

Here's the slide: pic.twitter.com/KXG4imFy77

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

First recommendation is 401 (k) style retirement benefits for KERS and CERS future hires with mandatory employee contribution of 3%

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

KY budget dir John Chilton, left, and consultants Mike Nadol, right, & Adam Reese present pension recommendations^JB pic.twitter.com/d714y3Dmof

— Bluegrass Politics (@BGPolitics) August 28, 2017

PFM says "to the extent possible," accrued benefits by employees and retirees should be protected.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

Here's a summary chart of PFM's recommended changes to pension benefits for all retirement systems: pic.twitter.com/LQfNDlO4fj

— Bluegrass Politics (@BGPolitics) August 28, 2017

Ok, now for the main event: PFM's recommendations on changes to pension system.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

Big changes in the pension plan for current teachers also on the table: pic.twitter.com/saN25heTlR

— Bluegrass Politics (@BGPolitics) August 28, 2017

For state workers in hazardous pension plan, the ability to retire early with full benefits might get curtailed. pic.twitter.com/GIut1Vdhu4

— Bluegrass Politics (@BGPolitics) August 28, 2017

Huge potential pension changes for state retirees and active workers on the table: pic.twitter.com/XW2nlItmtx

— Bluegrass Politics (@BGPolitics) August 28, 2017

The recommended retirement plan for future teachers: pic.twitter.com/zGDshSFuL7

— Bluegrass Politics (@BGPolitics) August 28, 2017

The recommended retirement plan for future state workers. pic.twitter.com/o6lxnBqjbu

— Bluegrass Politics (@BGPolitics) August 28, 2017

Chilton says there are only three options to raise the billion necessary: cut spending, increase taxes and/or adjust benefits.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

New teachers would go to combo of Social Security & DC retirement benefit. ^JB

— Bluegrass Politics (@BGPolitics) August 28, 2017

Pension recommendations include 401(k)-style defined contributions for new hires, with mix of employer & employee contributions. ^JB

— Bluegrass Politics (@BGPolitics) August 28, 2017

State budget director John Chiton handles copies of public pension recommendations. ^JB pic.twitter.com/xKRNpC0hYL

— Bluegrass Politics (@BGPolitics) August 28, 2017

Chilton says actuarial backloading has contributed the most to underfunded pensions - 25 percent.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

Chilton says there are only three options to raise the billion necessary: cut spending, increase taxes and/or adjust benefits.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

John Chilton's power point says the state's gonna need an additional $1 billion per year.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

Overflow crowd in Capitol Annex to hear final recommendations to panel on public pensions. ^JB pic.twitter.com/TeCwmq8pMp

— Bluegrass Politics (@BGPolitics) August 28, 2017

Lots of folks in the crowd wearing stickers supporting FOP. State Police pension is around 30 percent funded.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017

45 minutes before the pension meeting and the room is already packed. "It's like a rock concert" someone said.

— Daniel R. Desrochers (@drdesrochers) August 28, 2017
Kentucky budget director John Chilton, left, and consultants Adam Reese, center, and Mike Nadol present recommendations Monday, Aug. 28, 2017, to the Public Pension Oversight Board on how to solve the state’s public pension crisis. Jack Brammer jbrammer@herald-leader.com
Kentucky budget director John Chilton and Jennifer Hans, a staffer with the Public Pension Oversight Board, check copies on Monday, Aug. 28, 2017, of the recommendations to attack the state’s financially strapped public pension systems. By Jack Brammer/jbrammer@herald-leader.com
An overflow crowd gathered in the Capitol Annex to hear final recommendations to a panel considering the future of Kentucky’s public pensions on Monday, Aug. 28, 2017. Jack Brammer jbrammer@herald-leader.com
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