Pension Overhaul Bill Introduced In Kentucky Senate

Feb 20, 2018

A long-awaited overhaul of one of the country's worst-funded public pension systems was introduced Tuesday in the Kentucky Senate, setting the stage for debate on one of the defining issues of this year's legislative session.  The bill introduced by Republican Sen. Joe Bowen was notable in part for what it didn't include, deviating from some key provisions in an earlier plan endorsed by Gov. Matt Bevin.

Credit Kentucky Chamber of Commerce

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Republican lawmakers in the cash-strapped state of Kentucky say their plan to overhaul one of the country's worst-funded public pension systems will save taxpayers $4.8 billion over the next 30 years while completely eliminating a crushing $42 billion debt.

But their plan does it not by raising more revenue to pay the bills, but by cutting some benefits and making changes designed to encourage people to work longer before they retire.

The cuts are less severe than a proposal pushed by Republican Gov. Matt Bevin last year, but it could still present lawmakers with a tough vote in an election year where Democrats appear to be gaining momentum. On Tuesday night, the same day pension bill was filed, a Democratic teacher opposed to the pension changes won a special election in a Kentucky House district with 68 percent of the vote.

But Republican leaders appeared confident Wednesday the bill would pass, with chief sponsor Sen. Joe Bowen saying it contains "countless concessions."

"I can't imagine there will be a lot of pushback on this," he said.

But the pushback has already begun. Stephanie Winkler, president of the influential Kentucky Education Association, said she could not support the bill without changes.

"The root of the problem is still not being addressed, which is finding new revenue," she said.

Public school teachers would see the most changes. Under the plan, teachers who already have unused sick days can keep them and would be paid for them upon retirement. But they won't be able to accumulate any more sick days after July 1. New hires after July 1 won't be paid for unused sick days at all.

Teachers who are already retired get an annual cost-of-living raise of 1.5 percent. But the bill would cut that raise to 0.75 percent, at least until the retirement system is 90 percent funded. That could take a while, because right now the system is 56.4 percent funded.

All new hires, both teachers and non-teachers, would be put into a hybrid plan. But the plan would be less generous. Right now, workers are guaranteed a 4 percent return on their accounts. The bill would change that to guarantee workers would never lose money in their accounts.

Other changes would let people use a more generous formula for calculating their monthly retirement checks, but only if they work longer.

Kentucky's various public pension systems are among the worst-funded in the country. The state is at least $42 billion short of the money required to pay benefits over the next 30 years, according to official estimates. The Republican proposal would change how the state pays that debt. The debt would be treated similar to a 30-year mortgage on a home, where the state makes the same set payment each year. Under this scenario, the state would pay more at first than it would have under the old system. But lawmakers say it will be better in the long run.

"Putting a billion more in this budget than last budget is dramatic. It's very, very difficult to do," Acting House Speaker David Osborne said. "It would be easy to do what has been done for years, and that is to ignore what we need to do. At some point in time, you have to put a stake in the ground and say, 'We're not going to do it anymore.'"

Lawmakers said the proposal would not impact the state's upcoming two-year spending plan. Gov. Matt Bevin has proposed spending $3.3 billion on the pension system, or about 15 percent of all state spending.

The measure would not force any current or future state employees or teachers to move into a defined contribution 401(k)-style retirement plan. That was the cornerstone of a proposal endorsed by Bevin last year.

But that prior proposal drew fierce opposition from hundreds of thousands of state workers and public school teachers. The backlash came in advance of an election year, the first since voters gave Republicans full control of the state legislature in 2016.

Bowen said Tuesday the new bill will deal with the unfunded liability in Kentucky's ailing pension systems.

"We listened to key stakeholders, experts and taxpayers, and we are confident our new plan balances the need to stabilize the system while honoring the commitments we have made," he said.

The new bill also would not require all employees and teachers to pay an extra 3 percent of their salary for a retiree health benefit.

And the new version does not create an incentive for employees and teachers to retire at their earliest possible eligibility by ending the ability to accrue more service credit in their current defined benefit plan.

The legislature's top Republican leaders also weighed in on the measure.

"We are committed to funding our plan, meeting our obligations to state employees, and to making systemic reforms to ensure these systems will be financially sound for current and future employees," Senate President Robert Stivers said.

House Speaker Pro Tem David Osborne noted the backlash generated by the prior proposal.

"This plan is our attempt to address many of those issues brought to us," he said. "We listened to the concerns, and this bill represents a compromise that will bring our pension systems to the appropriate funding levels over a 30-year period."

Kentucky has one of the worst-funded public pension systems in the country. The system is at least $42 billion short of the money required to pay out benefits over the next 30 years. That's according to official estimates approved by the state's various retirement systems. Bevin, a Republican who has aggressively campaigned for pension changes, says the true number is likely double that.

The system's struggles have strained the state budget. Bevin's two-year spending proposal includes $3.3 billion for the retirement system, or 15 percent of all state spending. The enormity of the spending prompted Bevin to propose cuts of more than 6 percent across most of state government.