Over the last decade, Kentucky lawmakers have passed or attempted to pass all different types of pension legislation. Here at NPPC, we wanted to provide some historical context as to how Kentucky’s public pension systems ended up in their current situation and write about the different kinds of legislation lawmakers considered to address the underfunding of the systems.
2000 – 2008
At the start of the millennium, Kentucky’s pension systems were sound and in good shape. This includes the following plans:
- Kentucky Retirement System (KRS)
- Non-Hazardous Plan
- Hazardous Plan
- The State Police Retirement System (SPRS)
- County Employee Retirement System (CERS)
- Kentucky Teachers Retirement System (TRS)
In the following years, governors and state legislators from both parties either partially paid or skipped pension payments entirely. While public employees such as teachers, firefighters, and police officers paid into their pension with each and every paycheck, lawmakers did not. When the market crashed in 2008, coupled with the lack of funding discipline, the unfunded liabilities skyrocketed.
2008 – 2014: The Creation of KRS Tiers
In an immediate response to the housing market crash in 2008, lawmakers created a new tier of public employee retirees who participate in KRS (TRS was not affected). Anyone hired before September 1, 2008, would receive the benefits that were guaranteed at the start of their employment. Anyone hired after September 1st would contribute more to their retirement than previous employees – thus creating a first and second tier, respectively.
In 2013, lawmakers passed a bill that created a third KRS tier, moving all newly hired public employees into a cash balance retirement system. Cash balance plans combine elements of both a traditional defined-benefit plan and a defined-contribution plan, such as a 401(k). With this type of plan, the employer is obligated to “guarantee” participants’ benefits by funding any shortfall in accumulated assets below the accrued liabilities of the plan. In Kentucky, the plan, which was pushed by Pew, is considered woefully unsuccessful.
Facing what the governor’s administration called “threats from ratings agencies,” Governor Bevin threatens to call a special session to deal with pension underfunding as well as tax reform. After introducing a pension plan, which was widely panned, and dropping his plans for tax reform, the governor was forced to backtrack. Additionally, the governor asked an actuarial firm to study the costs of his plan. The study so badly rated the governor’s plan that Bevin to this day has kept it from public view. Ellen Suetholz, the coordinator for the Kentucky Public Pension Coalition, attempted to file a Freedom of Information Act to see it and was subsequently sued. Her story can be found here.
February and March, 2018
Despite plan design changes implemented by the legislature, the unfunded liability for KRS only worsened from 2014 to 2018. There are many factors as to why this occurred, including mismanagement of the KRS pension fund, but the bulk of the blame can go toward the legislature not fully paying their bills for years and switching newly hired employees to the cash balance system.
In 2018, the legislature was running out of options to address the unfunded liability of KRS. As the situation worsened, Governor Bevin fully paid the actuarial required contribution to KRS and TRS for the first time in years. Although a responsible decision, Bevin and some legislative leaders had their own plans. In late February, 2018, State Senator Bowen, the Chairman of the State and Local Government Committee introduced SB1. Instead of focusing on the issues with KRS, the legislation focused on TRS. The bill sought to move all newly hired teachers from the defined benefit pension they received from TRS to a cash balance plan, the same as what is offered to new KRS employees.
SB1 caused some major strife in the state. Teachers all over Kentucky called in sick to protest the bill causing school districts to close. Hundreds of teachers ended up protesting at the capitol after the bill’s introduction. After passing out of the State and Local Government Committee, the bill was set for a vote on the Senate floor on March 9th, but was sent back to committee once it was realized that the Senate (and most likely the House as well) did not have the votes.
After SB1 was considered dead and teachers returned to the classroom, lawmakers started crafting up another plan. On March 29th, which was the last day of legislative session, lawmakers took a bill that was intended for wastewater treatment, SB151, gutted it, and inserted anti-pension language that would put teachers into the same cash balance plan outlined in SB1. It also violated the “inviolable contract” and eliminated sick leave for the purposes of retirement eligibility. In a span of eight hours, without any debate, readings, and without the public being able to see the actual bill language, the House and Senate passed SB151 and it was later signed by the Governor. The bill was immediately challenged in court by the Attorney General, the Fraternal Order of Police, and the Kentucky Education Association.
In December 2018, the Kentucky Supreme Court ruled unanimously that the bill was unconstitutionally passed – negating the three readings requirement in the state constitution. In response to the Supreme Court’s ruling, Governor Matt Bevin called a special session of the legislature on December 17th to address the underfunding of pensions. Without a plan or votes in the legislature, the special session ended less than 24 hours after it was called without any legislation being passed.
During the 2019 legislative session, lawmakers failed to pass HB525, which would have changed the board of TRS – an attempt by Governor Bevin to give board seats to his allied political appointees. The legislature passed HB358 only for the legislation to be vetoed by the governor. The bill would have moved future university employees into a defined contribution plan as well as freeze the pension contribution rate of quasi-government agencies, such as rape crisis centers.
Since the legislature was unable to pass HB358 without the governor’s veto, these quasi-government agencies faced a dire situation. On July 1st of 2019, their contribution rates to KRS were set to double. Already cash-strapped, these quasi-state agencies needed relief.
Although HB358 was vetoed, Governor Bevin vowed to call a special session of the legislature to address these underlying issues with quasi-state agencies and on July 15th, he did just that. In the matter of 6 full days, the House and Senate passed, and eventually the Governor signed HB1 – the Governor’s version of relief for quasi-state agencies. HB1 incentivizes quasi-state agencies to leave KRS, which will only worsen the unfunded liability of the plan and ultimately violates the inviolable contract thousands of workers have with the state.
As NPPC and our coalition in Kentucky, the Kentucky Public Pension Coalition, continue to protect the retirement security of public employees across the state, be sure to follow our blog, sign up for our email list, or follow NPPC on Twitter and Facebook for all updates.