Kentucky Governor Matt Bevin has called a special session of the legislature to begin on July 19, 2019. 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 what kind 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)
- Kentucky Employee Retirement System Non-Hazardous Plan (KERS-NH)
- Kentucky Employee Retirement System Hazardous Plan (KERS -H)
- The State Police Retirement System (SPRS)
- County Employee Retirement System Non-Hazardous (CERS-NH)
- County Employee Retirement System Hazardous (KERS-H)
- Kentucky Teachers Retirement System (TRS)
In the following years, governors did not recommend and state legislators from both parties did not appropriate enough funds for the teacher and state pension systems. 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 and risky investments, 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 and unrealistic assumptions, 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 three 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, Constitutionally required 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, again citing eminent downgrades in Kentucky’s credit ratings. 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.
2019 has so far been unsuccessful for lawmakers and the governor. Lawmakers failed to pass HB525, which would change up 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 face a dire situation. On July 1st of this year, their contribution rates to KRS doubled. Already cash-strapped, these quasis will need relief. As of this writing, Governor Bevin has called another special session to begin on July 19th to address the quasi’s contribution rate. Some of the draft legislation seen by NPPC shows a complete violation of the inviolable contract public employees have with the state, forcing workers into a defined contribution plan, among other provisions. As the special session begins, stay tuned for more information. To do so, follow our blog, sign up for our email list, or follow NPPC on Twitter and Facebook.