Kentucky’s Gov. Matt Bevin got his wish, as a special session for the General Assembly to determine a fix for the state’s looming pension crisis will happen Friday morning.
Bevin’s office announced the news Monday. His administration has been trying to get a special session in order since the end of the year’s regular session, which like in 2018, failed to pass anything on a pension reform.
Last session, the governor introduced two proposals designed to help Kentucky’s retirement funds. The first was to shake up the Teacher Retirement System’s board with his own appointees. The other would have moved future university employees into a defined contribution plan and freeze the contribution rate of Kentucky’s quasi-governmental agencies for a year, which was half of a similar bill that passed, but was soon vetoed by Bevin. The governor then resubmitted his version, which tacked on the DC clause.
Quasi-agencies include regional universities, health departments, domestic violence centers, and community health centers. After July 1, members’ contribution rates to the Kentucky Retirement Systems, the institution responsible for their pensions, skyrocketed to a near 70% increase, to 83% of payroll from 49%.
The $12.3 billion fund had rapidly been making large cuts to its assumed rate of return and adjusted contribution rates in a similar fashion over the past several years. New mortality tables created a further contribution increase to the levels made this month. If nothing happens by August 10, the pension costs will become delinquent and the fund is on its own until at least next session.
The pension plan’s board would then decide how large of a fine they would have to pay to cover the delinquent plan, while still being on the hook for paying the benefits. The newfound budget constraints could lead to agencies laying off staff and possibly closing their doors.
Bevin’s latest proposal is to freeze the pension costs until April and give the quasi-agencies the option to leave the retirement system. That will be the subject of the special session, expected to last through Wednesday. If all goes well for Bevin, a bill could wind up on his desk as early as next week.
“The proposal [the governor’s administration] put through created this mess because of all of the other things they incorporated rather than just setting a rate freeze for the quasis,” Bridget Early, executive director of the National Public Pension Coalition, told CIO. “It’s unfortunate when this is how policy—particularly pension policy that impacts the livelihoods of the retirees—is being decided: in these shotgun moments that do not lend themselves to transparency or a conversation about how to address the root of the issue.”
The Kentucky Retirement System houses the retirement assets for five retirement plans, the two Kentucky Employees Retirement Systems (hazardous and non-hazardous), the State Police Retirement System, and the two County Employees Retirement Systems (also hazardous and non-hazardous). The one that affects the agencies is the non-hazardous variant of the ERS, which is about 14% funded, according to Brian O’Neill, a Louisville firefighter and spokesperson for activist group the Kentucky Public Pension Coalition.
The association opposes Bevin’s concept.
“It’s not good,” O’Neill told CIO, suggesting it also encourages and incentivizes those organizations (quasi-agencies) to mistreat their employees while giving them a way to get out of the retirement system. “Now you’ve got fewer people actually paying into the system, which harms the system as a whole.”
O’Neill also said the 401(k)-like solution also creates opportunity for those organizations to freeze the benefit package for their employees. This, he said, would continue to harm the pension system as no members would be paying into the KRS.
The Kentucky Retirement System is 39.3% funded, according to its most recent annual report.
A new Maryland law requires greater transparency in disclosing millions of dollars in fees paid by the state’s pension system to Wall Street investment firms.
The Maryland State Retirement and Pension System has reported paying about $370 million annually in fees to the firms that invest its $51 billion in assets.
But the real amount of fees paid is anywhere from $460 million to $570 million. That’s because so-called “carried interest fees” — a cut of the Maryland fund’s profits that goes to the outside investment managers — have not been not disclosed publicly.
Del. Kumar Barve, a Montgomery County Democrat, sponsored legislation this year to demand greater transparency, in part because he thinks the state is getting a bad deal.
“You, me and every member of the public can invest and get better returns while being charged lower fees than the state of Maryland,” Barve said.
Baltimore County Republican Del. Robin L. Grammer Jr. was the bill’s other lead sponsor.
At one point, the legislation sought to cap the amount of fees the firms could charge the pension system, but it was amended to become a bill requiring greater disclosure. Both chambers of the General Assembly passed the revised bipartisan legislation unanimously and Republican Gov. Larry Hogan signed it into law.
The pension system now must publicly disclose the amount it pays in carried interest fees by the end of each calendar year. The first report, due Dec. 31, will include the fees from fiscal years 2015 through 2019.
The pension system says it administers retirement benefits, as well as death and disability benefits, for more than 405,000 retired and current state employees, teachers, judges, state troopers and other law enforcement officers.
Barve argues the pension system needs reform because Maryland’s pension fund has underperformed passive index funds — costing the state about $5 billion in gains over 10 years that he says it’s missed out on. At the same time, fees the state has paid to dozens of Wall Street firms, which actively manage investments from the state pension system, have totaled more than $3 billion, Barve says.
Jeffrey Hooke, a senior lecturer at the Johns Hopkins Carey School of Business who co-wrote a report on the state pension fund for the Maryland Public Policy Institute, argued that the hundreds of millions in fees charged each year to the state could be used for better purposes — such as funding public schools.
Hooke estimates that Wall Street firms receive about $200 million a year from Maryland through carried interest fees; the state pension system puts the number closer to $90 million annually.
“It seems to me there is an opportunity to save a ton of money,” Barve said in February when he and Hooke testified for the bill in Annapolis.
“The public is not really aware of how much money we have been wasting to pay these fund managers,” said Carol Park, a senior policy analyst at the Maryland Public Policy Institute, a conservative think tank.
R. Dean Kenderdine, director of the state pension system, and Andrew C. Palmer, the system’s chief investment officer, testified in February against capping the fees. Both argued capping the fees would disincentivize Wall Street managers from bringing in higher returns for Maryland’s pensioners.
“The bill limits the system’s ability to generate better returns,” Palmer said.
Kenderdine and Palmer testified, however, they had no objection to disclosing the fees to increase transparency.
Maryland is part of a trend of states requiring greater transparency in their pension systems. In recent years, the California Public Employees’ Retirement System and the Pennsylvania Public School Employees’ Retirement System have released reports showing carried interest earned by the Wall Street general partners managing investments on their behalf.
In its first report, California reported $700 million in carried interest payments to investment firms in fiscal year 2015.
The Maryland bill became law July 1.
In just 10 days, pension contribution rates for regional universities and quasi-state agencies are set to about double. “It was one of those deals when once again, something was getting done at the very end of the session,” Larry Totten said of House Bill 358. When the legislature passed HB 358 on the very last night of the legislative session, Totten, the president of the Kentucky Public Retirees, felt it was a bad move. “It was pretty obvious that it was not a bipartisan piece of legislation, that there were issues that came up after it was passed that was not a surprise,” explained Totten.
Both Totten, and his counterpart with the Kentucky Government Retirees, Jim Carroll, say they were happy Governor Matt Bevin vetoed the bill. “I was relieved he vetoed the bill, because it had some serious problems with the bill having to do with the contract rights of participants inKentucky Retirement Systems,” Carroll said. However, they say Bevin’s replacement bill isn’t much better. Carroll said, “Think it’s a bad bill because it basically turns Kentucky retirement systems into a bank. It makes KRS, the Kentucky Retirement System basically take on the risk of allowing quasi government employers to leave the system and to pay off their liabilities over decades and that’s a bad idea when we’re the nation’s worst funded state pension system.”
“The bill has issues, not the least of which is that is penalizes, to some degree, Tier 1 and Tier 2 employees, depending on how their employers chose to leave KRS,” added Totten. Totten said he’s pleased with some of the governors changes to the original bill. “It’s got some things that the governor tried to address in his four points that he agreed to change. The fact that in the first version, a state employee could not sue a bill, was something I’d never seen before.”
Bevin has said he won’t call a special session until he has the votes. Senator Chris McDaniel (R-Taylor Mill) said he isn’t sure if Bevin has the votes yet. McDaniel told reporters, “Whether the House has the votes, I don’t know at this point. No-one has told me that the definitely do, so I just don’t know the answer to that question.”
Suzanne Miles (R-Owensboro), who is the majority caucus chair insinuated the House does not have the necessary votes, but did say she has been looking at scheduling. “I have been cross referencing multiple calendars and conferences. We have a lot of people who are signed up for conferences. As you know, if the governor calls a special session, those arrangements will be canceled and people will be coming in, rather than going to conferences. And that’s part of it. And we all know,” said Miles. Totten and Carroll are both hoping for more changes before the special session is called.
Carroll requested, “Lets look at putting funding, so these quasi government agencies can participate in KRS and not dis-enroll all of their employees. What we say is freeze it and then fund it. So lets go ahead and freeze the contribution rate that they’re paying now, that they’ve paid over the last fiscal year, for another year, and then lets take a serious look at funding options for the 2020 session.” Totten says he that’s what he wants, but he says he doesn’t think that will happen. If that doesn’t happen, he says he has an alternative, explaining, “What I want to happen is KRS get its funding so that all of us that worked 30 and 40 and 50 years in the system have pensions as we were promised when we were hired. Now, how you get there. There’s obviously different paths to how you get there. And funding on that isn’t part of the issue. I used to call it a hole in the dyke, now I think it’s more of a whack-a-mole issue.” Rates will go up July 1, the first payment at those rates won’t be due until the end of July, so lawmakers say they do have a bit more time.
Legislation increasing state contributions to the $145.4 billion Texas Teacher Retirement System, Austin, passed the Texas House of Representatives and Senate on Sunday.
The House voted 145-1 and Senate, 31-0, to approve the final version of legislation previously passed by the Legislature in April.
The amended Senate Bill 12, originally filed by Sen. Joan Huffman, would gradually increase contributions from teachers, employers and the state to the pension trust fund. The state’s contribution will increase to 8.25% from 6.8% of the statewide teacher salary cost over the next five years. The original April bill called for statewide contributions to increase to 8.8%.
The bill also authorizes a one-time supplemental payment of up to $2,000 to plan participants who retired prior to 2019. The original April bill has a payment of up to $2,400 for participants who retired prior to 2017.
Also under the revised bill, member contributions would increase to 8% from 7.7% as of Sept. 1, 2021, and then 8.25% as of Sept. 1, 2023. Employer contributions, which include public schools or regional education centers, will rise by 10 basis points per year until reaching 2% as of Sept. 1, 2024, from the current 1.5%.
The retirement system’s funding ratio was 76.9% as of Aug. 31, 2018, according to its most recent comprehensive financial annual report.
The bill has been sent to Gov. Greg Abbott for his signature. A spokesman for Mr. Abbott could not immediately provide any comment on whether he plans to sign the bill.
Austin Arceneaux, Ms. Huffman’s spokesman, could not be immediately reached to provide comment.
The pivotal step to deliver the first cost-of-living adjustment for nearly 30,000 retired public employees in a decade narrowly cleared the State Senate Thursday.
The 12-11 vote sends the bill (HB 616) for a 1.5 percent increase to the desk of Gov. Chris Sununu, who has said he will sign it.
The increase, effective July 1, would only to go to state, county and local retirees who finished their government service at least five years ago.
The COLA would be capped at a $50,000 pension, meaning no retiree would get more than $750 per year from it.
Senate Majority Leader Dan Feltes, D-Concord, said the state’s unfunded pension liability remains high but the system has stabilized and can well afford this modest increase.
“In my district, 2,400 retirees including people who have worked their entire life, dedicated public servants struggling with food, medicine, heat and rent and we can’t finally go forward with an actual COLA,” Feltes said.
Sen. Jeb Bradley, R-Wolfeboro, pointed out lawmakers approved one-time $500 stipends for retirees in 2011, 2013 and 2018, but a permanent COLA would increase local property taxes by nearly $150 million over the next 20 years.
The COLA would raise state taxpayer costs by more than $40 million over the same period.
“You can’t on the one hand promise property tax relief and then on the other vote for a plan to raise them by $150 million,” Bradley said.
Senate Republicans had again proposed Thursday a one-time, $500 stipend but that failed on the same, 12-11 vote.
The Senate GOP plan would have paid the stipend with $7 million in state dollars and only grant it to those making up to a $40,000-a-year pension.
Sen. Jeanne Dietsch, D-Peterborough, broke ranks with the other Senate Democrats and she opposed the COLA and backed the one-time stipend.
She said the state retirement system could not estimate the impact of this increase on local property taxes in her district towns.
“I can’t go back to my towns … I can’t go back to the taxpayers that I promised I would lower your property taxes and vote to raise your property taxpayers,” Dietsch said.
The New Hampshire Retirement Security Coalition said in a statement studies have shown 80 percent of the economic benefit from this COLA would remain in NH.
Sen. Harold French, R-Franklin, said most of the retirees in his district have lower pensions and would get more from a one-time, $500 stipend than a 1.5 percent increase.
But Sen. Kevin Cavanaugh, D-Manchester, said it’s time retirees get an increase they can depend on year after year.
“They want the COLA because they can depend on it,” Cavanaugh added.