Call to Order and Roll Call
The second meeting of the Budget Review Subcommittee on General Government, Finance, and Public Protection of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, July 23, 2015, at 10:00 AM, in Room 129 of the Capitol Annex. Representative Rita Smart, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Danny Carroll, Co-Chair; Representative Rita Smart, Co-Chair; Senators Julie Raque Adams, Joe Bowen, Christian McDaniel, Dennis Parrett, and Johnny Ray Turner; Representatives Mike Denham, Adam Koenig, Tom McKee, Steve Riggs, and Tom Riner.
Guests: Bill Thielen, Executive Director, Kentucky Retirement Systems; Brian Thomas, General Counsel, Kentucky Retirement Systems; and, Karen Roggenkamp, Chief Operations Officer, Kentucky Retirement Systems.
LRC Staff: Frank Willey, Katie Comstock, Joe Lancaster, and Spring Emerson.
Kentucky Retirement Systems
In response to a question from Representative Riggs, Mr. Thielen said the employee contribution rate of twelve percent is comparable to national numbers.
In response to a question from Chair Smart, Mr. Thielen said Kentucky Retirement Systems (KRS) staff has a range of experience in the field of one to five years, and there is a significant amount of turnover due to the possibility of them getting significantly more pay elsewhere. The KRS currently has 261 staff members. In 2010, they lost 10 staff members, as well as 10 in 2012, 18 in 2013, 22 in 2014, and as of March 30, 2015, 25 have left this year.
In response to a question from Senator McDaniel, Mr. Thielen said that based on a Cavanaugh McDonald actuarial study, the unaudited return on investment is at two percent, which is significantly lower than the 7.5 percent assumed rate of return.
In response to a question from Senator Bowen, Mr. Thielen said that it is not significantly important for his replacement to have investment experience, since there are separate CIO and investment staff.
In response to questions from Senator Carroll, Mr. Thielen said entry level pay for counselors is $29,000 and at level four range is $64,000. The issue of lower pay is not confined to one type of position. He added that four investment firms are hired for advice, as well as other firms for other matters.
In response to a question from Chair Smart, Mr. Thielen said approximately $1.5 million per year is used for outside consulting, from overall expenditures of over $30 million.
In response to questions from Senator Parrett, Mr. Thomas said there would continue to be agencies that are misclassifying employees, entering into independent contract arrangements to drop their payroll. Mr. Thielen said the economic impact of agencies leaving the KRS is unknown at this time. Senator McDaniel commented that agencies funded by Medicaid would have a substantial budgetary impact.
In response to questions from Chair Smart, Mr. Thielen said the average retiree from the Kentucky Employees Retirement System (KERS) non-hazardous plan is getting a total of approximately $1,800 per month through health insurance premiums, and County Employees Retirement System (CERS) retirees are getting less than $20,000 per year in benefits. He explained that the board has adopted an assumed long-term rate of return of 7.5 percent, and in September of this year the board will make decisions on the allocation of assets going forward in order to best meet the assumed rate of return.
In response to questions from Representative Riner, Mr. Thielen said board members elect the chairman, and the members receive a per diem rate of $190 per meeting plus travel expenses, and they hold twelve or thirteen meetings per year. The rate of pay for attorneys at entry level is $43,000.
In response to a question from Chair Smart, Mr. Thielen said there had been a $5 billion increase in unfunded liability over a seven-year period, of which 25 percent was caused by the recession in 2008-2009 and 15.5 percent was caused by unfunded cost of living adjustments that were granted in 2008, 2009, 2010, and 2011. Employer contribution shortfalls caused about 30.2 percent of the unfunded liability. There are various other reasons for the remainder of the unfunded liability, including a closed amortization period, lack of payroll growth, timing, and software issues.
In response to questions from Representative Denham, Mr. Thielen said actuaries recommended that the KRS increase funding to follow along with the changes in accounting and reporting as required by the Governmental Accounting Standards Board (GASB), and the board decided to phase-in the increase for CERS over a five-year period in order to lessen the impact. The time period was increased to ten years by legislation, so the KRS is still phasing-in the impact of GASB 43 and 45 to the CERS, which would have had an approximate 12 percent impact. The bond rating agencies say GASB 67 and 68 will not have a significant impact on the CERS, other than in reporting. Ms. Roggenkamp said the KRS has been very proactive in notifying the agencies of the GASB 67 and 68 requirements.
In response to questions from Senator Carroll, Mr. Thielen said contribution rates are the same for employees, although the benefit calculation is different. The Actuarially Required Contribution (ARC) is designed to account for certain assumptions, such as an increased economy.
In response to a question from Chair Smart, Mr. Thielen said the board had not requested more money above the ARC.
In response to a question from Senator McDaniel, Mr. Thielen said KRS 61.645 had been amended to allow the KRS to not be subject to filing contracts with the Government Contract Review Committee.
In response to questions from Chair Smart, Ms. Roggenkamp said the expenditure category labeled as “Other” includes small administrative items such as fees for background checks. Mr. Thielen said the KRS budget is subject to approval by the General Assembly during the biennial budget process and moneys come directly from trust funds; no General Fund is used for administrative expenses. Any moneys not expended at the end of the year are returned to the trust funds.
In response to questions from Chair Smart, Mr. Thielen said the KRS call center receives approximately 250,000 calls annually and there are approximately 12,000 in-office visits per year. He said there is still a significant backlog in post-retirement audits; however, there is a backlog reduction plan in place and during the first six months of this year that number has been greatly reduced.
In response to a question from Chair Smart, Mr. Thielen said the board voted to renew the healthcare contract with Humana to provide Medicare Advantage plans for a three-year period beginning January 1, 2016 with three one-year renewal options.
In response to a question from Representative McKee, Mr. Thielen said several changes had been made over the years to make the system more sustainable from a cost perspective in the future. He said the problem is the unfunded liability for benefits already earned, unless the contract with members is broken and benefits reduced for both retirees and Tier 1 members, which would require additional funding.
There being no further business before the subcommittee, the meeting was adjourned at 11:35 AM.