Call to Order and Roll Call
The third meeting of the Task Force on Kentucky Public Pensions was held on Tuesday, August 21, 2012, at 1:00 PM, in Room 149 of the Capitol Annex. Representative Mike Cherry, Co-Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Damon Thayer, Co-Chair; Representative Mike Cherry, Co-Chair; Senators Jimmy Higdon, Paul Hornback, Bob Leeper, Joey Pendleton, Dorsey Ridley, and Mike Wilson; Representatives Derrick Graham, Brad Montell, Rick Rand, and Brent Yonts.
Guests: Representatives Arnold Simpson and Addia Wuchner; Steve Shannon, Kentucky Association of Regional Mental Health/Mental Retardation Programs; Dave Adkisson, Kentucky Chamber of Commerce; Tommy Turner, Kentucky Association of Counties; J. D. Chaney, Kentucky League of Cities; Leon Mooneyhan and Shannon Stiglitz, 3KT; Joe Baer, Kentucky Professional Firefighters Association; Ron Saathoff, International Association of Professional Firefighters; Paul Looney, Kentucky Association of Transportation Employees; Brent Sweger, Kentucky Association of Transportation Engineers; Dan Doonan, AFSCME International; David Warrick, AFSCME Council 62; Paul Guffey and Shirley Clark, Kentucky Public Retirees; Mary Ruble and Helen Cottongim, Kentucky Education Association; Terry Donoghue, Northern Kentucky Tea Party; Jim Waters, Bluegrass Institute; Lowell Reese, Kentucky Roll Call; David Draine, Pew Center on the States; and Josh McGee, Laura and John Arnold Foundation.
LRC Staff: Judy Fritz, Brad Gross, Jennifer Hays, Frank Willey, Greg Woosley, and Peggy Sciantarelli.
Approval of Minutes
The minutes of the July 24 meeting were approved without objection, upon motion by Representative Yonts.
Opening Remarks
Senator Thayer said the Task Force will soon be working to develop recommendations and that the purpose of the meeting is to hear suggestions for possible solutions to the pension funding problem. Representative Cherry discussed factors that have led to pension underfunding.
TESTIMONY FROM INTERESTED GROUPS/ORGANIZATIONS
Kentucky Association of Regional Mental Health/Mental Retardation Programs (KARP)
The guest Speaker was Steve Shannon, Executive Director. KARP is the association representing Kentucky’s 14 community mental health centers (CMHCs), which were established by the General Assembly in 1966. Copies of his prepared statement were provided.
Mr. Shannon said CMHCs support approximately one of every 25 Kentuckians and employ about 9,000 individuals. There are 310 voluntary board members serving on 14 regional boards. In FYs 2011 and 2012, CMHCs spent approximately $104 million on contributions to the Kentucky Employees Retirement System (KERS)—equivalent to the budget of four reasonably sized CMHCs. The significant increase in the employer contribution to KERS poses the greatest threat to the financial stability of the participating CMHCs. Since FY 2006, the KERS-mandated employer contribution has increased from 5.89 percent to 23.61 percent and is set to increase to 26.79 percent in FY 2014. This unfunded mandate cannot be sustained and could result in bankruptcy for some CMHCs.
The employer contribution impacts all facets of operations of the participating CMHCs. The escalating KERS contribution hampers the ability to secure competitive grant funding and competitively negotiate with the three Medicaid managed care organizations. It restricts service diversification, expansions to new markets, and expansion of needed services for returning members of the Kentucky National Guard and Reserves. There is reluctance to hire new staff, salary levels have become less competitive, and other employee benefits, such as tuition reimbursement, are weakened.
CMHCs appreciate action of the General Assembly in the 2010 Regular and Special Sessions to include in the budget approximately $2.5 million for FY 2011 and $3.8 million for FY 2012 to assist CMHCs. Language was also included to permit the funding expansion as a state match to draw down federal dollars through Medicaid, thus turning approximately $6.3 million into $21 million. The intent of the General Assembly was to fund a Medicaid rate increase in FY 2011 and 2012 to help cover the increased KERS cost. However, CMHCs have not realized any of the additional funding to date. CMHCs are committed to using the appropriation as a state match for additional federal dollars, as opposed to just receiving General Fund dollars. CMHCs are working with Kentucky Medicaid officials to submit the necessary information to the Centers for Medicare & Medicaid Services.
KARP believes that any proposed solutions should not put additional burden on Kentucky Retirement Systems (KRS), must not jeopardize the KERS benefit of CMHC retirees or current vested employees, should prohibit the migration of current vested employees to an alternative retirement plan, and must provide immediate and long-term relief to CMHCs.
KARP offers the following solutions for consideration: fund the increased employer contribution in the budget, as was done during the 2010 regular and special sessions; direct CMHCs to pay a base rate—perhaps the first 15 percent—with the remainder funded in the biennial budget; issue a pension bond to help address the unfunded liability; permit CMHCs to offer an alternative defined contribution retirement plan to new hires after a date certain; and amend KRS 61.520 to permit KRS to treat CMHCs the same as regional universities. KARP feels that a 401(k) option for new hires would be very appropriate; it might not benefit but would not harm KRS. There were no questions for Mr. Shannon.
Kentucky Chamber of Commerce
The guest speaker was Dave Adkisson, President and Chief Executive Officer. His prepared statement was not available at the meeting but may be obtained from task force staff.
Mr. Adkisson said the Chamber believes the work of the Task Force is the most important and urgent task of state government in advance of the 2013 regular session. Kentucky’s business community contributes about 40 percent of state revenue in income, corporate and sales taxes, and the Chamber is concerned about the unsustainable trends in public employee benefits. Increased spending on benefits is taking needed funding away from education at all levels. This is particularly disturbing because education attainment is key to growing the economy. The Chamber commends the Governor and the General Assembly for acting in 2008 to address state retirement benefits but believes more aggressive action is required.
The Chamber believes that public health benefits are generally out of line with the private sector and that Kentucky can significantly lower its unfunded liability by meaningful changes to health benefits for active employees. The Kentucky Employee Health Plan reports that state government paid more than $7,000 per year for single coverage in 2011, or 90 percent of premium costs. This cost is 50 percent higher than the cost of health insurance in the private sector. The Chamber has advocated that state employees be required to pay at least $50 per month for health insurance benefits and recommends more aggressive wellness activities for public employees. Mr. Adkisson complimented the action taken by the Kentucky Teachers Retirement System (KTRS) to reduce health insurance costs.
The Chamber further recommends: provide no COLAs for retirees until the system is more adequately funded; place new employees in a defined contribution plan, with a portion of the employer share of the contribution used to fund a bond issue to help finance transition from the current defined benefit program; provide financial incentives for current employees to convert to the new plan, to help limit the unfunded liability; amend KRS 61.650 to require the KRS Board of Trustees to consider the impact on the state budget of retirement benefit changes that they recommend or support; and prohibit the practice of “double dipping,” which compounds the pension problems and is not allowed in the private sector. Mr. Adkisson stated that the Kentucky Chamber is willing to work with the Task Force and to support meaningful changes to the pension system. There was a brief discussion of transition costs and bonding in response to comments from Representative Yonts.
Kentucky Association of Counties (KACo)
The guest speaker was Tommy Turner, LaRue County Judge/Executive and President-elect of KACo. Copies of his prepared statement were provided. He emphasized that KACo supports the commitment of the inviolable contract for current and retired KRS members.
Mr. Turner described hybrid plans—used in Virginia, Utah, and New York—and Kansas’ cash balance system. KACo proposes that either option would adequately provide for future employees’ retirement, ensure that they would not face a future funding crisis, and address the fact that current KRS contribution rates are using a disproportionate percentage of limited resources.
To address the unfunded liability of the County Employees Retirement System (CERS), KACo proposes issuance of a bond, freezing the current employer contribution rate, lowering the current tax exemption on retirement income, and creating a separate governing board for CERS. The unfunded liability of CERS is currently estimated at $6.9 billion. If an 80 percent threshold would be considered an adequately funded amount, a $5.5 billion bond issue, with historically low bond rates, would place CERS at that threshold. The FY 2013 CERS-nonhazardous employer contribution rate is 19.55 percent, and the hazardous duty rate is 37.6 percent. With a bond issue pushing the funding level of CERS to the 80 percent threshold, the balance of the employer contribution above the normal contribution rate could be used to pay the debt service for the bond—approximately $40 million monthly. This would also give long-term rate consistency to struggling local governments. Current law exempts from state income tax the first $41,110 of all forms of both public and private retirement income. According to the Governor’s Office for Economic Analysis, for every $1,000 decrease in the exemption, $25.3 million would be realized annually to help pay the debt service on bonds for CERS. KACo proposes that lowering the exemption be coupled with a sunset provision that would expire when the bond is retired.
KACo asks that the Pensions Task Force review the possibility of allowing CERS to be governed by its own board. Local governments have been consistent in paying 100 percent of the required employer contribution. CERS, currently funded at about 63 percent, is not anticipated to experience the cash flow problem currently projected for KERS. The KRS Board must make investment decisions on behalf of all five plans based on the cash flow needs of the most poorly funded program in the system. With a separate board, CERS would be in a better position to adjust investment options to a more long-term, higher yielding investment strategy. Mr. Turner closed by stating that KACo wants to be a partner in reaching a solution to the pension crisis. There were no questions from the Task Force.
Kentucky League of Cities (KLC)
J. D. Chaney, Chief Governmental Affairs Officer, was guest speaker. He provided the members with a copy of his slide presentation and two recent KLC research briefs: “New GASB Rules to Affect Pension Reporting,” and “Hybrid Approaches to Public Pension Plans.”
Mr. Chaney focused his remarks on CERS. He said Kentucky cities have voted pension reform as their top legislative priority for the past five legislative sessions, and it will no doubt be the top priority for the 2013 regular session. The employer contribution rate for nonhazardous employees is 19.55 percent and 37.6 percent for hazardous duty employees—250 percent higher than in 1991. This year it is expected that city governments will pay $212 million into CERS. Continuing on the current path, by 2031 nonhazardous duty rates are projected to reach more than 25 percent, and hazardous duty rates 55 percent. Despite the good reforms enacted in 2004 and 2008, KRS’s own actuarial numbers show a disturbing trend of continuously increasing rates with no relief in sight for the next 18 years. The contribution rates for cities are not affordable or sustainable without significant cuts in the workforce and employee compensation.
Two basic principles guide the KLC Board of Directors’ legislative agenda: short-term employer contribution rate relief, and a new pension model for new employees to ensure long-term predictability and sustainability of the system. The Board supports changes to cost-of-living adjustments (COLAs); adopting an 80 percent full funding standard; changes in health insurance; limited changes for active employees—but only if needed to achieve short-term rate relief; and transition to a defined contribution or hybrid plan for new hires.
Based on actuarial information provided by KRS, permanent elimination of COLAs would bring contribution levels down and significantly reduce the employer contribution rate by the year 2031. Because of the impact on current retirees, KLC proposes allowing current employees and new hires the option to fund their own COLAs. If established appropriately, this would result in additional funds coming into the system. In addition, current retirees could choose a reduced benefit for a number of years in order to receive COLAs in the later years of retirement. Those who have been retired for more than 10 years might be granted an automatic COLA, unless suspended by the General Assembly.
Experts consider a funded ratio of 80 percent or better to be sound for government pensions. Targeting 80-85 percent instead of 100 percent funding for CERS would immediately lower the employer contribution rate while not jeopardizing integrity of the system or breaching the inviolable contract. After 80 percent funding has been met, the additional 20 percent of unfunded liability could be reamortized over a longer period of time to keep rates at a lower, more affordable level.
KLC proposes that the unfunded liability in the KRS health insurance trust could be reduced by changing the health insurance plans offered to active state employees. Bonding the unfunded liability deserves further examination and is one of the few options available to provide short-term rate relief to cities. If relief cannot be provided by other means, the KLC board is open to increasing the employee contribution rate for employees not yet vested and asking employees to contribute more in order to earn future benefits. KLC does not advocate reducing pension benefits already earned by active employees under the current system. However, it is KLC’s position that the law is unclear about what the inviolable contract means in Kentucky. A few states have won legal challenges when courts ruled that benefit changes were necessary and reasonable in order to achieve an important governmental purpose, such as avoiding financial catastrophe.
To achieve long-term sustainability and predictability, a new retirement model—either a defined contribution, hybrid, or cash balance plan—must be developed for new hires that will share investment risk or at least limit the potential risk to public employers and taxpayers. Mr. Chaney described features of cash balance, parallel hybrid, and stacked hybrid plans—the three options recommended by KLC. He also answered questions from Representative Graham relating to stacked hybrid plans and prefunding of COLAs. Representative Cherry concurred with a request by Representative Graham that KLC provide task force staff with data comparing the average pension benefit of KTRS and KRS retirees.
3KT (Kentucky School Boards Association, Kentucky Association of School Superintendents, and Kentucky Association of School Administrators)
Representative Cherry pointed out that the Task Force is not considering KTRS in its review but that 3KT was invited to testify with respect to classified school employees who are members of CERS. The guest speakers were Dr. Leon Mooneyhan, Chief Executive Officer, Ohio Valley Educational Cooperative; and Ms. Shannon Stiglitz, Director of Governmental Relations, Kentucky School Boards Association. Dr. Mooneyhan explained that he facilitates the 3KT group, which works together on many issues. They provided a copy of their prepared statement, which was read by Ms. Stiglitz.
She said that all education groups worked together to develop a solution for funding health insurance for KTRS retirees, which culminated in the passage of House Bill 540 (2010 Regular Session). The primary goal today is to convey the desire to be a partner and resource for the Task Force as it makes critical decisions. The 3KT organization is a strong supporter of the nearly 50,000 classified school employees, who transport children to and from school, provide them with nutritional meals, ensure cleanliness and safety of the facilities, and assist teachers in all phases of instruction. Without them, the teaching and learning experience during the school day could not be successful.
Classified employees are eligible to participate in CERS if they work 80 hours per month. Many work 187 days each year and receive a full year’s credit, as do certified employees. Retirement benefits are a primary tool for recruiting the best classified employees, whose average salary is $13,998. New fiscal constraints have forced school districts to reduce costs and personnel—both certified and classified. Districts are facing unprecedented financial stresses with the loss of millions in federal and state dollars. This is compounded by rising overhead costs, including retirement contributions. In FY 2003, the employer contribution rate for CERS was 7.34 percent; in FY 2012, it rose to 18.96 percent.
The rising contribution rate is impacted by dramatic increases in health care inflation and the fact that COLAs are not prefunded. 3KT believes it is critical that COLAs be suspended until they can be provided as a prefunded benefit. It is hoped that this change would allow enough time to for the system to achieve 80 percent actuarial funding—or a level secure enough to protect retiree benefits for years to come. Local school boards have always made the required employer contribution set by KRS and will continue to do so. There is no question that the state must find a way to reduce skyrocketing health care costs.
3KT looks forward to learning more about alternatives such as cash balance, hybrid, and defined contribution plans. To date, the member organizations have not been supportive of 100 percent defined contribution plans but recognize that the Commonwealth must look at various options to ensure the long-term financial stability of CERS. They would also be interested in bonding as a possible solution. 3KT encourages the Task Force to thoroughly analyze the inviolable contract to provide a clear picture of changes that would be permitted for current and future employees and retirees. There were no questions from the Task Force.
Kentucky Professional Firefighters Association (KPFA)
The guest speakers were Joe Baer, President of KPFA, and Ron Saathoff, Pension Resources Director, International Association of Professional Firefighters. They provided a copy of their slide presentation relating to the KERS and CERS hazardous duty systems.
Mr. Saathoff said that as of June 30, 2011, KERS-hazardous was funded at 70.8 percent and CERS-hazardous at 62.2 percent. The system funding ratio is improving, but there is a significant unfunded liability. As recently as 2002, KERS-hazardous was over-funded at 116 percent and CERS-hazardous at 111.9 percent. The system is recovering from the worst economic downturn since the Great Depression. Investment losses have figured into the current employer contribution rate, exacerbated by the fact that when there were excess earnings, contributions to the system were reduced, thereby lowering the available cushion. In the hazardous system, investment returns are on the upswing and are above 13 percent for the calendar year.
The legislature has modified benefits in recent years to reduce the COLA to 1.5 percent, increase the employee contribution, eliminate lump-sum payment calculations, increase service requirements, and increase the age requirement for the nonreduced benefit. Funding of COLAs is a problem that needs to be addressed.
Mr. Saathoff discussed KPFA’s recommendations to conduct an experience valuation—which would provide a clearer picture of the unfunded liability—and to consider pension obligation bonds as a viable option for retiring the debt. The majority of firefighters in Kentucky are not eligible for Social Security benefits. Their pensions will be the principal source of their retirement incomes.
He explained the potential costs associated with closing a defined benefit plan. Relative to recruitment and retention costs, when Alaska implemented a defined contribution plan, after the five-year vesting period, there was a significant turnover problem due to employees moving to jobs that offer a defined benefit retirement plan. Alaska’s unfunded liability has grown since adopting a 401(k) system, largely due to market forces and transition costs. Nebraska’s 401(k) plan, begun in 1984, has a very generous contribution level, with employees contributing 6.5 percent and the employer 13 percent. The first firefighter who retired from that plan received a benefit equivalent to less than $1,000 monthly, after 28 years of employment.
Mr. Saathoff said that 401(k) plans will not provide a meaningful retirement benefit, regardless of contribution level. Investments are more expensive than under a defined benefit plan. Accumulating sufficient money that will be sustained over time is a big problem with 401(k) plans. Kentucky’s current defined benefit retirement system is providing significant benefits to the taxpayer with, according to KRS, $3 billion yearly going into the economy. In KERS, 80 percent of money paid out comes from investment return (68 percent) and employee contributions (12 percent).
Mr. Saathoff said the current plan can be preserved; it is getting healthier, provides a meaningful level of benefits, and is cost effective over time. With everyone involved working together, there are things that can be done to significantly improve the short-term funding situation. Mr. Baer said firefighters realize that current economic times are unprecedented and are willing to discuss any reasonable modifications to the hazardous duty system. There were no questions from Task Force members.
Kentucky Association of Transportation Engineers (KATE)/Kentucky Association of Transportation Employees (KTEA)
The guest speakers were Brent Sweger, Transportation Cabinet (DOT) employee and President of KTEA; and Paul Looney, member and former president of KATE. Mr. Sweger said that KTEA—originally named “Ten-40 Club”—was established in 1950; KATE was established in 1972. Neither organization is associated with a union. A copy of their slide presentation was provided to the Task Force.
Mr. Sweger said they are concerned about both current and future DOT employees. Salaries, even in good economic times, have been losing ground. A recent study of compensation, retirement, and benefits of public employees and comparable private employees in Kentucky shows that state employees in most cases earn 14 percent less than their private sector counterparts. DOT salaries are 18-42 percent lower than the average salaries of other state DOTs, based on a national survey of 2011 data. The workforce is declining; there were 9,000 employees in the 1970s and today only 4,700 statewide. In many rural districts it is difficult to attract and retain qualified staff. Much of the unfunded liability resulted because the legislature did not fund the actuarially required contribution (ARC).
Mr. Sweger said that the Transportation organizations want to work with the Task Force to find sustainable solutions that will not hurt current or future employees. He emphasized that the Pew Center recently advised the Task Force that state policymakers need to ensure that the compensation being offered will help the state recruit and retain a talented public sector workforce.
Mr. Looney said that KATE represents current and retired Transportation Cabinet engineers and that most of them also belong to KTEA. He said that considering overall compensation and benefits, state employees are underpaid when compared to the private sector. The state employee health plan is not a “Cadillac” plan. “Double dipping” does not harm the retirement system. The state benefits from reemploying persons with valuable experience at lower salaries. KATE does not support a pure defined contribution system because it is not necessarily less expensive in the long term. Employees are not professional money managers, and the portable system may negatively impact employee retention. Without a defined benefit retirement system, state government would lose its most valuable recruitment tool. If a defined contribution system is pursued, KATE recommends that there should be a minimum mandatory employee contribution, a minimum employer match, guaranteed five percent minimum return on all contributions, and it should be professionally managed. It would also be imperative for the legislature to renew prior commitments to the existing defined benefit system by reaffirming the guarantee of the inviolable contract.
KATE believes that the 2008 reforms were a step in the right direction and that, given adequate time and market recovery, possibly no other drastic action will be necessary. KATE supports continued oversight of KRS investments and recommends that half of the FY 2012 Commonwealth budget surplus should be invested in COLAs for current workers, with the remaining half going into the pension system. It is also recommended that the legislature approve a bond issue to pay in full the present value of the past underfunded ARC, including investment return. This would immediately reduce the unfunded liability and provide infusion into the system to allow for a longer financial recovery period. According to KRS, approximately 33,000 of the 115,000 total accounts in KERS are inactive. KATE suggests that the legislature consider a buy-out incentive for individuals with inactive accounts. Offering the opportunity to cash out the total employee contribution plus a return of five percent on that money—coupled with the potential for KERS to lose a future health insurance obligation—could be a winning situation for both the employee and the system and have a dramatic impact on the future unfunded liability.
Mr. Looney concluded by commenting on the rewards of public service work, the importance and value of state employees, and the necessity that the Commonwealth fulfill its obligation to those employees. There were no questions from the Task Force.
American Federation of State, County and Municipal Employees (AFSCME)
The guest speakers were David Warrick, Executive Director of AFSCME Council 62, and Vice President of AFSCME International; and Dan Doonan, Labor Economist, AFSCME International Research Department. Mr. Warrick said that Council 62 includes members in Kentucky and Indiana and that AFSCME International has 1.6 million active members and retirees. In Kentucky, AFSCME membership includes classified school employees, and city, county, and state employees.
Mr. Doonan’s testimony was accompanied by a slide presentation, a copy of which was provided to the Task Force. He explained charts relating to funding of future accruals in KRS’ five plans and liabilities owed by the KERS and CERS systems. Other charts showed that the KERS-nonhazardous and CERS-nonhazardous plans have the largest number of retirees and that the average benefit for all five plans is $16,826.
Mr. Doonan said a study published by the National Institute on Retirement Security in 2008 found that to provide the same level of benefits costs nearly twice as much in a 401(k) type/defined contribution (DC) plan as in a defined benefit (DB) plan. This is due to the higher returns, lower fees, better asset management, and longevity risk pooling of DB plans. A study by the Center for Retirement Research at Boston College indicates that over the period 1988-2004, DB plans outperformed DC plans by a full percentage point. DB plans continue to invest for the long term because they have a mixed population. In DC plans, eighty percent of 401(k) accruals occur after age 45, when one should invest conservatively; persons in their 20s are usually unable to invest aggressively because they have little money. DB plans are more efficient and provide more value—essentially providing “a better bang for the buck.”
Mr. Doonan said people are beginning to recognize that 401(k) plans are a disaster. A recent study showed that 75 percent of Americans nearing retirement in 2010 had less than $30,000 in their retirement accounts, when they should have 8-20 times their annual salary for a safe retirement. A 2008 survey by Deloitte Consulting found that 80 percent of employers believe that 401(k)s are effective in recruiting employees, but only 13 percent of plan sponsors think these plans will provide retirement security.
AFSCME recommends that state law should be changed to require the full ARC to be paid each year; if a phase-in is necessary, it should be shorter than 12 years. The ARC should include the intention to pay COLAs. With today’s borrowing cost falling from 7.75 percent to about 4-4.5 percent, bonding of past ARC shortfalls of $4.3 billion would improve funding ratios and save $141-163 million in interest cost annually. There has never been a 30-year period where returns were below today’s borrowing costs. Bond payments of about $250-266 million annually for 30 years in flat-dollar amounts would reduce the ARC by approximately 12.3 percent of payroll and result in a net savings over 30 years of about $6.3 billion.
To pay for the bonds, AFSCME recommends cutting tax expenditures, which should face the same scrutiny as other spending but rarely do. FY 2014 tax expenditures include items such as $157 million for exclusion of dividends from taxable income and $782.5 million to exclude capital gains from income from estate property transfers.
For CERS, it is recommended that the funding calculation include a COLA assumption and require a minimum employer contribution instead of a specific contribution as a percentage of pay. This would allow employers to pay down their obligations more quickly if they choose and allow more rapid improvement in the CERS funded ratio. GASB will require allocating a pro-rata share of unfunded liability on participating employers’ balance sheets. It is also suggested to review exit and re-entry rules under CERS and, if necessary, to implement a withdrawal liability for any employer trying to exit the plan.
Mr. Doonan discussed proposed solutions that AFSCME believes would fail. For example, moving new hires to a cash balance or 401(k) type plan would not improve plan funding status, would rob the plans of new hire contributions, and worsen cash flows. Because IRS rules may not permit offering a choice of benefit levels, the outcome of reforms enacted in San Jose, California, is unclear. He suggested, too, that PEW testimony failed to give proper weight to legal battles, which can nullify changes and “poison the well.”
Mr. Doonan answered questions from Representative Yonts regarding AFSCME’s bonding proposal. He explained that the numbers he has charted do not assume new revenue to pay for bonding and are directed only to the ARC shortfall. Representative Yonts said he sees good economy in the suggested bonding and reduction of tax expenditures.
Representative Graham suggested that the Task Force obtain information about the work of the Governor’s Blue Ribbon Commission on Tax Reform and consider recommendations that may be forthcoming from the Commission.
Kentucky Public Retirees (KPR)
The guest speakers were Paul Guffey, President, and Shirley Clark, Vice President and Liaison to Kentucky Retirement Systems. Mr. Guffey read their prepared statement, a copy of which was provided. KPR is a nonprofit organization of KERS, CERS, and SPRS retirees with the goal to protect the benefits of retirees and assure the stability and solvency of KRS.
Mr. Guffey said that public retirees have been concerned for years about the underfunding of KRS and have been alarmed by the growing funding crisis. Aside from underfunding the recommended ARC, poorer than expected investment earnings have been a significant variable. KPR has supported previous measures by the legislature to address pension reform and understood the need to suspend the COLA, which hopefully can be reinstated in 2014. The General Assembly is urged to honor the inviolable contract without fail and to view it as a moral and legal responsibility of state government. Any attempt to weaken or negate the contract will be fought by retirees statewide.
The negative cash flow must be stopped immediately. The state must find ways to increase employer funding to the systems. When the country’s economic situation improves, KRS must attempt to maximize investment earnings. Floating a bond issue might be a consideration. For years, KPR has requested full funding in the budget process. Underfunding the employer contributions is compounded by the fact that there are no potential investment earnings on the unfunded money. There should be no enhancement to retirement benefits in the future unless prefunded through the budget process. Loopholes should be closed that permit employees/retirees to change positions or be rehired in other positions in order to amass excessive pensions. Annual COLAs are important in order to keep pace with the increasing cost of living, especially for those who retired years ago at much lower salaries. The state is urged also to keep its promise to retirees with respect to health insurance. The Task Force and any future legislative efforts should treat retirees the same in all the systems.
KPR is not opposed to creation of a new hybrid or DC plan as long as it does not divert attention and funds from the current DB plan. There is real fear that the creation of a new system for new hires would reduce badly needed funding for the current system. KPR supports the efforts of the Task Force to find solutions; however, retirees did not cause the funding crisis and the solutions should not punish retirees. Mr. Guffey concluded, and there were no questions from Task Force members.
Kentucky Education Association (KEA)
The guest speakers were Mary Ruble, Assistant Executive Director, and Helen Cottongim, KEA member and career classified school employee participating in CERS. Ms. Ruble explained that thousands of bus drivers, food service workers, administrative assistants, instructional aides and other support professionals rely on KEA to protect their interests on important legislative issues.
Ms. Ruble said she feels compelled to correct statements published recently by the Kentucky Gazette and the Bluegrass Institute. An August 8 editorial entitled “Pension Reform: Kick Private Employees Out of the State’s Public Pension System” asserted that people who work for KEA--a private employer--participate in the state’s public pension system at the expense of taxpayers. The Bluegrass Institute e-mailed its members questioning whether KEA employees should be allowed to participate in the system. She explained that KEA is a private statewide membership organization with over 70 permanent paid employees. Only the president and vice president—who are on professional leave from their teaching positions while temporarily serving as KEA elected officers with term limits—continue to contribute to KTRS. The 70 permanent employees of KEA do not participate—and never have participated—in any of the plans administered by KRS or KTRS during employment with KEA.
Ms. Ruble said the CERS participants that KEA represents are education support professionals (ESPs) employed in Kentucky schools. They and their employers regularly contribute to CERS in the amount required by law. In that system neither the employees nor employer has the option to forego or decrease contributions in favor of other preferred expenditures. As a result, in many cases ESP wages remain artificially low throughout their entire career because the employer contributions are so high. ESP members of KEA respect the work of the Task Force but are not pension experts and cannot offer a specific solution to the unfunded liability problem. Many suggestions offered at today’s meeting are possible solutions. KEA encourages the Task Force to consider all reasonable measured options that fairly, though not necessarily equally, distribute the burden of solution among all the stakeholders.
Ms. Cottongim said she is the district safety coordinator for transportation in her school district. During her 40 years as an ESP, she has been honored to serve as a leader for classified school employees in Kentucky and has worked hard to ensure that their voices are heard. ESPs are the backbone of Kentucky’s public schools and are critical to every child’s success. They are among the lowest paid state employees and are concerned how they will be affected by potential changes to the retirement system. Most will earn very small retirement and Social Security benefits. Undermining the financial sacrifices made by this group of working class Kentuckians would be inappropriate and degrading.
Ms. Cottongim said she understands the difficult position faced by the Task Force. Although she cannot offer a solution to the dilemma, she asks that any solutions created will not undermine the commitment and already precarious financial status of these dedicated public servants.
Ms. Ruble closed with a statement that KEA agrees that the public pension system should be for public employees. Private employers participating in the system are being subsidized by the taxpayers, and KEA believes that is not appropriate. There were no questions from Task Force members.
Northern Kentucky Tea Party
The guest speaker was Terry Donoghue of Hebron, KY, a retired citizen and registered Republican who is active in the Tea Party. He provided a copy of his prepared statement.
Mr. Donoghue was critical of 2005 retirement legislation, House Bill 299, and how its passage has enhanced legislative pensions. His comments included references to several current and former legislators. He said House Bill 299 should be repealed, and done so retroactively—that the padding of legislative pensions is a prime example of why the Tea Party supports term limits. He also spoke about a national investigative report on state legislative pensions by Thomas Frank, published a few months earlier in USA Today, and a recent appearance by Senator Thayer on the “Pure Politics with Ryan Alessi” television show that included discussion of pension reform.
Mr. Donoghue suggested adoption of a 401(k) or cash balance plan; hiring of an independent panel to implement reform; eliminating free health insurance coverage after 20 years of service for legislators and their families; and ending free family health insurance coverage for hazardous duty retirees, although he supports early retirement and health insurance benefits for those engaged in hazardous duty. He said the pension crisis is not a Democrat or Republican issue but one that faces all Kentuckians. He encouraged the Task Force to implement bold, aggressive reforms that will lay a foundation upon which future legislatures can build a bright fiscal future.
Senator Thayer clarified that he has co-sponsored legislation to repeal House Bill 299, will continue to be committed to its repeal, and that the state Senate has twice passed legislation to do so. He said he made it clear on “Pure Politics” that he would not support a tax increase to support the pension problem. He noted, too, that he was an invited speaker at today’s Tea Party rally. Representative Cherry said he did not vote for House Bill 299 and has sponsored legislation that would eliminate the reciprocity provisions enacted in that bill. Task Force members had no questions for Mr. Donoghue.
Bluegrass Institute
The guest speakers were Jim Waters, President of the Institute, and Lowell Reese, editor and publisher of Kentucky Roll Call. Copies of Mr. Waters’ prepared statement were provided, along with Mr. Reese’s special report, “The Unsustainable: Kentucky’s Public Employee Pensions Systems/A Primer and Analysis of Kentucky’s State-Administered Plans.”
Mr. Waters said that the state’s unfunded public pension liability went from less than $960 million in 2000 to $33.5 billion 2011. There is no doubt that the worst economic downturn since the Great Depression has had a substantial negative impact on KRS’ funding problem. Lower ARC payments have also been a factor. The KERS plan is one of 126 public retirement plans across the nation that has been followed and analyzed by Jeanne Pierre Aubrey at Boston College’s Center for Retirement Research. According to the Boston study, KERS has gone from the top of the heap to the bottom. Fully funded in 2000, KERS had an unfunded liability of 30.1 percent in June 2011.
Mr. Waters expressed concern that legislators are not leading by example as they face tough choices in an effort to protect the retirement benefits of state workers. He said the retirement fund of legislators is 71.5 percent funded, and in the midst of the 2000s decade, the legislature enacted a reciprocity provision that allowed for enrichment of legislators’ pensions. Pension reforms enacted in 2008 were mainly cosmetic, and the positive effect of those changes will not be realized for 20 years or more. The Bluegrass Institute estimates that a DC plan could save the state an estimated $635,000 on just one mid-management career employee. The up-front transition cost could be about $5.6 billion during the first 15 years, with savings beginning to be realized in the sixteenth year. Between 2028 and 2035, savings could exceed $11 billion in the KERS plan alone.
The Bluegrass Institute offers several recommendations: end the practice of double and triple dipping for all government workers, not just new hires; move to a 401(k) type system where workers will contribute more to their retirement; reform the KRS board to include more members with financial expertise and remove the boards’ dominance by beneficiaries; end the reciprocity provision for lawmakers; and make public pension information transparent.
When the issue was raised by Representative Rand and Representative Yonts, discussion followed regarding bonding, reduction of tax expenditures, and general tax reform as possible solutions for managing the transition costs of moving to a defined contribution plan.
Pew Center on the States/Laura and John Arnold Foundation
Present were David Draine, Senior Researcher, Pew Center on the States, and Josh McGee, Vice President for Public Accountability Initiatives, Laura and John Arnold Foundation. Mr. Draine said it was heartening to hear the variety of ideas offered in today’s testimony. He commended, in particular, the presentations from the Kentucky Chamber of Commerce and AFSCME. He offered the Task Force some guiding principles. The state should commit to comprehensive reform that will not require policymakers to revisit the issue in 5-15 years. Changes should honor benefits that have already been accrued. Comprehensive reform must accomplish three goals: responsibly pay down the unfunded liability over a reasonable time frame without unduly impacting either government services or the economic viability of the state; create a retirement system that is affordable, sustainable, and secure, and does not allow missed payments or unforeseen cost increases to create future funding crises; and the new plan must not jeopardize the ability of the state to recruit and retain a talented public sector workforce.
Mr. Draine said it is important to realize that if a new retirement plan is created, the state will still need a credible plan to pay off the existing unfunded liability. The potential for cash flow problems is only one of the issues the state will need to solve as part of its plan to close the funding gap. Cash flow issues are not as intense under hybrid models because assets remain pooled together. It is important to recognize that massive costs will not accompany closing the existing plan if a new plan is created. While old accounting rules arguably would require the state to pay down its funding gap over a shorter time frame under that scenario, new GASB rules do not require this. Opening a new plan may or may not be the best move, but the decision should be decided on its own merit.
Bonding adds risk to the state, and the cost of borrowing may be greater than future returns. However, pension debt is like any other debt—when it makes sense to refinance, bonding is a tool that the Task Force should consider. If the bonding approach is chosen, Pew Center recommends that it include a requirement to make future contributions. Connecticut issued bonds for its teachers’ plan, with the condition that failure to make contributions in the future at an actuarially appropriate rate would result in technical default.
The problems facing the state took years to emerge and no solution will solve them immediately. Policymakers will need a credible plan to close the funding gap, fairly share the cost, and reform the system to ensure that it is affordable, sustainable, and secure. Time is of the essence. Every year that the state’s pension challenges remain unresolved, the costs and the pain of dealing with them will increase. Reform is not about blame, politics, ideology, or incremental steps that do not fix the problem. It is about deliberately and thoughtfully thinking about the problems facing Kentucky and identifying a solution that will secure benefits for public workers, protect taxpayers, and meet the policy needs of the state.
Senator Thayer asked the speakers to address concerns that moving to a DC or hybrid plan would undermine the financial stability of the current DB system because it would not receive contributions from new employees. Mr. Draine said that under hybrid or cash balance plans, future contributions remain pooled and would not likely result in a cash flow problem, regardless of whether an aggressive funding strategy is followed. With a DC plan there will be separate accounts and a cash flow problem could result because employee contributions will no longer go into the DB plans, some of which are poorly funded. It is imperative, regardless of the approach, that money goes into the plans to bolster them and to ensure that benefits are secure and that the funding gaps do not become unmanageable. This could include issuing a bond.
Mr. McGee said that if new employee contributions are necessary to keep the fund solvent, the fund has a cash flow problem regardless of new employee contributions. The turnover rate for new employees is relatively low. If a plan is developed to responsibly pay down the unfunded liability over a closed interval, new employees would enter the new system at a relatively slow rate.
Adjournment
There were no further questions, and the meeting was adjourned at 4:58 p.m.
(NOTE: A printed statement entitled “What Needs to be Done NOW!” from Louisville Metro Councilman Jerry T. Miller was distributed to Task Force members, but it was not discussed, and Councilman Miller did not speak at the meeting.)