Call to Order and Roll Call
The fifth meeting of the Task Force on Kentucky Public Pensions was held on Monday, October 29, 2012, at 1:00 PM, in Room 154 of the Capitol Annex. Representative Mike Cherry, 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, Keith Hall, Brad Montell, Marie Rader, Rick Rand, and Brent Yonts.
Guests: Representatives Dennis Horlander and Arnold Simpson; David Draine, Pew Center on the States; Josh McGee, Laura and John Arnold Foundation; Richard Hiller, TIAA-CREF; William Thielen, Kentucky Retirement Systems.
LRC Staff: Judy Fritz, Brad Gross, Jennifer Hays, Greg Woosley, and Peggy Sciantarelli.
Approval of Minutes
The minutes of the September 18 meeting were approved without objection, upon motion by Representative Yonts.
TIAA-CREF Retirement Plan Presentation
Guest presenter was Richard Hiller, TIAA-CREF Senior Vice President for the Midwest Region, and Head of National Government and Religious Markets. The meeting materials included copies of his slide presentation and a flyer entitled “TIAA-CREF at a Glance.”
Mr. Hiller said that TIAA-CREF is a $500 billion nonprofit organization dedicated to government education and research in broad or nonprofit fields. Core defined contribution (DC) retirement plans with TIAA-CREF have been in place with the University of Kentucky since 1964, the University of Louisville since 1955, Northern Kentucky University since 1970, and the community colleges since 1998. The primary focus of these plans is retirement income, and they have performed very well for both the employee and employer. TIAA-CREF was recently hired by the state of Rhode Island to manage the DC part of its new hybrid retirement system.
Mr. Hiller described features of hybrid defined benefit (DB) and core DC plans. He said a core DC plan is similar to a privatized cash balance plan. Unlike a traditional cash balance plan, it removes investment performance risk from the state, with the risk being borne by the insurance company issuing guaranteed products within the plan design. Both hybrid DB/DC and core DC plan models focus on providing retirement security, whereas traditional 401(k)-style plans focus on asset accumulation. DB/DC and Core DC plans can be open to new and existing employees, depending on plan structure and local state regulations. Both plan structures help provide more predictable costs and outcomes. When DB and DC plans work in tandem—as in a hybrid DB/DC plan—it can increase the probability that retirement income needs can be met.
The objective of a risk-managed DC plan is to provide employees with the means to build sufficient savings to provide income replacement in retirement that will maintain their standard of living. Participation in the plan should be mandatory, with low or no age restrictions. The investment structure should consist of a limited low-cost investment menu with a maximum of 15-20 options preselected by the employer that include asset allocation vehicles such as target date or life cycle funds. Individual investment advice should be available at no cost to the participant. Annuities or other lifetime income options should be part of the distribution of assets. Hybrid DB/DC and Core DC plan structures recognize the mobility of the modern workforce without penalizing the individual. According to statistics from the U. S. Department of Labor, the average tenure of a state government employee is a little over six years.
There were no questions, and Representative Cherry thanked Mr. Hiller for his presentation.
Announcements
Representative Cherry advised that no action or votes would be taken on the draft recommendations presented today. He said the Task Force will have one or two more meetings and hopes to present specific recommendations at the November 20 meeting.
Draft Recommendations From the Pew Center on the States and the Laura and John Arnold Foundation
Guest speakers were David Draine, Senior Researcher, Pew Center on the States (PEW), and Josh McGee, Vice President for Public Accountability Initiatives, Laura and John Arnold Foundation (LJAF). Copies of their slide presentation and Mr. Draine’s prepared statement were provided.
Mr. Draine said that their goal is to provide a road map for the Task Force in deciding how to fix Kentucky’s pension system. Rising contribution rates are threatening to crowd out needed public services, as funding levels of the Commonwealth’s pension plans are projected to continue to drop. There are serious concerns about the future solvency of the main state plan, Kentucky Employees’ Retirement System (KERS)-nonhazardous. If future investment returns dip below the projected 7.75 percent, the price tag goes up. There is no single answer that works for every state. PEW and LJAF offer a set of potential approaches to help put Kentucky on the right track. Comprehensive reform will need to achieve three things: a credible plan to close the funding gap over time; a new plan that is sustainable, affordable, and secure; and help Kentucky recruit and retain a talented public sector workforce.
The pension funding gap for Kentucky Retirement Systems (KRS), as well as the judicial and legislators’ retirement plans, is more than $12.5 billion (as of FY 2011). The PEW and LJAF analysis is focused on the nonhazardous and hazardous plans of KERS and CERS (County Employees Retirement System), which represent 96 percent the total unfunded liability. Reforms, however, should also include the smaller plans.
The present value of employer contributions is estimated at $20.4 billion. Measured in 2013 dollars, the total amount employers are expected to put into Kentucky pensions through 2044 will total $35 billion. This takes into account that Kentucky’s pension debt is expected to continue growing by 7.75 percent annually.
When Representative Cherry asked why the analysis is focusing solely on pension funding, to the exclusion of health insurance, Mr. Draine said Kentucky offers a relatively constrained health insurance benefit for retirees that is not as likely to present the runaway costs that make it a real risk in some other states.
Mr. Draine said that based on current policy, it is estimated that employer contribution rates for pension costs in the KERS-nonhazardous plan will rise to 41 percent of pay in 2038. This does not include retiree health care costs, which are projected to be more than 11 percent of pay for that plan by 2017. All numbers used in the analysis are based on the same assumptions used by KRS. Future investment growth will have a big impact on cost. Investment analysis suggests an average investment return of 7.75 percent, but returns are likely to vary in any given year. Under a pessimistic scenario—with investment return of only 6.25 percent over the next 30 years—the present value of employer contributions rises from $20.4 billion to $23 billion, and total employer contributions increase from $35 billion to $41 billion. If investment return is better than expected—with 9.25 percent investment return—costs drop, and the present value of employer contributions would be only $17.4 billion, with total employer contributions reduced to $28 billion. Investment assumptions matter but should not be exaggerated. Going from 9.25 percent return to 6.25 percent only increases cost by 32 percent. In FY 2015, Kentucky taxpayers are expected to set aside almost $900 million for the four main KRS pension plans. This is almost $200 million less than what the full actuarially appropriate contribution would require.
PEW and LJAF propose five major “buckets” of items to address the pension funding gap: change the contribution schedule, suspend the cost-of-living adjustment (COLA), issue bonds, change employee contribution policies, and tax retirement benefits.
Contribution schedule: For every year Kentucky delays making the full contribution toward pensions, the eventual cost increases. Full contributions to the KERS-nonhazardous plan are not scheduled until FY 2025. Making the full required contribution starting in 2014 would be the optimum funding policy; if this is not affordable, the Task Force should consider shortening the ramp-up to four or six years. Making the full contribution starting in 2014 would lower total employer costs by $700 million thru 2044 but would increase costs in the short term. Taxpayers would need to put approximately $200 million more into the KERS-nonhazardous plan in 2015. Local employers would not be affected because full contributions are being made to the CERS plans. The unfunded liability is currently being paid off over a 25-year period. Delaying the time at which Kentucky would reach full funding too far into the future would be unwise, but it may be necessary to reset the amortization period to 30 years. Total employer costs would go up by $3.25 billion, but KERS contributions in 2015 would be reduced by $44 million, and CERS by $44 million.
COLAs: The unfunded liability numbers and contribution rates under discussion do not include COLAs for retirees. State and local employers are not in a position to offer further COLAs until the funding gap is closed. The presumption of an annual COLA should be removed from Kentucky statutes, in lieu of the legislature having to suspend it every year. It is PEW’s and LJAF’s position that any COLA needs to be paid for immediately rather than allowing it to create an unfunded liability. It may be appropriate to give employees the opportunity to purchase COLAs by voluntarily increasing their plan contributions or accepting a reduced retirement benefit. How to offer COLAs to workers without imposing further costs on state and local employers would require a thorough analysis.
Bond issuance: Bonding is an issue that has been discussed and needs to be explored further. The KERS-nonhazardous plan is only 33.3 percent funded. Assuming the plan hits its investment target—and with projected future funding levels based on the current contribution schedule—the plan will have less than one year of benefit payments in assets on hand by 2020. KRS has identified a ratio of assets to annual benefit payments of 1.1 as a key solvency threshold. Issuing $780 million in bonds and putting the funds into the KERS-nonhazardous plan would keep that plan above the threshold, even under a pessimistic scenario.
Another potential reason for bonding would be to try to refinance Kentucky’s pension debt. It would take $4.2 billion in bonds to fund Kentucky pension plans by two-thirds, with a little over $4 billion going into the four major plans and the remainder to the State Police Retirement System (SPRS), the Legislators Retirement Plan, and the Judicial Retirement Plan. The state budget office estimates that borrowing costs would be 6.2 percent for a taxable pension bond. KRS’ investment analysis suggests that investments will have a long-term average return of 7.75 percent. This would suggest that bonding can save money. Based on these assumptions, issuing $780 million in bonds would reduce the value of employer contributions by $775 million, even after making the bond payments. If Kentucky issued $4.2 billion in bonds, the value of employer contributions would be reduced by $3.5 billion. Even if investment return was only 6.25 percent, taxpayers would come out ahead, but that does not mitigate the fact that issuing pension bonds poses a substantial risk to the state.
Ultimately, bonding to help the KERS-nonhazardous plan deal with its severe underfunding may be necessary. The wisdom of bonding a larger amount to refinance is dependent on the bonding interest rate. If borrowing costs were two percent, the likelihood of Kentucky coming out ahead is substantial, and the degree of risk is reduced. With borrowing costs at 4.5 percent, it becomes harder to balance benefits and cost. If Kentucky had to borrow at 6.2 percent, issuing billions in bonds would benefit taxpayers in some circumstances but could instead prove to be a major fiscal drag to the Commonwealth.
Employee contribution policies: It may be necessary for Kentucky to ask employees to pay more of the cost for their retirement benefits. The simplest approach is to increase all employee contributions equally by increasing employee contributions toward both pension and health insurance benefits by one percent. Assuming that the savings from reducing employer contributions to the insurance plans would go to pay for pension costs, the value of future employer contributions would be reduced by $2.5 billion. Asking Kentucky employees to contribute more toward retirement raises concerns with respect to contractual protections. However, retiree health benefits for workers hired after 2003 do not have the same level of protections. If everyone hired after 2003 had to pay a total of two percent of pay into the retiree health insurance plans and the employer savings went into the pension plan, the total impact on the value of future employer contributions for pensions would be $946 million. If interested in these approaches, the Task Force should consider all the legal ramifications.
Another possible contribution policy change would be to raise everyone’s pension contribution rate by one percent and also increase the retiree health care contribution for employees hired before 2008 by one percent. This would ensure that all Kentucky state and local workers are making the same KRS contributions and would reduce the value of future employer contributions by almost $1.7 billion.
Rep. Cherry commented that past discussions of increased employee contributions have also included commensurate employee pay raises. He said he mentions this because everything should be considered at this point, even though this is not being proposed today by PEW and LJAF.
Tax retirement benefits: Retirement income below $41,110 and public pension benefits earned prior to 1998 are exempt from Kentucky income tax. The combined value of this tax credit in 2011 was $330 million. Lowering the exclusion to $25,000, while keeping the exclusion for public benefits earned before 1998, is estimated to bring in $50 million initially in FY 2014, with that figure growing each year. Directing the additional revenue to KRS could reduce the present value of future employer contributions by $780 million. Eliminating the tax exclusion, but keeping benefits earned before 1998 untaxed, would bring in $160 million and reduce the present value of employer costs by $2.5 billion. (Mr. Draine later clarified for Representative Graham that $160 million would be realized in the first year.) If the exclusion was lowered to $25,000 but benefits earned before 1998 became taxable, the initial revenue gain is estimated to be $220 million. If that revenue stream went into the pension system, it would reduce the present value of employer costs over time by $3.4 billion and help KRS reach full funding by 2038. The Task Force would need to consider the legal issues involved relative to taxing benefits earned before 1998.
Mr. Draine said there are other important issues for the Task Force to consider, in addition to the five major “bucket” items. The reciprocity provision in the Legislators’ Retirement Plan has created outsized rewards for retiring policymakers. If the Task Force chooses to switch new legislators into the KRS plan, the point becomes moot, but if new legislators continue to join the Legislators Retirement Plan, rules should be put in place to ensure that the salary calculation is effective at properly allocating benefits and meeting the plan’s policy objectives.
Double-dipping remains a concern in Kentucky. While there is no evidence that this is a driving factor in the funding problem, it is an indicator of design problems with the current system. Public employees who want to work—and who state and local governments continue to want to employ—are incentivized to retire before they want to end their careers. Currently, if a retiree returns to the workforce less than three months after separation from public employment, the retirement is nullified. PEW and LJAF propose extending that period to two years.
Late career salary increases—spiking—can boost individual benefits at the cost of all other pension plan participants. Although the prevalence of this practice is unclear, it is recommended that the employer be held responsible for paying the actuarial cost when a salary increase greater than 10 percent is given in the last five years of service.
Given the impact of KRS decisions on local communities, the Task Force should consider whether there may be appropriate ways to increase representation of cities and counties on the KRS Board. Secondly, although the disclosures KRS offers through financial reports and other documentation surpass those provided by pension plans in many states, those documents are not always easy for voters to navigate. As part of the transparency section of the KRS web site, it may be helpful to include a link that makes funding information and other useful data more directly available. It might also include sensitivity analysis showing the impact of the various actuarial assumptions, projected contributions and funding levels, and information regarding the unfunded liability and its impact on current spending.
PEW and LJAF presented three potential packages of reforms which they view as a necessary part of real, comprehensive reform.
Package 1:
· Ramp up contribution rates over four years and make full actuarial contributions for every plan by FY 2017;
· Reset the amortization period to pay off the unfunded liability by 2044;
· Issue $780 million in bonds to help fund the KERS-nonhazardous plan;
· Increase employee contributions by two percent for those hired before 2008 and one percent for those hired after 2008. This would represent a total of six percent of pay for pensions and one percent of pay for retiree health benefits for nonhazardous workers and nine percent/one percent for workers in the hazardous plans.
· Reduce the $41,110 tax exclusion to $25,000 and tax benefits earned before 1998;
· Eliminate automatic COLAs. If the legislature wants to offer COLAs before the pension plans are 100 percent funded, they should be paid for by employees;
· Implement policy changes regarding double-dipping, spiking, and governance.
Implementing this package would reduce the present value of future employer contributions by $5.26 billion, reduce total employer costs by $8.8 billion, and keep the maximum contribution rate for the KERS-nonhazardous plan at 21 percent of payroll instead of 41 percent. In the short term, employer contributions in 2015 would be $71 million less. Responding to questions from Representative Cherry, Mr. Draine said that PEW and LJAF believe this first package would present the most savings and most broadly share costs. The tax changes are the most significant feature.
Package 2:
This package is similar to the first, with two key differences: the amortization schedule is not reset, and the ramp-up to full funding of the ARC occurs over six years rather than four. It would reduce the present value of employer contributions by $5.17 billion and reduce total employer costs by $10.7 billion. This package has a greater reduction in employer costs because the amortization schedule does not change. The maximum contribution rate for the KERS-nonhazardous plan would be 23 percent of pay, and employer contributions in 2015 would be reduced by $17 million.
Package 3:
This package does not include bonding or tax benefits earned before 1998. To compensate, it requires Kentucky to immediately begin paying the full ARC and eliminates the tax exclusion for retirement income. It resets the amortization period to 30 years, and changes to employee contributions, COLAs, double-dipping, and governance are the same as the other two packages. The projected reduction in the present value of employer contributions is $4.3 billion. Total employer costs would be reduced by $6.7 billion. The maximum employer contribution rate for the KERS-nonhazardous plan would go from 41 percent of pay to 25 percent of pay. In the short term, contributions in 2015 would drop by $14 million.
Mr. Draine said that even with the aforementioned reforms, Kentucky will still face a sizable pension debt. State and local employers will need to put more than $24 billion into Kentucky pensions through 2044, both to pay off the remaining unfunded liability and to fund new benefits for current employees. However, by reducing employer contribution rates to more manageable levels, the reforms should make the remaining burden bearable to taxpayers. The problem is solvable, but if Kentucky continues to delay, it could become an unmanageable crisis.
Representative Yonts said he does not think it would be a good solution to increase contributions for employees. They have gone several years without pay raises and should not be hit any harder. It might be better to create a fourth package that would combine various proposals from the other three. He suggested a possible compromise by reducing the income tax exclusion from $41,110 to $32,000 instead of $25,000, and by considering changes to income tax deductions that would not be directed solely at one group. He said elimination of double-dipping is a good idea. New revenue streams would need to be bonded to ensure their dedication to pension funding. The Task Force also needs to coordinate with the Governor’s Blue Ribbon Commission on Tax Reform.
Mr. Draine said that PEW and LJAF would be happy to include other ideas in their proposals. Kentucky needs to be able to recruit and retain a talented public sector workforce, and the lack of wage increases for employees is troubling. The problem is to find ways to put money into the system in a way that fairly shares the burden. Revenue will also need to come from sources other than those that have been proposed.
When Senator Higdon asked whether the recommended proposals will work, Mr. Draine said that closing the funding gap without fixing things going forward would be incomplete. The proposals offered are ways to make the burdensome pension gap more manageable and able to be handled by Kentucky employers. Mr. McGee added that the answer is yes, as long as the state has the fiscal discipline to stick to the plan; if not, none of the plans will be affordable or sustainable.
When Representative Montell asked whether increasing the minimum retirement age had been considered, Mr. McGee said this has been looked at across the country, but changing the retirement age would not produce significant savings and would be subject to constitutional and contractual challenges.
Senator Hornback asked about removal of the retiree health insurance dependent subsidy and its potential impact. William Thielen, KRS Executive Director, said that actuaries are currently evaluating the impact on the employer contribution and unfunded liability but that it should not have a major impact. It will increase the premium cost for only about 5,400 under-65 retirees who elect dependent coverage.
Senator Hornback asked whether it would be fair or realistic to justify bonding based on a 7.75 percent assumed rate of investment return, considering the condition of the economy and that the assumed rate has not been realized over the past 10 years. Mr. Draine said that the borrowing rate is the more useful number for the Task Force to consider in deciding whether bonding makes sense. A rate of two percent leaves room for error. As the borrowing rate approaches the assumed rate of return—6.2 percent, for example—there are many ways things can go wrong. Even with risk, however, bonding to help fund the KERS-nonhazardous plan in the short term may be worthwhile.
When the issue was raised by Representative Graham, Representative Cherry discussed the ramifications of double-dipping and how it was addressed in House Bill 1, retirement legislation enacted in the 2008 special session.
When Representative Hall questioned the 6.2 percent projected borrowing rate for bonding, Mr. McGee said that rate was projected by Kentucky’s state budget office. The uncertainty surrounding pension obligation bonds in the market place makes it very difficult to speculate on bonding rates. When Senator Ridley asked whether bonds could be nontaxable, Mr. Draine explained that under IRS rules, pension obligation bonds are not tax exempt.
Mr. Draine said reform that only addresses the unfunded liability would be incomplete. Kentucky’s current pension system is heavily backloaded, meaning that workers earn most of their benefits late in their careers. This can create an incentive for mid-career workers to work longer, which may help the state retain experienced workers, but it also means that employees’ retirement security is dependent on working for the same public entity for a majority of their working life. Traditional pension plans can also provide an incentive for experienced workers to leave once they reach retirement age. Kentucky’s pension plan has led to workers retiring even though they still want to work and their employer still wants to employ them.
Cash balance and stacked hybrid pension plans share risk between workers and taxpayers, offer a portable benefit that does not have the level of backloading of Kentucky’s current plan, and can put workers on a sustainable retirement path. Both plan types represent sustainable, affordable, and secure retirement options that should merit serious consideration as the right choice for Kentucky going forward.
A cash balance plan is a type of DB retirement plan that pairs the predictable, transparent cost of individual retirement accounts with many of the key features of a traditional pension, including a guaranteed minimum benefit and lifetime income. The value of the cash balance account is based on contributions and investment returns, just as in a defined contribution plan, but workers are guaranteed a minimum return. This provides a floor for benefits and helps insulate workers against market losses. Workers are also able to convert their retirement savings into an annuity—lifetime income in the form of a fixed monthly payment—to ensure that they will not outlive their retirement savings. Cash balance plans shift a manageable amount of risk from workers to state and local governments while offering an important guarantee of a certain benefit level. The Texas Municipal Retirement System has been offering this type of plan for years. In 2003, Nebraska instituted a cash balance plan for state workers. More recently, Louisiana and Kansas passed legislation instituting cash balance plans for new hires. The cash balance plan proposed by PEW and LJAF is designed so that employer and employee costs would match the current Tier 3 plan of KRS.
A cash balance plan is not risk free for the taxpayer, but the risks are manageable. If returns over the next 30 years are 6.25 percent instead of 7.75 percent, costs of the DB plan grow by 50 percent. With a cash balance plan, the increase would be only 19 percent. An analysis of projected investment return suggests that the guaranteed return has a 70 percent chance of being fully funded by the 25 percent of excess return that goes to the plan.
A stacked hybrid plan is simply a combination of a traditional DB pension plan and a DC plan. The traditional pension is usually not as generous as a stand-alone DB plan, but the employee also has a retirement account that grows from contributions and investment returns. While the traditional pension still faces investment risk, its smaller size means the risk is more manageable. The traditional pension may still be backloaded, but the individual retirement account means a worker who switches careers will have a benefit that is portable. Rhode Island switched to a hybrid plan in late 2011. Other recent adopters of such a plan include Virginia and the city of Atlanta, Georgia. Ohio and Oregon instituted this type of plan in the early 2000s.
Mr. Draine discussed in greater detail the cash balance and stacked hybrid plans designed by PEW and LJAF and illustrated on charts in their slide presentation. He stated that both cash balance and hybrid plans can offer a core retirement benefit. They can have other features built in, such as disability benefits or spousal benefits. Either plan type can be a good option for Kentucky. While they have some differences, the similarities are more important. Both plans share risk between workers and taxpayers, offer a real retirement benefit that workers cannot outlive, and provide a portable benefit for workers who change jobs. Both cash balance and stacked hybrid plans offer more predictable, stable, and transparent costs to employers.
When Representative Cherry asked why Kentucky should adopt one of these two plans, Mr. McGee said the question is about transparency and how much cost uncertainty the state can bear. Changes in assumptions for DB plans can lead to big changes in cost, which leads to a lack of transparency. Both plans would provide additional transparency and predictability of cost. Also, a new plan might be in order because of the degree of backloading in the current retirement plan, which puts workers on an insecure retirement savings path through much of their working life.
When Representative Montell asked why the proposals do not include a 401(k) type plan as an option, Mr. Draine said that a well designed DC, or 401(k), plan that is sufficiently funded can offer a secure retirement benefit. McGee added that DC plans are relatively well understood. The proposals described today highlight some of the risk and cost-sharing plans that might be right for Kentucky but generally are not as well understood.
When Senator Wilson asked about employee contributions in the KERS-nonhazardous plan under a cash balance arrangement, Mr. McGee explained that they would be limited to four percent. An additional DC plan could be offered to provide elective deferrals. The IRS feels that a DC plan is the proper vehicle for elective deferrals.
Representative Graham expressed concern about the initial impact on KRS and on state employees at the lower end of the pay scale if Kentucky moves to a cash balance or stacked hybrid plan. Mr. McGee concurred that employees have borne much of the burden. He said that if there is interest in these plans, KRS would have to examine the impact. A cash balance system could be structured as another tier inside the pension system. Since the money would still go to KRS and be managed by KRS, the impact would be negligible except for actual implementation. It would also improve retirement security for employees at the bottom of the income distribution. The state’s significant unfunded liability puts huge pressure on employee benefits and salaries. Anything that leads to a system that pays for itself with more certainty and better ensures that promised benefits will be paid for is good for employees across the board.
Mr. Draine said that all of the proposed plans have approximately the same projected employer contribution cost. Switching to a more even wealth accrual—a less backloaded plan—is not going to be as beneficial to those who spend their entire careers with state or local government, but it can be a much better option for someone who switches careers once or twice. There are important distributional consequences across the workforce, both in terms of ensuring that a broader cross-section of state and local workers have retirement adequacy and that the benefit is attractive and can help the state recruit and retain talented workers. Mr. McGee said that workers at the bottom of the income distribution would benefit from a cash balance or stacked hybrid system, since they seem to have a higher probability of switching jobs at least once in their career.
Representative Cherry said he appreciates how KRS has cooperated throughout the process with PEW and LJAF and LRC staff. Mr. Thielen said that KRS has tried to provide as much information as possible to assist in the effort but that KRS staff did not see the proposals until today. The actuary is working on general concepts and ideas, such as the impact of shortening the phase-in period and suspending COLAs. Any infusion of additional funds would be most welcome, especially for the KERS-nonhazardous plan. Suspension of COLAs that are not prefunded would be consistent with the position adopted by the KRS Board. KRS will have to examine the proposals presented today before giving a specific response to the Task Force.
Prompted by questions from Representative Cherry, Senator Higdon, and Representative Montell, discussion followed regarding how the ARC would be affected by resetting the amortization period to 30 years, the state tax exclusion for public and private retirement benefits, and the inviolable contract with respect to retirement benefits earned before 1998. At request of the Chair, Brad Gross, LRC staff, explained in greater detail the current $41,110 state tax exclusion, noting that the pre-1998 exemption does not apply to private pension benefits. Representative Cherry said his preference would be to make public pension benefits earned before 1998 subject to state tax.
Senator Thayer said the Task Force has tough decisions to make. He believes there can be broad agreement in some areas, particularly on recommendations relating to governance, transparency, and legislative reciprocity. The most difficult decision faced by the Task Force will probably be how to close the funding gap. Bonding and tax exemption are difficult issues, about which he is not enthused. The Task Force is charged with trying to find a solution to save retirement benefits for current retirees and employees and also design a new system for new employees. However, the Task Force must also be cognizant of the financial role of the taxpayers who fund public pensions—many of who have not had raises in a long time, are unemployed or under-employed, are paying more for their health care as their incomes decrease, and whose employers are no longer contributing to their private pension accounts. He said that finding agreement among the members regarding the recommendations that have been proposed is only the initial step; the bigger challenge begins in January when the General Assembly considers legislation proposed by the Task Force.
Representative Cherry emphasized that the task force meetings are not the last chance for input. He said there will be ample opportunity in the 2013 legislation session for further testimony from citizens and organizations.
With business concluded, the meeting adjourned at 3:27 p.m.