Program Review and Investigations Committee




<MeetMDY1> June 11, 2015


Call to Order and Roll Call

The Program Review and Investigations Committee met on<Day> Thursday,<MeetMDY2> June 11, 2015, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Senator Danny Carroll, Chair, called the meeting to order. He recognized Senator West and Representative Couch as new members of the committee. The secretary called the roll.


Present were:


Members:<Members> Senator Danny Carroll, Co-Chair; Representative Martha Jane King, Co-Chair; Senators Tom Buford, Perry B. Clark, Christian McDaniel, Dan "Malano" Seum, Stephen West, and Whitney Westerfield; Representatives Leslie Combs, Tim Couch, Terry Mills, Ruth Ann Palumbo, Rick Rand, and Arnold Simpson.


Guests: Robert Gunter, Finance Director, City of Henderson; Ronnie Bastin, Commissioner of Public Safety, Bill O’Mara, Commissioner of Finance and Administration, and Scott Shapiro, Senior Advisor to the Mayor, Lexington-Fayette Urban County Government.


LRC Staff: Greg Hager, Committee Staff Administrator; Christopher Hall; Colleen Kennedy; Van Knowles; William Spears; Shane Stevens; Joel Thomas; Ashleigh Hayes, Graduate Fellow; and Kate Talley, Committee Assistant.


Minutes for December 16, 2014 and February 13, 2015

Upon motion by Senator McDaniel and second by Senator Seum, the minutes for the December 16, 2014, and February 13, 2015, meetings were approved by voice vote, without objection.


Staff Report: Local Defined-Benefit Pension Plans In Kentucky

Greg Hager presented the report, which covers local defined-benefit plans other than the County Employees Retirement System (CERS).


House Bill 398 closed local defined-benefit pension plans to new enrollees in 1988. Members of existing plans could switch to CERS or remain with their plans. First class cities and urban county governments were given the option to have plans outside of CERS. The first class city, Louisville, has its employees, police, and firefighters in CERS. The Lexington-Fayette Urban County Government maintains its local plan for police and firefighters. It is the one remaining local defined benefit plan open to new enrollees. The 29 other local defined-benefit plans that remain are closed to new enrollees.


There is nothing in statute to indicate state financial responsibility for local defined-benefit plans other than for CERS. Statute does specify an inviolable contract between employees and cities for some employee plans, but not for police and firefighter plans.


Statute requires that there be an actuarial evaluation of a local defined-benefit plan at least once every 3 years. Program Review staff verified that most plans are doing reports in a timely fashion but most are not sending the reports to LRC as required. Statute also requires that cities with defined-benefit pension plans contribute annually to adequately fund the plan. Other statutory requirements vary depending on the city classification and whether it is a plan for employees or police and firefighters. For most types of plans, statute defines who is on the governing board of the plan. For second, third, and fourth class police and firefighter plans, statute specifies that there be one retired police officer and one retired firefighter on the board. If there is a specified number of active members of the plan, there shall also be one active police officer and one active firefighter on the board. If all remaining active members are from the same department, that department gets two representatives. There is no such contingency for retired members. A more general issue is that as the number of retirees and beneficiaries in a plan declines, there may not be any of them who are able or willing to serve on the governing board. If so, the governing board could be as small as two local officials.


The first recommendation of the report is that the General Assembly may wish to consider revising statutes related to the composition of governing boards of police and firefighter plans of second, third, and fourth class cities.


Statute may also establish employee contributions, benefits, minimum service time and age for retirement, reporting to the city, cost-of-living adjustments (COLA), and who qualifies as a beneficiary of a retiree. Depending on the type of plan, a beneficiary can be a surviving spouse, a minor child, and/or dependent parents.


The 29 plans closed to new enrollees are the plans for Louisville police; for Louisville firefighters; for police and firefighters in Ashland, Bowling Green, Corbin, Covington, Danville, Fort Thomas, Frankfort, Glasgow, Hazard, Henderson, Hopkinsville, Madisonville, Mayfield, Murray, Newport, Owensboro, Paducah, Richmond, and Winchester; and for other employees in Ashland, Covington, Franklin, Henderson, Lexington-Fayette County, Newport, Owensboro, and Paducah. The 29 closed plans have 1,093 retirees and beneficiaries. Four closed plans each have one active employee. The other plans have no active employees. The Louisville plans each have more than 150 retirees and beneficiaries. Eighteen of the plans have 30 or fewer retirees and beneficiaries, including six plans with fewer than 10. The Lexington-Fayette County police and firefighter plan has 1,097 active members and 1,070 retirees and beneficiaries. So, overall for the 30 plans, there are 2,163 retirees and beneficiaries, nearly one-half of whom are in the one plan accepting new enrollees.


The Mayfield police and firefighter plan is the only closed plan for which the average age of retirees and beneficiaries is less than 70. Average age for the other closed plans ranges from 71 to 81. Two-thirds of retirees and beneficiaries of closed plans that reported on age are at least 75. The average age of retirees and beneficiaries of the Lexington-Fayette police and firefighter plan is 63.


For 14 of the 29 closed plans, the average pension is between $15,000 and $20,000. Five plans have an average pension of less than $10,000 and five have an average pension of more than $20,000. The average pension for Lexington-Fayette County police and firefighters is more than $50,000.


Five of the closed plans are at approximately 100 percent funded or greater. Seven closed plans are 65 percent to 75 percent funded. The open Lexington-Fayette police and firefighters plan is 76 percent funded. Seventeen closed plans have funded ratios of less than 65 percent. This includes six plans with funded ratios of less than 5 percent. In practice, these are pay-as-you-go plans. For nine closed plans, the actuarial reports showed the projected benefits for many years. Benefits are predicted to decline for each of these plans.


Five cities have issued bonds to finance pension liabilities. Over a 3-year period, Lexington-Fayette County issued more than $136 million in bonds to fund its police and firefighter pension plan. Covington, Newport, Owensboro, and Paducah issued bonds to finance plans closed to new enrollees.


For the Lexington-Fayette County police and firefighter plan, the city’s required contribution and pension bond payments represent 9.4 percent of local general fund revenue in FY 2014. For 19 of 22 localities with closed plans, the annual required contribution plus any pension bond payment represents less than 4 percent of general fund revenue. This includes nine cities for which the percentage is 1 or less. The three cities with required payments of approximately 5 percent or more are Corbin (4.8 percent), Hazard (7.3 percent), and Mayfield (9.7 percent).


An issue for the closed plans, in the near future for some, is that at some point there will be no retirees and beneficiaries for whom benefits have to be paid. Statute covers repeal of Fourth Class police and firefighter plans, which applies to only 3 of the 29 closed plans.


Recommendation 2 is that the General Assembly may wish to revise statutes governing local defined-benefit pension plans to establish procedures for the repeal of plans with no retirees and beneficiaries.


Before plans have no retirees and beneficiaries, their numbers will decrease to the point that there will only be a few of them. When a plan has such few members receiving benefits, it is feasible that the cost of the plan will be manageable by the city regardless of the pension fund’s actuarial status. Given this, it may be advisable for the statutory reporting requirement to take the status of the plan into account. Having an actuarial study done every 3 years may not be worthwhile for all local pension plans.


Recommendation 3 is that the General Assembly may wish to consider revising the timing of actuarial reports as specified in KRS 65.156.


Senator McDaniel asked how the issuance of bonds has worked out. Mr. Hager said that he could provide details on this, but that he recalled that one locality issued a bond to make investments just before the stock market crash of 2008. In response to other questions from Senator McDaniel, Mr. Hager said that for most plans state statutes do not provide for a fund’s balance to revert to the locality’s general fund as the amount needed to support its remaining retirees or beneficiaries diminishes. For plans with very few retirees and beneficiaries, meeting the statutory requirement of doing an actuarial report every three years may not be cost effective.


In response to a question from Senator West, Mr. Hager said there are no statutory penalties for local defined-benefit pension plans that fail to submit actuarial reports to LRC. There are no statutory penalties for localities that do not make the required contributions to their local defined-benefit pension plans. However, for some types of plans, COLAs can only be provided if the plan is funded at a specified level.


In response to a question from Representative Mills, Mr. Hager said that statute only provides for reversion of fund balances to the locality’s general fund upon repeal for one type of plan.


In response to a question from Senator Seum, Mr. Hager said that the Commonwealth does not have financial responsibility for local defined-benefit pension plans except for CERS.


Robert Gunter of the City of Henderson appeared before the committee.


Mr. Gunter agreed with recommendations 1 and 2. He said that it is difficult to obtain responses from retirees to ballots for governing board members. He would like to see the General Assembly revise statutes related to the composition of governing boards. City of Henderson officials’ understanding had been that any leftover funding reverted to the state. Recommendation 3 is not yet relevant for Henderson. He would like to see procedures established in statute for the repeal of plans with no retirees and no beneficiaries. Mr. Gunter also noted that the City of Henderson now sends actuarial reports to the LRC and also posts the reports on the city website.


In response to a question from Senator Clark, Mr. Gunter clarified that funds remaining after a locality repeals its plan should revert to the locality’s general fund, not that of the state.


Scott Shapiro, Bill O’Mara, and Ronnie Bastin of the Lexington-Fayette Urban County Government appeared before the committee.


Mr. Shapiro said that Lexington’s police and firefighter pension system had spiraled out of control. The annual required contribution for the fund had quadrupled from 2000 to 2012, from $7 million to $29 million, with $37 million projected for 2013. This happened despite the issuance of more than $130 million in pension bonds, which contributed to Lexington-Fayette County hitting its bond ceiling. As a share of general fund revenue, the cost of the police and firefighter plan and for local employees in CERS increased from 7 percent in 2000 to 22 percent in 2012.


Pension benefit changes and a guarantee of more money from the city took the unfunded liability from $296 million to $161 million. The changes included lowering the range of COLAs from 3-5 percent to 0-2 percent, increasing the employee contribution from 11 percent to 12 percent, and increasing required service time for new hires from 20 to 25 years and reducing their benefit formula. By statute, Lexington-Fayette County must pay at least $20 million per year to the police and fire pension fund.


He summarized how the reform of the system will affect liability and annual required payments over time. The result is that the city will be able to pay down the liability over the next 30 years with no more bonding. This makes the fund sustainable and affordable, while maintaining a dignified retirement for policemen and firefighters.


Representative Palumbo thanked those who worked to produce the agreement to put the pension plan on a sound financial footing that was fair to police and firefighters.


In response to questions from Senator Seum, Mr. Shapiro said that the number of years new enrollees must serve to be eligible for full pension benefits was increased from 20 to 25. They did not extend the requirement beyond 25 years because their consultant advised that a 25-year requirement is long enough if the plan is structured correctly. The ratio of active members to retirees is 1:1. He also said that in theory a COLA could be frozen but that such a practice was not part of the negotiated solution in this case. There is nothing further needed from the General Assembly for the Lexington-Fayette police and firefighter plan.


Senator Buford commented that after the 2013 statutory change, cities are no longer required to obtain the General Assembly’s approval before making changes to their pension plans. Lexington-Fayette County’s reform allowed it to correct its local defined-benefit pension plan without increasing bonding. The General Assembly should take that decision to heart as it considers the state’s pension plans. Any bond funding is taken from funding for the rest of the state’s programs.


In response to questions from Senator Carroll, Mr. O’Mara said Lexington-Fayette County Urban Government had found that with regard to investment strategies, the most beneficial course of action was to listen to its pension advisers and stay the course. They do, however, actively manage their investments. He also noted that joining the state system was not feasible for them because it was unaffordable.


In response to a question from Senator West, Mr. O’Mara said prior to 2013, the plan’s long-run rate of return was just over 8 percent. It was decided that a 7.5 percent assumed rate of return for the next 30 years would be realistic.


In response to a question from Senator Seum, Mr. Shapiro said Lexington-Fayette County’s costs and other numbers are transparent. Transparency was achieved in part by hiring a new independent consultant.


Senator Seum said that the only source of information on the Kentucky Teachers’ Retirement System is the system itself. Senate leadership has discussing bringing in an outside group to provide numbers on teacher retirement.



Mr. Shapiro said that consultants for the Lexington-Fayette plan brought in their own actuary, which provided a new independent assessment.


Senator Carroll said that the state seems to fail to provide for bad times during good times. He asked whether there are plans to create reserves for the Lexington-Fayette County plan. Mr. Shapiro said that the calculation of the actuarially required contribution takes potential bad times into account.


Mr. O’Mara noted Lexington-Fayette Urban County Government commits to pay the actuarially required contribution with each payroll, though it is not required to do so.


Upon motion by Representative Simpson and second by Representative Palumbo, the Local Defined-Benefit Pension Plans In Kentucky report was adopted by a roll call vote.


The meeting adjourned at 11:02 am.