The fifth meeting of the Interim Joint Committee on State Government was held on Wednesday, October 22, 2003, at 1:00 PM, in Room 149 of the Capitol Annex. Senator Albert Robinson and Representative Charles Geveden, Co-chairs, jointly chaired the meeting. Representative Geveden called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Albert Robinson, Co-Chair; Representative Charles Geveden, Co-Chair; Senators Walter Blevins, Charlie Borders, Julie Denton, David Karem, Alice Kerr, and Johnny Ray Turner; Representatives John Adams, Eddie Ballard, Joe Barrows, Carolyn Belcher, Buddy Buckingham, Dwight Butler, Jim Callahan, Larry Clark, Perry Clark, Tim Couch, Brian Crall, Joseph Fischer, Derrick Graham, Mike Harmon, Charlie Hoffman, Jimmie Lee, Paul Marcotte, Mary Lou Marzian, Lonnie Napier, Stephen Nunn, Tanya Pullin, Jon David Reinhardt, Tom Riner, John Will Stacy, and Tommy Thompson.
Guests: Bill Hanes, Kentucky Retirement Systems; C. W. Ritchie, Frankfort, KY.
LRC Staff: Joyce Crofts, Alisha Miller, Mark Roberts, Kathryn Walton, Stewart Willis, Laura Hendrix, Jim Roberts, and Peggy Sciantarelli.
The minutes of the September 23 and September 24 meetings were approved without objection, upon motion by Representative Crall. Later in the meeting, Representative Ballard introduced a guest from his district, Karen Cunningham, Mayor of the city of Madisonville.
Representative Geveden reported on the October 13 and October 21 meetings of the Subcommittee on Public Employee Benefits, which he and Senator Robinson co-chair. Next on the agenda was discussion of legislative proposals to address Kentucky Retirement Systems funding issues. Bill Hanes, KRS Executive Director, was guest speaker.
Mr. Hanes discussed recommendations for plan design change that have been proposed by the legislative committee of the KRS Board of Trustees. He said the full Board will consider those recommendations when it meets over the weekend to decide on adoption of formal legislative proposals. The Board, because of its fiduciary duties to members and beneficiaries, wants to be sure that any recommendations it makes relating to public employees will address their mission of trying to maintain an adequate level of funding. He added that five of the nine board members serve on the legislative committee.
Mr. Hanes said that the KRS actuary, The Segal Company, has reported that the pension benefits are comparable to those in the benchmark states but that the 30-plus methods of purchasing service are unparalleled in other state systems. He went on to say that the cost of service purchases is based on the pension benefit and not the medical insurance benefit, since federal regulations restrict employee monies from going into the medical insurance trust fund. The legislative committee has recommended that purchased service not count toward total service for purposes of the medical insurance benefit. This would not violate any contractual obligation and will be included in KRS' 2004 "housekeeping" legislation. The committee of the Board is also recommending that purchased service not count toward vesting for retirement, although it would continue to be used in the calculation of pension benefits. Both recommendations would have a positive effect on employee turnover rates.
Mr. Hanes said that prior to enactment of the 2.2 percent/"high three" window in KERS-nonhazardous, a permanent benefit factor of 2.2 percent had been established for CERS. He said the lowest retirement factor now available for KERS is 1.97 percent. The actuary has suggested that the retirement factor be changed to 2.0 percent for both KERS and CERS nonhazardous. In order to do that, the benefit factor would have to be adjusted for new hires in CERS. With the exception of not counting purchased service toward vesting, Segal is not recommending changes in age/years of service required for normal or early retirement of hazardous members—they would still be able to retire with full benefits at any age after 20 years of service.
Mr. Hanes said the actuary found that the generous retiree health insurance benefit is unparalleled in other state systems. He went on to say that it would a require major change to make that benefit comparable with the benchmark states. The legislative committee decided to propose that after 10 years of actual service, nonhazardous retirees would be eligible to receive $10 toward their monthly health insurance premium for each year of actual service earned; hazardous members would receive $15 for each year of actual service. This change would result in significant savings to the retirement systems.
Mr. Hanes said the retirement disability program is also very generous. To resolve issues relating to the Age Discrimination in Employment Act and to attempt to deal with funding problems, the legislative committee is proposing that nonhazardous retirees receive a minimum disability benefit of 20 percent of salary at time of retirement, or 25 percent for hazardous duty retirees. If the calculation based on actual service produces a higher benefit, the retiree would receive the higher amount without any penalty. The committee is still considering whether to propose changes in the composition of the hazardous classification.
Mr. Hanes said that, based on last year's calculation, the cost savings under SB 205 would be $1.243 billion over a 20-year period. Under the legislative committee's recommendations, the projected savings over 20 years would be $2.3 billion. The committee's main focus has been on the medical insurance benefit, which has the greatest impact on the systems' funding problems.
Representative Larry Clark asked Mr. Hanes whether he would transmit in writing the information that he presented to the Subcommittee today. Mr. Hanes said he would.
Senator Blevins spoke about the difficulties faced by workers in Kentucky's juvenile treatment facilities. He noted that they are employees of the Justice Cabinet and do basically the same job as correctional officers, but under tougher standards. He inquired about the hazardous-duty classification in other state systems. Mr. Hanes said he does not think any other state system has as many hazardous duty classifications as Kentucky. In other states, hazardous is usually limited to police, firefighters, emergency medical technicians, or correctional officers. He said he does not know of any state system that treats juvenile treatment workers as hazardous.
Representative Crall asked whether the $2.3 billion savings mentioned earlier by Mr. Hanes would mitigate the current unfunded liability. Mr. Hanes said it would not, since the projected savings is based on new hires. He said the savings, however, would facilitate paying off the unfunded liability in the future because a lesser liability would be incurred for new hires. He emphasized that the retirement systems will continue to face funding problems many years into the future, even if all the recommendations are adopted. To sum up, Representative Crall said that if the changes are adopted, the cost would then be $2.3 billion less for all prospective hires.
Representative Ballard said he has received inquiries recently from volunteer firefighters. He asked whether any state provides retirement benefits for volunteer fire departments. Mr. Hanes said they do not. He explained that in Kentucky they participated in CERS for a brief time. It was difficult to ascertain actual service accrued by the volunteers, and legislation was subsequently enacted to exclude them. Those who came into the system during that period, however, retain any retirement benefits that they earned.
Representative Harmon asked whether there has been any discussion about designating local police dispatchers as hazardous. Mr. Hanes said that no CERS agency has yet petitioned to include local dispatchers.
Mark Roberts, LRC staff, reviewed in detail the changes proposed in SB 205 and how they compare with current retirement provisions. (Copies of the comparison document are on file with committee staff.)
Senator Robinson spoke about the serious funding problems of Kentucky Retirement Systems and how SB 205, which he sponsored, would alleviate the problems by changing the benefits for new hires. He said that misinformation has circulated about the legislation. For example, it was falsely claimed that KLEPF funds would be cut. He said it is his intent to do more for current employees and retirees by making changes that would apply to people who have not yet been hired. He said he is willing to compromise on his proposals but that it would be fiscally irresponsible not to take some kind of action to address the problems. He added that everyone should carefully consider how much extra they are willing to pay, and how much less they are willing to receive, in order to promise that new hires receive the same benefits as current members of the retirement systems. Representative Geveden emphasized that KRS funding is a difficult but very important issue. He said the Public Employee Benefits Subcommittee has been working on the issue and continues to seek the involvement of everyone concerned.
Mr. Charles Ritchie of Frankfort addressed the Committee. Mr. Ritchie said he is a member of the Coalition of State Employee Organizations and a retired state employee with 35-plus years of service. He expressed concern about retirement benefits for current and future retirees. He went on to say he believes that employees who work with juvenile delinquents should be considered for the hazardous duty designation. He realizes the state's budget dilemma and foresees a possible zero percent increase in state employee salaries in the next year or two. He understands the importance of education but does not think teachers should receive better benefits than state employees.
Discussion of 2004 RS BR 62, prefiled by Representative Rick Nelson, was next on the agenda. Representative Geveden briefly explained the legislation. It would require separate rating of "unescorted" retirees (retirees of government entities whose employees do not participate in the state health insurance group) who retire January 1, 2004, or later; it would also require all employers participating in CERS to pay a fee to the Kentucky Retirement Systems beginning July 1, 2006, to fund the cost of "unescorted" retirees. Representative Geveden noted that the legislation has the support of organizations representing affected parties. Representative Nelson was not present, and there were no questions. The Committee did not take action on BR 62.
Representative Perry Clark pointed out that if the recommendations in SB 205 should be enacted, nothing would preclude the General Assembly from enacting other retirement changes in subsequent sessions. He said that legislation had been considered in previous sessions to establish a study group to look at retirement issues and said that might be a wise approach for the future. He suggested this approach be looked at again in the future. Representative Geveden said that the Committee would consider this suggestion.
Business concluded and the meeting was adjourned at 2:05 p.m.