The fifth meeting of the Interim Joint Committee on State Government was held on Tuesday, November 20, 2007, at 1:00 PM, in Room 154 of the Capitol Annex. Senator Damon Thayer, Cochair, called the meeting to order, and the secretary called the roll. Senator Thayer and Representative Mike Cherry, Cochair, jointly chaired the meeting.
Present were:
Members: Senator Damon Thayer, Cochair; Representative Mike Cherry, Cochair; Senators Walter Blevins, Jr., Julian Carroll, Carroll Gibson, Ernie Harris, Alice Forgy Kerr, and Johnny Ray Turner; Representatives Eddie Ballard, Sheldon Baugh, Johnny Bell, Tim Couch, Danny Ford, Derrick Graham, J. R. Gray, Mike Harmon, Melvin Henley, Jimmy Higdon, Charlie Hoffman, Jimmie Lee, Mary Lou Marzian, Lonnie Napier, Tanya Pullin, Tom Riner, Carl Rollins II, Dottie Sims, John Will Stacy, Kathy Stein, John Tilley, Rob Wilkey, and Brent Yonts.
Guests: Andy Crocker and Jackson Andrews, Kentucky Personnel Board; Bill Thielen, Kentucky Retirement Systems (KRS); Sylvia Lovely and Jerry Deaton, Kentucky League of Cities (KLC); and Tom Stephens, Personnel Cabinet.
LRC Staff: Joyce Crofts, Brad Gross, Alisha Miller, Karen Powell, and Peggy Sciantarelli.
The minutes of the October 24 meeting were approved without objection, upon motion by Senator Harris. Representative Graham recognized a member of the audience, Tony Massey, Frankfort City Manager. Representative Cherry noted that committee member Carolyn Belcher has resigned her House seat to serve as the newly-elected county judge/executive of Bath County.
The Kentucky Personnel Board's legislative proposals to revise KRS Chapter 18A (State Personnel) were first on the agenda. The Board was represented by Boyce "Andy" Crocker, General Counsel, and board member Jackson Andrews. The Board provided the Committee with copies of proposed revisions to the following KRS sections: 18A.005, 18A.010, 18A.020, 18A.037, 18A.0551, 18A.065, 18A.075, 18A.0751, 18A.080, 18A.095, 18A.100, 18A.110, 18A.115, 18A.120, 18A.130, 18A.135, and 18A.140.
Mr. Crocker said he is aware that Representative Cherry has prefiled legislation dealing with KRS Chapter 18A but that the Board does not yet have a sponsor for its proposed legislation. He discussed some of the proposed changes, many of which he said are housekeeping measures to make language consistent throughout the chapter.
Mr. Crocker explained that the Board proposes to allow employees 60 rather than 30 days to exercise their appeal rights [18A.095]. He went on to say that KRS 18A.0551, relating to the election of the two classified employee board members, is incredibly detailed and difficult to administer with the Board's small staff and that the Board proposes to repeal that statute and promulgate an administrative regulation to set out the election procedures. Only about eight percent of employees cast a ballot in 2006, and the Board would like to see an increase in employee participation. One way to do this would be to eliminate the requirement that employees use their social security numbers on the ballot. The Board also proposes increasing its per diem compensation from $100 to $500 [18A.080].
Representative Cherry said he believes it is appropriate to increase the compensation of board members, but probably to an amount less than $500. He suggested a possible per diem of $180.54, which is equivalent to what legislators receive, or $190, the per diem for Kentucky Retirement Systems Board members. He said that House Bill 62, which he sponsored in 2007, would have replaced all references to employee Social Security numbers with the employee's unique identification number for purposes of Personnel Board elections. The bill passed the House but died in the Senate State and Local Government Committee. He said he has already prefiled that legislation, referred to as the Public Employee Protection Act, for 2008, and that it will include some of the Personnel Board recommendations. It would also increase the number of employee members from two to four. He said he has some concern about the Board's proposed elimination of language relating to employee testing in 18A.010. Similarly, he would have a problem with having the election of the two classified employee board members governed solely by administrative regulation.
Representative Baugh and Representative Rollins questioned the need for the revision of 18A.0751(5) to allow the Board to file an emergency regulation without prior review by the Personnel Cabinet Secretary, and a similar revision to 18A.110(6)(e) to permit the Personnel Secretary to file an emergency regulation without prior Board review. Mr. Crocker said this would simply permit a regulation to be filed if there was not an opportunity for the Secretary or Board to review it first. He said that the language is probably not essential but added that sometimes it is difficult to obtain prior review when it is important to file a regulation—for example, in the case of regulations relating to health insurance.
Representative Graham asked about the basis for proposing a $500 per diem. He suggested that to go from $100 to $500 would not be good from a public perception standpoint. Mr. Andrews said the Board does an enormous amount of substantive and difficult work. To illustrate, he showed the Committee two bankers' boxes filled with 10˝ months worth of briefs, case law, etc. and other documentation that each board member must read. He said that if the per diem were adjusted for inflation just from 1986, it would be at least $217 per day. He pointed out that the Board's hearing officers are paid $85-$95/hour. Representative Graham said he wants the Board to receive fair compensation, and he agreed that the compensation has not kept up with the rate of inflation. He said, however, that it would be hard for him to justify that large an increase to his constituents. Mr. Andrews added that some boards and commissions are paid $1,000 or $500 per day but that the Board's recommendation is not "chiseled in stone."
Senator Carroll suggested, considering the magnitude of the Board's workload, that maybe the time has come to examine the structure of the Personnel Board itself. He said that perhaps a judicial body rather than a board of civilians should be reviewing the hearing officers' recommendations. He noted, too, that there are areas of state government where individuals are paid on a full-time basis for doing the same type of work as the Personnel Board. He also suggested that the Board draft a regulation pertaining to the employee election process, in preparation for discussing the Board's proposals after they obtain a sponsor for their legislation.
Representative Stacy asked about sections 18A.065 and 18A.100, which name the Franklin Circuit Court as the court of jurisdiction. Regarding 18A.100, Mr. Crocker said that judicial review has always been in Franklin Circuit Court; in 18A.065 the new language merely clarifies that Franklin Circuit Court would enforce subpoenas authorized under that subsection. At Representative Stacy's request, Mr. Crocker described the various steps involved in the appeal and hearing process, which he acknowledged may require several trips to Frankfort for employees and their attorneys who work in other areas of the state. Mr. Crocker said it has been proposed in the past that the Personnel Board hold hearings in other places but that the Board has not been set up or had the funding to do so. Representative Stacy said he feels it would be only fair for appeals to be filed in the circuit where the employee lives or works. Senator Thayer said there would likely be a lot of support for that in the Senate, since in 2007 the Senate passed legislation that would allow appeals to be heard in the county of residence. He said he would look forward to working with Representative Stacy on this issue during the 2008 session.
Representative Yonts described the disability hearing process of Kentucky Retirement Systems, which he noted has the same structure as Personnel Board hearings. He said it seems to him that local circuit courts would be the appropriate forum for review. He suggested that the broader question perhaps should be whether to eliminate appeals to the Board and in lieu thereof provide for direct appeals from the hearing officer to the circuit court. Mr. Crocker responded that the Personnel Board, unlike the retirement board, does not have a stake in the outcome and is more of a neutral adjudicative body. He said the Personnel Board is charged with overseeing Chapter 18A but does not make decisions regarding hiring or firing employees. The only time there might be a potential conflict would be if an appeal was from a Personnel Board employee.
Representative Cherry asked Tom Stephens, General Counsel for the Personnel Cabinet, to comment on the proposed deletion of language relating to competitive examinations in 18A.010 and 18A.120. Mr. Stephens said he is representing Personnel Secretary Brian Crall, who could not attend today. He said that the Personnel Board invited the Cabinet to participate in the review of KRS Chapter 18A and that the Cabinet agrees on most, though not all, of the Board's proposed revisions. He also noted that on November 26 the Cabinet's Career Opportunities System will come online for the first time. This will allow people to search and apply for state positions from any computer, without having to travel to Frankfort.
With respect to testing, Mr. Stephens said that the Personnel Cabinet has found that the current testing process does not work well. He went on to explain that there are approximately 1,400 different classifications for state positions but that only about 10 percent of those positions are actively tested. The tests indicate whether the person is a good test taker but are not a good indicator of whether the person can perform the functions of the job. The tests probably disproportionately tend to exclude minorities and other groups, including veterans. Because of that, the Cabinet has been moving away from testing. It has also been difficult to find anyone willing to write the tests.
Senator Carroll asked how the employment register and veterans' preference points would be affected by the elimination of testing. Mr. Stephens said that the 10 percent of applicants who are tested are still ranked on a register. He also suggested that veterans' preference points are much less valuable than they have been sold to be. He said that only the 10 percent who are tested benefit from the veterans' preference points and that veterans might find a guaranteed interview preferable. Mr. Crocker said that the purpose of the language change is not to eliminate testing but rather to eliminate the false impression that testing is the primary selection method. Mr. Andrews said the statutory revision is intended to clarify that merit and fitness do not necessarily mean that testing has been done. The deletion would simply make the law consistent with current practice. Representative Cherry suggested, instead of removing the reference to examinations, that language be inserted to list all criteria, including competitive examinations, that are used as a basis for hiring and promotion in the classified service. He added that veterans preference legislation passed the House and Senate in 2007 and that, although it did not become law, he expects it will in 2008. Representative Cherry thanked the speakers. He said that he will be sponsoring relevant legislation in the 2008 session and that discussion of these issues will continue at that time.
The next topic for discussion was 2008-2009 employer contribution rates for Kentucky Retirement Systems. Representative Cherry noted that the meeting folders contain a document prepared by staff which charts the current and future recommended rates. Guest speakers were Bill Thielen, Chief Operations Officer for Kentucky Retirement Systems, and Sylvia Lovely, Executive Director of the Kentucky League of Cities. Mr. Thielen noted that Executive Director Bill Hanes is out of state and could not attend today.
Mr. Thielen said that KRS's annual actuarial valuation provides the required employer contribution rates based on funding methods and economic and demographic assumptions that are adopted by the Board. He went on to say that the funding methods and assumptions are tools used by the actuaries to develop a budget pattern to help ensure that necessary contributions are made on a systematic basis to the system. Every five years an experience study is performed to look at how the methods and assumptions are affecting the contribution rates and system funding in order to recommend changes that might be necessary to accurately reflect expected future experience. The last study was done at the end of 2005, and the next study is due in the fall of 2010.
Mr. Thielen explained that one of the system wide economic assumptions relevant to the funding of the system is the medical inflation rate, sometimes referred to as the health care cost trend assumption. He said it is used to estimate the insurance premiums that will be in effect at the time a member retires, as well as the pattern of premium rate development throughout retirement. It is one of the assumptions that can significantly impact the development of future plan liability and can substantially alter the actuarial results and the contribution rate recommendations. The KRS actuary, Cavanaugh Macdonald Consulting, has indicated that this is probably the most difficult economic assumption to set. The Segal Company, which performed the last experience study, recommended a medical inflation rate assumption that was adopted by the Board in January 2006. Segal also indicated that the medical inflation assumption should be reevaluated annually, or at least every two years, in order to comply with GASB-45 [Governmental Accounting Standards Board Statement No. 45/Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions] for evaluating the insurance fund financial conditions.
Mr. Thielen said that the actuary, when performing this year's valuation, decided that the medical cost trend assumption needed to be lowered fairly significantly. He explained that one factor having a positive affect on the trend is that the health plans are now self-funded. Lowering the cost trend assumption had a very significant impact on plan liability. For KERS (Kentucky Employees Retirement System) and SPRS (State Police Retirement System) the unfunded liability was reduced by $2.94 billion over the amortization period; for CERS (County Employees Retirement System) there was a $1.9 billion reduction in unfunded liability. The reduction in liabilities resulted in lowering of the needed contribution rates. Mr. Thielen emphasized that a comparable change in the medical inflation rate cannot be expected to reoccur in the future. He went on to say that for KERS-nonhazardous and SPRS the actuary recommended that the employer contribution rate should be funded in the budget on a full funding basis, using a 7.75 percent assumed interest rate rather than a blended rate of 4.5 percent. This also had a significant impact on reducing the required employer contribution rate.
Mr. Thielen said that, in order to mitigate the impact on local government employers, the Board last year adopted a five-year phase-in of the increase in the health insurance rate that was caused by the application of GASB-45. This also had the effect of lowering the employer contribution rate for CERS employers.
Mr. Thielen said that the employer contribution rates set this year by the Board are lower for all plans than they were last year. He said it is unlikely that this will continue to the same degree and that there will continue to be pressure to increase the rates over time. He said that KRS expects to receive new 10-year projections from the actuary by the end of the week.
Senator Carroll asked about the current estimated amount of unfunded liability. Mr. Thielen said that the unfunded liability on the actuarial value of assets for KERS-nonhazardous is $4.1 billion; for KERS-hazardous it is $91.7 million. Senator Carroll asked whether this unfunded liability can be attributed to the failure of the General Assembly to fund the recommended contribution rates over the years. Mr. Thielen said that certainly has had a major impact. Senator Carroll asked whether there has been a calculation of the financial impact of the potential retirement of 30 percent of state employees if the January 2009 window is not extended. Mr. Thielen said that the actuary has looked at that only from the standpoint of legislation to extend the window. Representative Cherry said that he and Representative Graham have prefiled legislation to extend the window. He said there is a difference of opinion on the cost impact. One actuarial firm has estimated that it will be more expensive to keep the window open for those currently eligible than to let it expire in January. He said that he and Representative Graham recently received a cost analysis which indicates that the cost impact would be negligible. He said he personally is convinced that it will be a "wash" and that the window should be left open for the benefit of the approximately 6,000 employees eligible for the enhanced benefit who are not yet ready to retire. Representative Graham said he understands that some employees are already taking steps to retire because they are uncertain whether the window will be extended. He said he might disagree on a few points heard today but that he hopes the legislation can be passed early in the session so that employees can make informed decisions and so that the Commonwealth will be able to retain the valuable expertise of those who decide to stay.
Ms. Lovely spoke next. She was accompanied by Jerry Deaton, KLC's Director of Governmental Affairs. They provided members with copies of a chart entitled, "CERS Employer Contributions for Louisville Metro," which illustrates new and original projections of employer contribution costs from FY 2006 to FY 2013. Ms. Lovely said that the new rates approved by the KRS Board are a welcome relief but that KLC views this as a one-time event and not a long-term structural solution to what continues to be a major problem. Referring to the Louisville Metro chart, she noted that the new lowered rates will mean a one-time decrease of approximately $1 million in CERS employer contributions for 2008-2009, assuming that the employees receive a 2.5 percent cost-of-living adjustment. She noted that the city of Frankfort will see a one-time decrease of about $186,000 next year. She explained that the latest trend projections show that Louisville's payments will increase each of the following years, reaching $104.6 million in FY 2013. Under the original projections the FY 2013 figure would be $136.4 million. The difference is substantial, but the cost is still staggering. Ms. Lovely said that KLC's goal is to work with the General Assembly, the Blue Ribbon Commission [on Public Employees Retirement Systems] and others in the incoming governor's administration to find a solution to the structural problems. She said cities need to address this serious and complex problem not only as it relates to future hires but also to current employees, many of whom will be retiring in the next few years. Cities also have a lot of hazardous duty employees. She noted that KLC recently proposed some suggested solutions at the Committee's October meeting.
Senator Kerr asked how the lowered projections would affect the city of Lexington. Ms. Lovely said she did not have that information at hand but would be glad to get it for her. Mr. Thielen said he cannot vouch for the numbers presented for Louisville Metro because KRS does not yet have the new 10-year actuarial projections using the new assumptions and the method change. He said they should have the new projections by Friday of this week. Ms. Lovely said that she was just trying to give the Committee an idea today of costs affecting one city and that KLC will have more accurate information later.
Representative Cherry thanked the speakers. He noted for the record the November 19 subcommittee report of the Task Force on Elections, Constitutional Amendments, and Intergovernmental Affairs. Business concluded, and the meeting was adjourned at 2:35 p.m.