Interim Joint Committee on State Government


Minutes of the<MeetNo1> 4th Meeting

of the 2008 Interim


<MeetMDY1> November 24, 2008


The<MeetNo2> fourth meeting of the Interim Joint Committee on State Government was held on<Day> Monday,<MeetMDY2> November 24, 2008, at<MeetTime> 1:00 PM, in<Room> Room 154 of the Capitol Annex. Representative Mike Cherry, Co-Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Damon Thayer, Co-Chair; Representative Mike Cherry, Co-Chair; Senators Julian Carroll, Ernie Harris, Alice Forgy Kerr, Johnny Ray Turner, and Ed Worley; Representatives Eddie Ballard, Sheldon Baugh, Kevin Bratcher, Dwight Butler, Larry Clark, Tim Couch, Will Coursey, Tim Firkins, Joseph Fischer, Danny Ford, Derrick Graham, Mike Harmon, Jimmy Higdon, Charlie Hoffman, Jimmie Lee, Lonnie Napier, Sannie Overly, Darryl Owens, Tanya Pullin, Tom Riner, Carl Rollins II, John Will Stacy, Tommy Thompson, John Tilley, John Vincent, Jim Wayne, Alecia Webb-Edgington, and Brent Yonts.


Guests:  House Speaker Jody Richards; Jonathan Miller and Greg Haskamp, Finance and Administration Cabinet; Todd Hollenbach, Office of State Treasurer; Tad Thomas, Office of Attorney General; John Hicks, Office of State Budget Director; Joe Meyer, Education Cabinet; and Mary Elizabeth Harrod, Personnel Cabinet.


LRC Staff:  Bill VanArsdall, Brad Gross, Alisha Miller, Karen Powell, Greg Woosley, and Peggy Sciantarelli.


The Committee gave special recognition to Representative Baugh and Representative Vincent, who will be retiring from the General Assembly at the end of 2008. The Co-Chairs also welcomed House Speaker Jody Richards, who was sitting in at the meeting. Representative Cherry also recognized absent members Representatives Rob Wilkey and Kathy Stein, who will not be returning to the House of Representatives in 2009.


Later in the meeting, the minutes of the October 22 meeting were approved without objection, and Representative Cherry recognized the State Government Committee’s new acting committee staff administrator Bill VanArsdall.


Senator Thayer, Co-Chair of the Task Force on Elections, Constitutional Amendments, and Intergovernmental Affairs, read the subcommittee report for the October 28 meeting of the Task Force. The report was approved without objection.


Next on the agenda was a report from the Personnel Cabinet regarding state employee turnover and retirements. Mary Elizabeth Harrod, Director of the Division of Employee Management, represented the Cabinet. Ms. Harrod said that the workforce currently totals 33,520, compared to 35,593 at this time last year. She went on to say that turnover is based on resignations, dismissals, transfers out, layoffs, and terminations. The current turnover rate is 6.2 percent. The turnover rate for both 2005 and 2006 was 9.8 percent; for 2007, it was 8.7 percent. In previous years, an average of about 607 employees have transferred between agencies. Only 140 employees have transferred out in 2008, which indicates that not as many positions are being filled. There have been 1,979 [executive branch] state employee retirements, to date. When Representative Cherry said it appears that the number of retirements is fewer than anticipated with the approaching expiration of the benefit window in January 2009, Ms. Harrod said that is correct.


When Representative Yonts asked, Ms. Harrod confirmed that the total number of retirements might not be determined until as late as the last week of December. Representative Yonts said, as he recalls, original projections were that 5,300 to 5,500 would retire, and that 3,500 or 3,600 slots would be allowed to be filled. John Hicks, Acting State Budget Director, briefly came to the speaker’s table and agreed with the figures quoted by Representative Yonts.


Representative Rollins asked whether there is any data regarding the number of employees scheduled to retire before 2009. Ms. Harrod said that the Cabinet does not have that information. She said that, although data is available about age and years of service, the Cabinet does not have information about purchases of service credit.


Representative Clark asked whether the Cabinet, in determining the turnover rate, tracks total years of service of employees who leave. Ms. Harrod said they do track that information but that she did not have those numbers with her. She said that the Cabinet reports a detailed analysis of employee turnover and retirement, by agency, to the Governor’s Office, the Personnel Board, and LRC in January of each year. Representative Clark said that significant turnover at the entry level would entail greater hiring costs for the Commonwealth and also could reflect that entry salaries are too low. Ms. Harrod noted that past analysis indicates that most turnover occurs within the first two years of employment. Discussion concluded, and Representative Cherry thanked Ms. Harrod.


Next on the agenda was a report from the Kentucky Public Pension Working Group, which was created by executive order dated May 29, 2008. The first speaker was Finance and Administration Cabinet Secretary Jonathan Miller, Chair of the Working Group. Secretary Miller provided the following 4-page handout to the Committee: “Recommended Investment Actions”; and a November 20, 2008, press release from the Office of the Governor, “Gov. Beshear calls on pension systems to reform investment practices.”


In his opening remarks, Secretary Miller said that the working group was charged with presenting policymakers with a series of options on how to pursue issues that were not fully resolved through House Bill 1, the bipartisan legislation relating to retirement that was enacted in the 2008 special session. He went on to say that there was clear consensus among the working group members that action needed to be taken immediately regarding the issue of pension fund investments. An independent consultant hired by the working group, Hammond Associates, found that if the two pensions systems—Kentucky Retirement Systems (KRS) and Kentucky Teachers’ Retirement System (KTRS)—had met the average investment returns of their peers across the country, they would have had an extra $5 billion profit over the past decade. He also noted that the reports of the Working Group’s six subcommittees were based on data prior to the recent national and global financial crisis, which would lead to an assumption that any losses of the Systems would actually be more significant.


Secretary Miller said that there was a definite desire to get more investment experts on the boards of the two pensions systems. He said that the KRS board has two members who can be considered experts—Chris Tobe, a certified financial analyst in Louisville who was appointed by the Governor about six months ago, and Clay Owen, retired former treasurer of the University of Kentucky, who was appointed by the Governor a few days ago. There are no such investment experts on the KTRS Board.


Secretary Miller reviewed the following recommended investment actions listed in the handout. Recommendations (1) and (2) relate to the composition and member qualifications of the Systems’ investment committees. Other recommended actions are: (3) Prohibit system employees from serving as voting members of the investment committees; (4) Members of the Systems’ investment committees shall participate in continuing education, on an annual basis, consistent with their investment consultant’s recommendations of best practices in the pension industry; (5) Both systems shall conduct an asset/liability modeling study to determine an asset mix that is broadly diversified among traditional and alternative asset classes immediately, and at least every five years hence, or more frequently if circumstances warrant such a study; (6) Both systems shall limit active or passive external manager concentrations to not more than 15 percent of the market value of the fund; and (7) Both systems shall conduct a formal review of their administrative regulations, using the “prudent man” standard, to remove all regulations that impair the ability of the Systems to implement efficient investment portfolios and take other appropriate actions, as necessary. Secretary Miller said that these recommended actions have the support of the Governor, the Chamber of Commerce, and employee groups. He went on to say that the leaders of the pension systems have indicated their general agreement, though they were not able to commit specifically before consulting with their boards. The KTRS Board is meeting on December 15, and the KRS Board may have a special meeting before the end of the year.


Senator Harris asked how much the Systems earned during the period in which it was estimated that their average investment return was $5 billion less than that of their peers. Secretary Miller said that the Systems might argue with the $5 billion figure; however, other groups that have looked at this issue found the Systems to be lagging behind other pension systems. He said he does not know how much was actually earned but that it can be found in the investment consultant’s report, which is included in the full report of the Working Group. He noted that the report is available in print and can also be accessed on the Finance Cabinet web site.


State Treasurer Todd Hollenbach, Chair of the Investments Subcommittee, spoke. He said that the Investment Subcommittee’s goal was to ensure that it came up with recommendations that the Governor could utilize in order to effect change. He explained that Hammond Associates identified several critical issues: Investments of both retirement systems have significantly underperformed; the governance structure responsible for investment oversight is inadequate; the investment portfolio is not sufficiently diversified among asset classes; and the investment manager structure had concentrated positions with increased risk. He said that the recommendations which the Governor has put forward address all of those issues.


Mr. Hollenbach said that for the 10-year period ended June 30, 2008, manager returns for both Systems were generally above the median when compared to other public pensions funds similarly situated. However, asset allocation in both KRS and KTRS differed substantially from the median. He said that the recommendations have the goal of correcting that by ensuring that investment professionals are on board who can better guide the Systems.


Representative Owens suggested that it would be helpful to do another peer group comparison after the current financial crisis subsides. Secretary Miller said that has been a recommendation of the Systems, which feel that in this downturn they may have performed better than some of their peers due to the fact that investments in international stocks, which previously had been doing so well, have recently been performing poorer than the domestic stock market. He went on to say that other systems have focused more on diversification. KRS and KTRS recognize the importance of that and have started the process. Hopefully, the efforts of the Working Group will help accelerate that process. Mr. Hollenbach agreed that after the crisis is over, it might be worth doing a “post mortem” to compare performance with other funds.


Representative Wayne commended the efforts of the study group. He asked whether it is recommended that legislation be drafted to make asset managers subject to financial disclosure requirements. Secretary Miller said he would not be opposed to that and believes that the Administration would favorably receive that kind of legislation.


Representative Cherry said that he is working on retirement “cleanup” legislation for the 2009 regular session to address issues such as the definition of hazardous duty, whether the County Employees Retirement System (CERS) should pay employer contributions on returning employees, and whether to make returning employees eligible for the $20,000 free life insurance. He said he is also working on separate legislation to codify some of the Working Group recommendations in statute and that he would be glad to work with Representative Wayne to include financial disclosure provisions. He is also seriously considering sponsoring legislation to phase in to the full ARC (actuarially required contribution) over a 10-year period for the CERS. Representative Cherry said he would welcome input from interested parties.


Senator Thayer said he is pleased to hear that Representative Cherry is working on this legislation. He said he has heard many comments about reemployment issues. He went on to say that the five-year ARC for CERS was discussed in today’s Local Government Committee meeting. The state Senate has been questioning the pension systems’ investment returns and practices for almost two years. Bipartisan legislation passed in the 2008 regular session changed the composition of the KRS and KTRS Boards’ investment committees. Senator Thayer expressed reservation about recommendations to change composition of the boards through administrative regulation but said there is agreement with the goal of the Working Group. He said the General Assembly will be working with the Administration toward that goal in the 2009 session.


Secretary Miller said that the Administration fully welcomes the dialogue. He pointed out that the Governor issued his recommendations relating to investments first because that issue was considered the most urgent. In coming weeks the Governor will announce his recommendations in other areas relating to pension reform, and the Administration will be working with stakeholders and members of the General Assembly to find right solutions. He added that the Administration shares the concerns about providing relief to cities and counties in a way that maintains long-term actuarial viability of the retirement system.


Representative Stacy asked about the recommendation relating to removal of administrative regulations that impair the ability of the Systems to implement efficient investment portfolios and take other necessary actions. Secretary Miller said that this recommendation was made by KTRS, which feels that some of their regulations have become antiquated. Treasurer Hollenbach added that, on the statutory level, KRS has expressed concern over the fact that some of the best money management firms refuse to manage funds of public pension plans that are subject to overly burdensome open records laws. For that reason, the consultant said it might be warranted to review the Open Records Act for possible change as it pertains to investments.


Representative Riner asked whether the Administration would be willing to issue an executive order to require financial disclosure for asset managers if this is not accomplished through legislation. Secretary Miller said he does not know whether an executive order could be imposed on the independent pension systems.


Reports of the Working Group’s remaining five subcommittees followed. Each report was preceded by introductory remarks from Secretary Miller. Tad Thomas, Assistant Deputy Attorney General in the Office of the Attorney General, reported on behalf of the Securities Litigation Subcommittee.


As stated in its report, the Subcommittee identified the following areas in which the retirement systems can improve their securities litigation policies and procedures: (A) Establishing and updating of official written policies; (B) Establishing a much lower minimum damages threshold for consideration of active participation in securities fraud litigation; (C) Establishing procedures for evaluating cases to pursue as an active litigant; (D) Establishing procedures for retaining litigation counsel; (E) Coordination of securities litigation plans; and (F) Role of the Attorney General.


Mr. Thomas said that the Subcommittee was charged with reviewing the securities litigation policies of KRS and KTRS, including whether the Systems were either “leaving money on the table” or actively pursuing securities litigation in an appropriate fashion. In addition, they reviewed the Attorney General’s role in securities litigation. The most important finding was that it does not appear that the Systems are “leaving money on the table.” He went on to explain that, to date, the approach to securities litigation has been passive—although not inappropriate. That means that someone else is filing the class action or leading the litigation and that the retirement systems are filing proofs of claims after litigation is completed. To take an active role would be to pursue lead counsel status or to opt out of a class action. The 1998 passage of the Public Securities Litigation Reform Act by the U. S. Congress changed the landscape in securities litigation. Prior to 1998, the lead plaintiff was the first person to file; after 1998, the lead plaintiff was always the plaintiff who had the highest amount of damages or losses. Thus, plaintiffs in securities class actions mostly are pension systems. Even if KRS or KTRS desired to be lead plaintiff, they would in most cases lose out to larger pension systems like California and New York, which are very active in litigation.


Mr. Thomas said that even before the Subcommittee started its work, the Systems had already taken action to improve their policies and procedures. Most significantly, KRS and KTRS have hired an evaluation counsel, Keith Johnson, whose job is to evaluate potential securities litigation and assist the funds and their boards in deciding whether to take an active or passive role in litigation. He said that the Subcommittee recommends that both Systems should establish or update official written policies. KTRS did not have written policies and procedures regarding securities litigation; however, KRS did. Both systems are already working with Mr. Johnson to implement this recommendation.


Mr. Thomas explained that KRS’s largest loss was $35 million, which is significantly below its current minimum threshold of $75 million. KTRS does not have a minimum threshold. Some retirement systems do not have a minimum threshold, but the vast majority do, ranging from $2 million to $25 million. He said that there is a cost involved in even evaluating whether to actively participate in a case and that the retirement systems should base their minimum thresholds on how active and aggressive they want to be with respect to litigation. It is recommended that KRS significantly lower the $75 million threshold and that KTRS establish a threshold. Both systems are working on this with Mr. Johnson.


Mr. Thomas noted that Mr. Johnson, as evaluation counsel, is an independent adviser and would be excluded from representing the retirement systems in any litigation he recommends. He said the Subcommittee recommends that the Systems pre-approve litigation counsel so that counsel will be available on short notice to get a case filed. This would also enable the Systems to set up ethical boundaries for litigation counsel.


Mr. Thomas said it is recommended that the Systems coordinate their securities litigation plans to the extent possible. By hiring Mr. Johnson, they will be able to share information and also possibly share litigation counsel and use the same pre-approved board. In some instances, they might be able to combine their losses in order to seek lead plaintiff status.


Mr. Thomas said that the statutes governing both Systems include language that the Attorney General can serve as a legal adviser to both Boards. He noted that KRS and the Office of the Attorney General have recently worked together in a case that resulted in victory before the U. S. Supreme Court. The Subcommittee felt, however, that the AG’s role could be strengthened. There were no further questions for Mr. Thomas.


Joe Meyer, Deputy Secretary in the Education Cabinet, reported on recommendations of the CERS Reorganization Subcommittee, which he Co-Chaired with State Auditor Crit Luallen. Mr. Meyer said that the purpose of the Subcommittee was to study the potential transfer of classified school board employees from CERS to either KTRS or KERS (Kentucky Employees Retirement System); whether to leave them in CERS and rate them separately from city/county employees; or whether to move local government employees to a new retirement system known as LGERS (Local Government Employees Retirement System). He explained that the core issue was whether non-school board members subsidize school board members in CERS; if so, what subsidy exists and how to deal with the actuarial and operational consequences; and whether there is a counter-balancing subsidy through the provision of health care benefits to local government “unescorted” retirees whose employers do not participate in the Kentucky Employees Health Plan (KEHP).


Mr. Meyer discussed the following key findings stated in the Subcommittee report. When rated separately, non-school board employees receive a small subsidy from school board employers on pension contributions, but school boards receive a larger subsidy from nonschool board employers on health insurance contributions. KRS actuarial consultants found that non-school board employers subsidize school board employers in an amount ranging from $32.6 million to $43.8 million, depending on the assumptions used. According to PricewaterhouseCoopers (PwC), local government employers who do not participate in KEHP benefit from a $37.2 million subsidy for their “unescorted” retirees. If the groups in CERS were divided, over time school boards would pay approximately three percent more than the current employer rate; non-school boards would pay approximately five percent less than the current employer rate.


Mr. Meyer said that the Subcommittee considered the following options: leave the system as is; leave school board employees and local government employees in CERS but rate each group separately; move the school board employees to KTRS and leave local government employees in CERS; move school board employees to KERS and leave local government employees in CERS; leave school board employees in CERS and move city/county employees to a newly established Local Government Employees Retirement System; or, lastly, split the school board employees from the local government employees on a prospective—future hire—basis only and have a different employer contribution rate for each. He said this last option is currently undergoing actuarial analysis.


Mr. Meyer explained that the major barrier to the split is the fact that school board employees could not be placed in either KTRS or KERS because they have different benefit structures. He went on to explain that if school board employees are moved, it would require the establishment of a separate subgroup. To split assets would present a significant challenge, involving major fiduciary responsibilities, and timing and tax issues. If CERS school board employees were moved to KTRS, there would be issues of management capability of KTRS. School board employees comprise approximately 55 percent of CERS membership. KRS estimated that to break out the school board employees into a separate subgroup would cost approximately $5 million over a five-year time frame. KTRS estimated that the impact on its budget would involve startup costs of $2.1 million and approximately $3.4 million per year in additional management costs because of the large number of additional employees. Such a change would significantly increase the financial responsibilities of school boards at a time when they have limited resources. The Subcommittee recommended that, if such a change is made, it be done in the first year of the biennial budget, when the burden for the local school districts could be discussed within the concept of the overall budget deliberation.


Mr. Meyer said that two issues are still open—the prospective split of city/county employees from school board employees, and valuation of the “unescorted” retiree subsidy. He went on to say that, at the Personnel Cabinet’s request, PwC updated previous studies of the “unescorted” retiree issue. Because questions have been raised regarding some of the numbers and assumptions, the Working Group is continuing to revisit the validity of the PwC study in order to fully understand the nature of the study in favor of the local government employers for the health care benefit.


Representative Clark asked whether it would be possible for the Subcommittee to provide the State Government Committee Co-Chairs with a summary of the six options, prioritized according to financial impact and potential barriers. He said this would make it easier for the members to understand the issues involved. Mr. Meyer agreed to do so.


Next on the agenda, John Hicks, Acting State Budget Director, reported for the State Funding Subcommittee. Mr. Hicks said much of their work was colored by House Bill 1. He said the Subcommittee focused on improvements in process and other changes that might be necessary to implement the legislation in the most diligent manner possible, as well other issues, particularly with respect to KTRS.


Mr. Hicks gave an overview of the policy options proposed for KRS, which were stated as follows in the Subcommittee’s report. (1) Projected amounts of additional funding needed to adhere to the targeted funding requirements in HB 1 should be publicized as early as they are available. (2) KRS should conduct a full experience study prior to the actuarial valuation as of June 30, 2009, upon which the ARC will be based for the FY 2010-2012 biennial budget. (3) The actuarial valuation, currently required to be conducted annually, should be conducted every two years to coincide with the biennial budget process.


Mr. Hicks discussed the following policy options proposed for KTRS. (1) Measures should be taken to both address the accumulated costs of health care that have been paid by the pension fund, and address the ongoing increasing costs of providing health care benefits to retirees. The Budget of the Commonwealth should provide adequate funding to eventually eliminate the practice of diverting pension funds to pay for health care expenses. (Mr. Hicks noted that, through FY 2010, it is estimated that $540 million has been borrowed from the KTRS pension fund—at 7.5 percent over 10 years—to fund health care benefits.) (2) As a component of a comprehensive funding plan, the Commonwealth should consider issuing bonds to pay off all, or a portion, of the accumulated costs of the health care benefits over the last three biennial budgets, which can be a more cost-efficient method to pay for these obligations than the current budgeting practice. However, bonds should only be issued if market conditions are favorable, resulting in: (a) the borrowing costs being less than the current budgeted interest costs assumed at the actuarial rate of return of 7.5 percent; and (b) the investment return on the proceeds of the bonds can reasonably be expected to exceed the cost of the borrowing over the life of the borrowing. (3) If bonding is utilized to pay a portion of the unfunded liability, an independent investment advisory committee should be established to assist KTRS with investment allocation and cash management issues.


Mr. Hicks discussed policy options proposed for both KRS and KTRS: (1) The Commonwealth should employ an actuary to review the assumptions used by the actuaries in the biennial valuation process and advise as to their reasonableness. (2) Both KRS and KTRS should implement an independent actuarial audit every four years to review the actuarial assumptions and performance of the firms employed by the systems. (3) Measures should be taken to address the ongoing increasing costs of providing health care benefits to retirees.


Senator Carroll asked how much the $540 million borrowed from the KTRS pension fund is projected to cost by the time it is repaid. Mr. Hicks said that $42 million is allocated from the General Fund for that purpose in the current budget for KTRS. Next year the cost is expected to increase to $60 million and will continue to grow at a rapid pace. He said that four years ago the cost was budgeted at $13 million.


Representative Thompson asked whether, in looking at pension obligation bonds as an alternative to retiring the loan from the KTRS pension fund, it was found that the interest rate would generally be lower and that there might be some savings in debt service. Mr. Hicks said that the opportunity of lowering the interest rate was seen as the most positive potential element of pension obligation bonds. Associated with that, though, would be the other risks of a pension obligation bond—i.e., achieving returns greater than the cost of borrowing and achieving returns greater than the expected rate of return that the pension system relies upon. There were no further questions.


Greg Haskamp, special assistant to Secretary Jonathan Miller, reported for the Defined Contribution Plan Subcommittee. Mr. Haskamp said that the central question evaluated by the Subcommittee was whether or not transitioning some or all of Kentucky’s employees to a defined contribution type plan would reduce or eliminate some of the accrued unfunded liability. He said that in conducting the study, the Subcommittee undertook three case studies; heard testimony from three nonpartisan national experts on public pension plans; interviewed four current and former public pension plan administrators from outside the Commonwealth, including two of the strongest defined contribution plans in the country; engaged two economists and two actuaries with extensive experience in both public and private plans; took testimony from Kentucky’s existing defined contribution plan administrators with the Kentucky Public Employees Deferred Compensation Authority; and heard the story of an individual who had participated in a tried-but-failed defined contribution plan in West Virginia.


Mr. Haskamp went on to explain that the Subcommittee found that Kentucky is one of 48 states that offer a defined benefit plan as the primary vehicle for retirement. Within defined benefit plans there are certain inherent economic efficiencies, dealing primarily with the economies of scale. Defined benefit plans are able to tolerate risk a lot better than individuals are when the market sours, and the individual retirement recipient does not have the total risk of an investment on his shoulders. A defined contribution plan of any design will not reduce or eliminate any part of the already accrued unfunded liability that the Systems face, which totals $26 billion for pension and health care benefits combined. Approximately 23 percent of employees participate in the Deferred Compensation defined contribution plan. While maintaining the voluntary aspects of that plan, the Subcommittee expressed hope that some strategies could be developed on the employer’s side to entice greater participation in that plan.


Representative Graham asked about the two states that have defined contribution plans. Mr. Haskamp said they are Alaska and Michigan. He said that Alaska changed to a defined contribution plan within the last 10-15 years but potentially plans to revert back to a defined benefit plan. Michigan’s plan has been in effect longer than Alaska’s. He went on to say that Nebraska started offering a defined contribution plan in 1965 but later reverted to defined benefit through a cash balance plan. Representative Graham said it would be helpful to know how the recent stock market downturn has impacted the investment rate of return for Alaska’s and Michigan’s plans, compared to the impact on plans in defined benefit states. Mr. Haskamp said that they could research that for Representative Graham.


Senator Thayer asked about the states that have hybrid plans. He also inquired about West Virginia. Mr. Haskamp said that the Subcommittee studied two states—Florida and Oregon—of the several that offer optional hybrid plans, which allow an employee to choose whether to participate in a defined contribution plan. He said that West Virginia had transitioned its teachers’ retirement to a defined contribution plan but ultimately reverted back to a defined benefit plan.


Representative Cherry asked whether Kentucky would be considered a hybrid state because of the 401k type plan offered through the Deferred Compensation Authority. Mr. Haskamp said that most studies would not include Kentucky as a hybrid. Secretary Miller noted, too, that there is no employer contribution to deferred compensation accounts.


Mr. Haskamp also reported for the Health Care Subcommittee. He reviewed background information in the Subcommittee report relating to the rise in healthcare costs and efforts that have exclusively focused on the task of managing healthcare costs for employees of the Commonwealth. He noted that Kentucky is one of just 13 states with any assets set aside for non-pension benefits, according to a study by PEW Charitable Trusts which said that Kentucky had $929 million set aside (as of 2006). As stated in the Summary, Mr. Haskamp noted the following key factors identified by the Subcommittee for the Commonwealth to consider in its efforts to maintain healthcare costs: (1) A large portion of the Commonwealth’s healthcare costs for employees could be substantially reduced through effective disease management and wellness efforts. (2) A number of states (e.g., Alabama), public pension plans, and other employers have utilized Medicare Advantage plans to substantially lower the plan costs they face, without lowering benefits to employees. These programs are sustainable for the foreseeable future and assist in lowering GASB (Governmental Accounting Standards Board) liabilities. (3) Nine plans have implemented employer group waiver plans to lower costs, and testimony indicated that many of these plans were relatively small. (4) Other states, like West Virginia, have also sought innovative solutions to deal with skyrocketing healthcare costs through the creation of trusts for favorable GASB treatment of liabilities. (5) A key strategy among states and large employers is to maximize economies of scale by utilizing group purchasing plans for pharmaceuticals.


Senator Carroll asked whether other cost-control options had been identified that could be implemented immediately. Mr. Haskamp said the key factors he enumerated were the primary options considered by the Subcommittee but that a number of smaller recommendations are also found in the report. Secretary Miller said the Governor will be issuing a new set of recommendations before the end of the year. It will include a package of “big picture” healthcare reforms, many of them relating to cooperation with the pension systems regarding purchasing power for prescription drugs and a fully engaged wellness program.


Representative Fischer asked whether the $929 million that Kentucky had set aside is net of the $540 million borrowed from the KTRS pension fund. Mr. Haskamp said that the PEW study did not include that information. Secretary Miller said he assumes that it does not include that money but that he will get that data for Representative Fischer.


Representative Thompson asked whether there is recent data available pertaining to the asset size of both the KRS and KTRS plans and the extent of the unfunded liability. Secretary Miller said that they do not have those numbers but that the Working Group has asked the Systems—and the Systems have agreed—to present the latest numbers to the 2009 General Assembly.


Representative Cherry thanked the speakers, and business concluded. The meeting was adjourned at 2:50 p.m.