Call to Order and Roll Call
The fifth and final meeting of the Interim Joint Committee on State Government was held on Wednesday, November 28, 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. Co-Chair Senator Damon Thayer jointly chaired the meeting with Representative Cherry.
Present were:
Members: Senator Damon Thayer, Co-Chair; Representative Mike Cherry, Co-Chair; Senators Walter Blevins Jr., Jimmy Higdon, Gerald Neal, R. J. Palmer II, and Dorsey Ridley; Representatives Linda Belcher, Kevin Bratcher, Dwight Butler, Larry Clark, Leslie Combs, Tim Couch, Will Coursey, Danny Ford, Derrick Graham, Mike Harmon, Melvin Henley, Martha Jane King, Jimmie Lee, Lonnie Napier, Sannie Overly, Tanya Pullin, Tom Riner, Bart Rowland, Steven Rudy, Sal Santoro, John Will Stacy, Tommy Thompson, John Tilley, Tommy Turner, and Brent Yonts.
Guests: David Draine, Pew Center on the States; William Thielen, Kentucky Retirement Systems; Representative Susan Westrom; David Meade; and Jonathan Shell.
LRC Staff: Judy Fritz, Kevin Devlin, Brad Gross, Alisha Miller, Greg Woosley, and Peggy Sciantarelli.
Recognitions
The committee recognized Senator Thayer for his election as new Majority Floor Leader in the Senate, effective in January 2013. Representative Ford and Representative Napier welcomed David Meade and Jonathan Shell, their successors to represent House Districts 80 and 36, respectively.
Representative Cherry recognized individually a group of students from the Kentucky Junior Historical Society who are his constituents in Crittenden and Livingston Counties.
Approval of Minutes
A motion to approve the minutes of the October 24, 2012, meeting was adopted without objection.
Task Force on Kentucky Public Pensions: Status Report
Senator Thayer explained that the Task Force on Kentucky Public Pensions, co-chaired by Representative Cherry and him, was created by enactment of HCR 162—sponsored by Representative Cherry—in the 2012 Regular Session. On November 20, the Task Force adopted recommendations to reform Kentucky’s pension system. The Kentucky Teachers Retirement System was not included in the Task Force’s studies. He expressed thanks to members of the Task Force, which included several members of the State Government Committee; LRC staff who worked with the Task Force; and the Pew Center on the States (PEW) and the Laura and John Arnold Foundation (LJAF), which provided input and assistance throughout the process.
Present from PEW were David Draine, lead researcher on public sector retirement systems, and Michele Evermore, Project Manager for State Policy, States’ Public Sector Retirement Systems. In appreciation for their work with the Task Force, Representative Cherry presented them with membership commissions in the Honorable Order of Kentucky Colonels. Kentucky Colonel commissions were also provided for other PEWand LJAF staff who assisted the Task Force but were not present.
Representative Cherry said he and Senator Thayer are proud to present a consensus report based on bispartisanship and compromise. The Task Force chose not to include in its recommendations methods for raising new revenue, although bonding, increasing employee contributions, and other potential revenue sources had been discussed. He proceeded with an overview of the recommendations adopted by the Task Force for inclusion in its final report to the Legislative Research Commission, due December 7, 2012. The overview included a slide presentation entitled “Funding and Plan Design Changes for Kentucky Retirement Systems.” Committee members were provided with copies of the presentation and a matrix style document outlining the proposed changes and how they differ from what is currently in place. Representative Cherry was assisted by Brad Gross, LRC staff.
The recommendations apply to the systems administered by Kentucky Retirement Systems (KRS)—Kentucky Employees Retirement System (KERS), County Employees Retirement System (CERS), State Police Retirement System (SPRS)—and the Judicial Form Retirement System, which includes the Legislators Retirement Plan (LRP) and the Judicial Retirement Plan (JRP).
Proposed changes to KRS:
· Begin paying the full actuarially required contribution (ARC) beginning in FY 2014-2015 for KERS and SPRS;
· Repeal cost-of-living adjustment (COLA) provisions;
· Reset the amortization period to 30 years for KERS, CERS, and SPRS;
· Reemployment after retirement option: Extend required break in employment to two years for retirees who are reemployed on or after July 1, 2013, except require only a one year break for full-time retired hazardous employees who are returning to full-time hazardous employment;
· Pension spiking: Require employers to pay any additional actuarial costs for salary increases greater than 10 percent during the last five years of employment;
· Transparency: Require KRS to establish a web page(s) with information that is easily available and understood by the public regarding its financial and actuarial condition;
· Increase KRS Board membership to 11 (currently nine members): five elected (two from KERS, two from CERS, one from SPRS); five appointed by the Governor (two must have 10 years of “investment experience” as defined by statute and cannot be participating or retired from KERS, CERS, or SPRS); one appointed from a list of three recommended by the Kentucky League of Cities; one appointed from a list of three recommended by the Kentucky Association of Counties; one from a list of three recommended by the Kentucky School Boards Association); and the Secretary of the Personnel Cabinet;
· New plan: Effective July 1, 2013, new hires in KERS, CERS, and SPRS would participate under a new hybrid cash balance plan.
Proposed changes to Judicial Form Retirement System:
· Repeal COLA provisions;
· New Hires: Close LRP and JRP to new participants. Effective July 1, 2013, new legislators and judges would participate in KERS under a new hybrid cash balance plan.
The slide presentation included charts showing the 20-year projected impact on employer contributions (in millions of dollars or percentage of payroll) by retaining the current phase-in schedule and continuing COLAs for KERS-nonhazardous; making the full ARC payment for KERS-nonhazardous with COLAs repealed; and by the continuation or repeal of COLAs in CERS.
Mr. Draine said that for about five years PEW has been studying public sector retirement systems and the fiscal challenge of their costs to states, taxpayers, public workers, and those who depend on public services. PEW has recently begun offering technical assistance to help states understand the options available and the tradeoffs of different approaches. There is no “one size fits all” approach. PEW’s view is that any real set of reforms will include a credible plan for paying off the funding gap over a reasonable time frame; a new plan going forward that is affordable, sustainable, and secure; and the ability to recruit and retain a talented public sector workforce.
Mr. Draine said he thinks the recommendations adopted by the Task Force represent a strong set of reforms for Kentucky. They include a plan to close the funding gap and commitment to pay the required contributions beginning in the next budget cycle. It will not be easy, and it is important that policymakers remain committed. The recommendation to suspend COLAs will help ensure that the funding gap does not widen. The way Kentucky has been offering COLAs has caused the unfunded liability to grow; an employer-provided COLA needs to be paid for before it is offered. However, Kentucky policymakers could consider offering COLAs that would be paid for by the employee—for example, by opting for a smaller benefit at retirement or an increased employee contribution.
Representative Cherry explained elements of the hybrid cash balance plan proposed for new hires and for all new legislators and judges. Mr. Draine said that a cash balance plan would allow costs to be more predictable and transparent, risk would be shared between public employers and employees, and workers would have a portable benefit that they could earn across their entire career.
Representative Belcher said she hopes the recommended two-year break in employment would not apply to retirees who return to work part-time in classified school positions and that she would appreciate that being taken into account when the legislation is drafted. The Co-Chairs said her suggestion is a good one and that it will be considered.
When the issue was raised by Representative Graham, discussion followed regarding reemployment after retirement. William Thielen, Executive Director, Kentucky Retirement Systems, said there are IRS requirements that must be met in order to maintain qualified plan status but that federal law does not specify the length of the required break in service. The Internal Revenue code also prohibits prearranged agreements for reemployment when retiring. If the break in service is violated or it is determined there was a prearranged agreement, current law requires the retirement to be voided and repayment of benefits that were paid out. Senator Thayer said there was some support on the Task Force, but not a consensus, to allow reemployment with suspension of pension payments. Both he and Representative Cherry indicated that opposition to double dipping is mainly an issue of public perception and that there are valid arguments both for and against the practice.
Representative Pullin suggested that longevity in a job might not be encouraged under the hybrid cash balance plan because of its portability. On the other hand, Mr. Draine pointed out that traditional pension plans tend to incentivize experienced and valuable employees to retire when they are still ready to continue their careers so that they will not forfeit benefits already earned.
In response to a question from Senator Blevins, it was explained that the Task Force recommendations do not include any changes relating to service credit requirements.
When the subject was brought up by Senator Higdon, there was discussion of the KRS funding situation and the factors that led to the unfunded liability over the past few years. Representative Cherry said the two prime factors were plummeting investment return and the failure to pay the full ARC. Mr. Gross reviewed an analysis by the KRS actuary of factors responsible for the $5.5 billion growth in the unfunded liability of the KERS-nonhazardous Pension Fund from 2005 to 2011. The pie chart analysis indicated that growth due to investment experience was about $1 billion; COLAs, $995 million; employer rate reductions, $948 million; demographic and salary experience, $371 million; assumption changes, $690 million; benefit changes, $88 million; and other, $1.345 billion. The Co-Chairs requested that copies of the analysis be sent to the committee members’ Annex offices and also to members of the Interim Joint Committee on Appropriations and Revenue for its November 29 meeting, at which Representative Cherry and Mr. Draine will be presenting the Task Force recommendations.
When Representative Overly inquired about potential transition costs to implement the hybrid cash balance plan, Mr. Draine explained why transition costs should not be a concern. Mr. Thielen agreed and said there will not be significant transition costs to move to a cash balance plan. There will be minor additional costs—for employer education, for example—but it would be difficult to provide detailed cost information at this time for the more than 1,400 participating employers. Mr. Thielen also commended the Task Force, PEW, and LJAF for their work and said the KRS Board does not have a problem with the Task Force recommendations. If the recommendations are implemented, he believes they will help resolve the funding problem, and he hopes that KRS will have input regarding the forthcoming legislation. The Co-Chairs assured Mr. Thielen that KRS would have the opportunity to work with LRC staff.
Responding to another question from Representative Overly, Representative Cherry said that the new hybrid cash balance plan would have little impact on the unfunded liability. Mr. Draine explained that paying the full ARC and suspending the COLA will help close the funding gap. Under the new plan costs will be more predictable, and risk will be shared. The goal of the plan was not to offer a less generous benefit but to offer a similarly generous benefit that provides retirement security and shares risk more evenly.
When asked by Representative Ford, Mr. Gross explained that the recommendations do not address how accumulated sick leave and compensatory time would be treated at retirement.
Senator Thayer said that the pension liability is the biggest fiscal issue facing the state at this time and that he is proud of the work of the Task Force and its development of a truly bipartisan, consensus compromise. The recommendations will be drafted as legislation that he will introduce in the Senate.
Subcommittee Report
Senator Thayer, Co-Chair of the Task Force on Elections, Constitutional Amendments, and Intergovernmental Affairs, read a report of the Task Force’s November 27 meeting. The report was adopted without objection.
Recognition of Retiring Members
On behalf of the committee, Senator Thayer presented resolutions honoring the following retiring members: Senator Jensen, and Representatives Belcher, Ford, Henley, Napier, and Webb-Edgington. He extended special thanks to retiring Co-Chair Mike Cherry and presented him with a framed certificate making him an Admiral of the Great Fleet of the Commonwealth. The committee adopted the resolutions without objection, upon motion by Representative Yonts.
Adjournment
With business concluded, the meeting was adjourned at 3:40 p.m.