Call to Order and Roll Call
The third meeting of the Interim Joint Committee on State Government was held on Wednesday, October 28, 2015, at 1:00 PM, in Room 154 of the Capitol Annex. Representative Brent Yonts, Presiding Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Joe Bowen, Co-Chair; Representative Brent Yonts, Co-Chair; Senators Julie Raque Adams, Ralph Alvarado, Stan Humphries, Christian McDaniel, Morgan McGarvey, Albert Robinson, and Damon Thayer; Representatives Johnny Bell, Kevin Bratcher, John Carney, Leslie Combs, Will Coursey, Jim Gooch Jr., Derrick Graham, David Hale, Mike Harmon, Kenny Imes, James Kay, Mary Lou Marzian, David Meade, Suzanne Miles, Phil Moffett, Brad Montell, Darryl Owens, Tom Riner, Steven Rudy, Sal Santoro, Kevin Sinnette, Diane St. Onge, Tommy Turner, and Ken Upchurch.
Guests: David Byerman, Legislative Research Commission; Bill Thielen, Kentucky Retirement Systems (KRS); Beau Barnes, Kentucky Teachers’ Retirement System (KTRS).
LRC Staff: Judy Fritz, Alisha Miller, Karen Powell, Greg Woosley, Kevin Devlin, Terrance Sullivan, and Peggy Sciantarelli.
Approval of Minutes
The minutes of the September 23 meeting were approved without objection, upon motion by Senator Bowen.
Discussion with the LRC Director
David Byerman, Director, was invited to speak about his ideas and vision for the future of LRC. Mr. Byerman said he wants to change the way LRC interacts externally as well as internally. He views academia as an important partner with LRC and plans to visit all of the state universities. He stated that there is a lot of work to do and some serious issues that need to be addressed in an expeditious manner. He invited legislators to give him ideas and feedback and asked for their patience. At an agency wide meeting on his first day he advised staff that change is coming but that it will take time.
The director’s primary focus at this time is to prepare for the 2016 legislative session. He does not plan to institute new policies and procedures that might imperil the ability to have a good session. However, he stated that there are things he can do now to begin altering the agency’s direction, to build morale, and to deliver on the promise of change. He has directed staff to post all job openings, other than those unique to only one individual, and there is a link on the LRC home page designated for career opportunities. There has been a dramatic increase in the number of positions posted, including some senior positions that will be filled in the next couple of months. The assistant director for human resources is retiring, and that position is being renamed “assistant director for human resources and professional development.” The new human resources hire will be responsible for training. He stated that staff needs more professional opportunities to grow and develop.
Mr. Byerman said he has invited all staff to meet with him one on one, and he has had 35 meetings so far with staff representing a wide cross section of the agency, but not many senior management staff. Concerns from staff have been raised, but the meetings have reflected a spirit of cooperation and collaboration. Public Information staff is working on an internal newsletter geared toward employees. The first issue should be ready before Thanksgiving. The director stated that he has held weekly staff meetings with his senior staff for the last four weeks and that he will be convening a meeting with all supervisors in mid-November. An atmosphere of internal communication is being encouraged, and there is a need to better disseminate information across the agency. He recently e-mailed all staff regarding a new standard for responding to e-mail, termed the “One Day Response Time Guarantee.” For e-mails containing a specific request or question, staff is asked to at least send an acknowledgment within one business day. A new personnel policy manual is being drafted and will be submitted for approval at the December meeting of the Commission. That manual will not address pay equity or position classification. Discussion of those and other serious matters, and implementation of solutions, will be first priority after adjournment of the session.
Mr. Byerman displayed a “We Are LRC” poster signed by many employees and said he senses optimism among them. His office is geared toward serving two constituencies—LRC staff and members of the General Assembly—and, by extension, the residents of Kentucky. He will be soliciting feedback from legislators in the coming months on how to best move forward. He is confident that significant changes will be made and that agency problems will be solved.
Representative Yonts commended Mr. Byerman for improving communication within the agency and for prioritizing the key issues of personnel policy and pay structure.
Representative Graham suggested that it would be beneficial for the director to meet with employees in their own work space, as well as in the front office. Mr. Byerman agreed and said this is recommended in the NCSL report. He has been in the Annex a lot during his first month. He feels that even informal hallway conversations are important and can provide valuable perspective and feedback. He plans to begin working two or three days a week from a satellite office in the Annex, beginning next May or June.
Representative Graham said he has an ongoing concern about the disparity in LRC salary levels and the need to place more women and minorities in higher positions. He hopes these will be priorities of the agency and the new human resources assistant director. Mr. Byerman said he will be filling vacancies for some of his senior management team, including a budget director who is familiar with the process in Kentucky, and a general counsel who is a member of the Kentucky Bar and knowledgeable about the Kentucky Constitution. The director will “cast a wide net” to fill the human resources assistant director position, and he has sought the help of former colleagues in other state legislatures to identify well qualified prospects for the position. The person hired for this position needs to be dynamic, with the ability to help craft personnel policy. Diversity in hiring is important to him also, and it is his goal to have a workforce in LRC that is reflective of the population. His workforce in Nevada reflected that state’s diverse population.
Representative Kay said he believes LRC staff are encouraged at the new direction being taken regarding personnel policy, transparency, and the compensation system. He attempted to address these issues when he introduced HB 262 in the 2015 regular session. He asked the director whether these issues will be assigned to a team of upper management staff or to the new assistant director for human resources and professional development, and whether an outside consultant will be brought in to help. Mr. Byerman said he has not yet determined whether to ask the Commission to hire an outside consultant. He plans to attend a NCSL conference on human resources next week that will include staff from 25 states—typically human resource directors for state legislatures. State of the art for personnel management is his goal as director. He is not going to delegate to the assistant director for human resources and professional development the task of developing new policy on position classification and compensation. The assistant director may be the lead person, but the work that is produced will be the result of collaboration between Mr. Byerman and the assistant director. He said he addressed similar issues during his tenure in Nevada and that it takes time for such a transition. Expertise from NCSL and SLC will be solicited in order to identify best practices.
Representative Kay said that some LRC support staff do not want to be referred to as secretaries. During orientation for legislators, the question was raised whether that title is appropriate in modern administrative terms. He encouraged the director to look at questions like this relating to staff. Mr. Byerman agreed that LRC should take a modern approach to nomenclature and position titles. He would like to do this in a way that is interactive with staff.
Representative Riner expressed concern that salaries in the past had sometimes been based on favoritism. He asked whether he and some of his friends on staff could meet with the director to share their information. Mr. Byerman said he needs all the help he can get and welcomes such meetings. He came to LRC with no prior allegiances or preconceptions and wants to learn what the issues are.
Representative Yonts asked whether future policy regarding salaries will address the issue of compensatory (“comp”) time. Mr. Byerman responded affirmatively. He said there should be accountability for the amount of comp time that is awarded to an individual or team of employees. He is not sure how to structure that at this time, but the process should be objective transparent that people understand the reason behind awards of comp time.
There were no further questions, and Representative Yonts thanked Mr. Byerman for his testimony.
Kentucky Retirement System Funding Proposals
Bill Thielen, Executive Director, Kentucky Retirement Systems, discussed the projected increase in rates and dollars that will be needed to fully fund the actuarially required employer contribution (ARC) in FYs 2017-18. He said it is only an estimate at this point because the actuary is still working on the FY 2015 evaluation, which will be reported to the board of trustees at the December 3 meeting. At that time the board will set the two-year employer contribution rate for the Kentucky Employees Retirement System (KERS) and the State Police Retirement System (SPRS). The current rate for KERS-nonhazardous is 38.77 percent of payroll. It is projected to rise to 45.46 percent in 2017 and 45.8 percent in 2018. The current rate for KERS-hazardous is 26.34 percent of payroll; it is projected to decrease to 24.13 percent—a savings of approximately $2.5 million. For SPRS, the increase to fully fund the ARC would be about $6 million. The rate would increase from 75.76 percent of payroll to approximately 86.71 percent. The total projected increase for KERS and SPRS is $130.4 million.
The total projected increase to fully fund the County Employees Retirement System (CERS) is projected to be about $34 million for the next biennium, spread across almost 1,500 participating employers. The rate for CERS-nonhazardous is projected to increase from 17.06 percent to about 17.89 percent. The CERS-hazardous rate is expected to decrease slightly—from 32.95 percent to 32.91 percent.
Responding to Representative Yonts, Mr. Thielen confirmed that the projected increase of $130.4 million for KERS and SPRS is over and above the additional $100 million that was appropriated for FY 2015-16 to fund the ARC at 100 percent. In 2014, the ARC was funded at only 57 percent.
Responding to questions from Representative Montell regarding the unfunded liability, payroll growth, and accuracy of the projections, Mr. Thielen said that the KERS-nonhazardous pension plan is the major problem. At the end of FY 2014, it was funded at 21.7 percent. Even with 100 percent payment of the ARC and 7.5 percent investment return, actuaries have projected that the funded status will drop to about 15 percent and not start to rise until after seven years. He believes the projections are accurate. The board recently changed a number of important assumptions based on a five-year experience study. The payroll growth assumption was reduced from 4.5 percent to 3.5 percent, and that is a long-term projection. The assumed investment rate of return assumption has been reduced and the mortality table extended to account for the fact that people are living longer.
Senator McDaniel said that investment return was only two percent this past year, while the assumed rate of return was 7.5 percent. He asked what size cash infusion would be needed to permit a more liquid investment strategy for KERS-nonhazardous. Mr. Thielen said that KRS invests differently in that plan, not choosing long-term investments that may lock up the money for 8-10 years. Any infusion of money into KERS-nonhazardous over and above the ARC would help the cash flow situation. The actuary did an analysis of yearly bonding in the amounts of $250 million, $1 billion, $2 billion, $3.5 billion, or $5 billion. Bonding of $1 or $2 billion had little impact; bonding at $5 billion would only raise the funding level into the 53-58 percent range. A series of small bond issues over a period of years would improve cash flow, but it would take several years to reach the point where long-term investments would be feasible.
Responding to another question from Senator McDaniel, Mr. Thielen said that the Kentucky Communications Network Authority, a new state agency, has been approved by the board to participate in KERS-nonhazardous, pending issuance of the required executive order by the Governor. At this time no employees of the new agency have joined KERS. He agreed with Senator McDaniel that the influx of new employees brings cash into the system in the short term but also increases the ARC dollar amount and long-term liability of the system.
Responding to questions from Representative Moffett, Mr. Thielen discussed the current 30-year amortization period to fund the ARC in the KERS-nonhazardous plan. He also explained that when more employees retire than expected, it adds to the system’s liability and the need to increase the ARC. The 1998 retirement window legislation that increased the retirement factor for certain employees, the downturn in the economy, and the lack of cost-of-living increases for state employees have all led to higher than usual retirement rates.
Representative Moffett said the pension crisis was a primary motivation for him to run for office. Employees and retirees are worried about their pensions, and he views Mr. Thielen’s recent 25 percent salary increase as a “slap in the face” of KERS members. In response, Mr. Thielen said he announced last April that he would retire at the end of 2015, after serving as executive director for nine and one-half years, but agreed to stay during the 2016 legislative session if needed. To fill his position, the board hired a national executive search firm that was used previously by the board. The search firm indicated it would be a difficult hire because of location, because the position was significantly underpaid compared to other public pension plans, and because of the funding and other problems facing KRS. For two months the search firm solicited applications. Three internal applications were received. Five applied from outside Kentucky—a tax commissioner, a development corporation finance officer, a city comptroller, a benefits attorney with a research organization, and an ex-city pension plan executive director who had had negative publicity nationally. The board decided that no applicants were suitable and asked Mr. Thielen to consider staying. He said it was not an easy decision and that he would not have stayed at the same salary level. The consultant advised that the salary would have to be in the $200,000 to $230,000 range in order to attract qualified applicants. The board accepted the suggested salary level, and Mr. Thielen agreed to stay as executive director. A person not experienced with the system or the Kentucky legislature could probably be hired at a lesser rate, but he stated that KRS is a complex system that is facing numerous problems. The KRS staff are hardworking and dedicated, and Mr. Thielen said he is hopeful that within the next 30 months he can help the system reach the point where KRS is not in a problematic situation.
When Representative Moffett said he hopes transparency will increase, Mr. Thielen said that KRS is probably as transparent as any public retirement system in the country. KRS has changed its investment reporting. In the past, fees were not reported as line item amounts but were netted against investment activity like in other public pension plans. The fees are now reported as separate line items for every manager. He stated that the board passed a resolution last Friday requesting an independent comprehensive audit, to be initiated and paid for outside of KRS with funds separately appropriated. A host of audits, studies, inquiries, and investigations in the past have found no significant problems. Although it will burden staff resources, KRS is willing to undergo another comprehensive audit.
Representative St. Onge said she is stunned that the KRS board would recommend such a large salary increase for Mr. Thielen, and she believes it was poor judgment on his part to accept it. The funding problem occurred during his tenure, and the problem is still there.
When Representative Yonts asked whether the funding level floor had once been projected lower than 15 percent, Mr. Thielen said he believes 15 percent is the current lowest projection. It might have been lower though prior to passage of House Bill 1 in 2008 and the changes enacted by Senate Bill 2 in 2013.
Senator Bowen said he had publicly voiced his concerns about the pay increase. He asked whether the KRS board members on the search committee had interviewed any applicants for the executive director position, and Mr. Thielen said that none were interviewed.
Senator Bowen said he will introduce legislation in 2016 to increase oversight of the pension systems and that Representative Harmon will introduce similar legislation in the House. The bills will add four nonvoting legislative members to the KRS and KTRS boards, thus enabling the legislative members to gain important knowledge early in the process. In the past, the legislature has had to react rather than act on problems in the retirement systems. The legislation will make all future appointed KRS and KTRS board members subject to Senate confirmation. This will create a system of checks and balances and ensure that board memberships conform to the law. The legislation will also remove the KRS and KTRS exemption from the Model Procurement Code, and any contracts entered into by those agencies will be subject to review by the legislature’s Government Contract Review Committee. This process has worked well for other state government agencies, and the same level of transparency should extend to KRS and KTRS. Mr. Thielen responded that it is up to the General Assembly to decide the framework, requirements, and standards relative to the systems. It is the duty of KRS, and his duty as executive director, to provide the General Assembly with the information needed to make decisions. KRS has strived to do that and will continue to do so.
Representative Kay said it is not his intent to tear down or attack Mr. Thielen but feels he must stand up for the many state employees he represents. He respects the job of the KRS executive director and its challenges, but such a large pay increase looks bad at a time when state employees may not be getting a five, three, or even one percent raise in the next budget cycle. Those employees, who work hard and deserve a raise, are worried about the pension system that is managed by Mr. Thielen. When things like this happen, it is more difficult for them to trust in the system.
Representative Harmon thanked Senator Bowen for reaching out to him to file the 2016 legislation. He said his constituents are concerned, and for quite some time he has been calling for a full performance audit for both KRS and KTRS. The bills will be a good first step toward diagnosing and fixing the funding problem. The systems need to be fully funded—though not through bonding but through recommended ARC payments.
There was no further discussion, and Representative Yonts thanked Mr. Thielen.
Kentucky Teachers’ Retirement System Funding Proposals
Beau Barnes, Deputy Executive Secretary of Operations and General Counsel, Kentucky Teachers’ Retirement System, discussed the KTRS budget request for the 2016 regular session. He said the numbers he will provide are preliminary estimates. The KTRS accounting department is working on final numbers, which should be available soon.
Ms. Barnes said the fixed employer contribution rate of 13.105 percent is paid through the SEEK (Support Education Excellence in Kentucky) funding formula as part of the Kentucky Department of Education’s budget request for school districts. It is currently funded at $372 million in FY 2014-15 and $380 million in FY 2015-16. For the new biennium, the employer contribution is projected to be $388 million for FY 2017 and $395 million for FY 2018.
The KTRS budget request for the next biennium includes three significant items. As a result of 2010 shared responsibility legislation, active and retired teachers and school districts are paying part of the health insurance cost for retired teachers. The commonwealth’s share of that cost is projected to be $76 million for FY 2017 and $83 million for FY 2018. Another portion of the KTRS budget request is a special appropriation for past benefit adjustments such as sick leave and old COLAs that are going away—referred to as green box dollars. The green box dollars are estimated at $114 million for FY 2017 and $112.7 million for FY 2018. The combined totals for retiree health insurance and green box dollars are estimated at $190 million for FY 2017 and $196 million for FY 2018. Thirdly, KTRS will need additional funds to maintain the pension fund on an actuarially sound basis. It is projected that an additional $520 million is needed for FY 2017 and an additional $488 million for FY 2018.
Representative Carney said he hopes the KTRS board will support legislation prefiled by Representative Montell—and co-sponsored by many of their colleagues—that would, in the future, direct that surplus monies in the public employee health insurance trust fund be transferred to the KRS and KTRS pension funds. Mr. Barnes said he does not normally speak on behalf of the board but feels safe to say that any bill that would provide additional funding for the teachers’ pension fund would be greatly appreciated.
When asked by Senator Bowen, Mr. Barnes clarified that the reduction in projected green box dollars reflects that the old COLAs will be paid off. There have been no changes in sick leave benefits, so the two-year preliminary budget request includes the estimated cost of the sick leave benefit.
Responding to questions from Representative Yonts, Mr. Barnes said that if SEEK formula funding from the Department of Education budget is included, the total appropriation for KTRS is projected to be a little under $1.1 billion in the first year of the biennium and a little over $1.1 billion in the second year. Funding needs have reached a critical point. In order to pay retirement benefits, KTRS sold about $650 million in assets last year and will have to sell about $755 million in assets in the current fiscal year. It is projected that about $845 million in assets will have to be sold in FY 2017 and about $940 million in FY 2018. If nothing changes, under the new GASB (Governmental Accounting Standards Board) accounting rules, the system will be depleted in about 20 years. The unfunded liability is increasing about $1 billion each year.
Responding to Representative Meade, Mr. Barnes said that the ratio of active to retired teachers currently is approximately 5:4. It has not been 2:1 for quite some time. It is approaching 1:1 but will eventually flatten out, which is the general trend in all maturing retirement systems. He does not recall what the ratio was 15 or 20 years ago but will be glad to get that information.
When Representative Meade asked whether the plan is sustainable as now designed, Mr. Barnes said the plan itself is sustainable. The cost for a new teacher entering the system is about $6.57 for every $100 of teacher salary, and that is sustainable. What is not sustainable is the unfunded liability. As of June 30, 2014, KTRS had only 53.6 percent of the assets needed to pay for benefits that have already been earned.
Responding to Senator Thayer, Mr. Barnes said that KTRS funding needed for FY 2017 is projected at $76 million for medical insurance, $114 million for green box dollars, $35 million to cover shortfalls, and $388 million from the SEEK formula (Department of Education budget). This represents a total of about $600 million and does not include the additional $520 million requested to address the unfunded liability. Senator Thayer said he wants everyone to understand the enormity of the amounts requested, which are separate from increased funding needs in other areas of the commonwealth budget. He said that a surplus of money does not exist in the commonwealth, and he cautioned everyone to be careful about making any funding promises relative to the next budget.
Representative Carney inquired about activity of the KTRS Funding Work Group. Mr. Barnes said there have been eight meetings so far, with two more scheduled for November 16 and December 3. The final report is due in December. The meetings have been productive, with a lot of discussion. The group has been looking at funding for teachers’ pensions, a possible new benefit tier for new teachers, and retirement benefits for current teachers which are not subject to the inviolable contract.
Representative Carney, who is a teacher, said the principal at his school is retiring and that he expects a mass exodus of teacher retirements in the future, due not only to concern about KTRS funding but also because of legislative and regulatory burdens that have been placed on school systems. Retirement funding is obviously a huge issue, but the legislature needs to look at revamping the education system to relieve some of the burdens teachers are facing.
Answering questions from Senator Bowen, Mr. Barnes said that if KTRS does not use the new GASB standard, the target date when the system could run out of money would be much later than the projected 20 years. KTRS is not obliged to apply the new standard. With regard to selling of assets, KTRS has increased its asset base by about $2 billion since 2013, despite having to sell assets. Investment return has been very good, with an exceptional return of 18.1 percent in FY 2014. Selling assets is a normal part of the investment process, but it is a problem when assets must be sold just to pay bills. KTRS is only 53.6 percent funded and in the current budget cycle is selling about $1.4 billion in assets. The great recession of 2008 presented a buying opportunity, at a time when the system was better funded. By contrast, when the market declined more than 10 percent in September 2015, KTRS had to sell assets at a loss.
Senator Bowen thanked Mr. Barnes and said that the legislature is committed to do its best to help both KRS and KTRS and will continue that commitment. He feels that the legislation which he and Representative Harmon are going to prefile will help everyone work toward that goal in a more collaborative manner.
When asked by Representative Bratcher, Mr. Barnes said he does not have the final numbers, but KTRS paid out approximately $2.1 billion in pension and medical insurance benefits in FY 2015 and about $1.9 billion in FY 2014.
Subcommittee Report
Senator Bowen, Co-Chair of the Task Force on Elections, Constitutional Amendments and Intergovernmental Affairs, read the report for the October 27 meeting of the task force.
There being no further business, the meeting was adjourned at 2:47 p.m.