Kentucky needs at least another $1 billion to cover current spending and meet its pension obligations and an outside firm is recommending benefit changes for current and future employees to meet that need — but lawmakers say in the end, they will be responsible for any enacted changes.
The Pension Oversight Board heard Monday the long-awaited report on the state’s poorly funded public pension systems from PFM Group, a financial consulting firm.
Without an additional $1 billion next year, Gov Matt Bevin’s budget director John Chilton said, the state will have no other option but to “adjust benefits” in the pension systems.
Chilton said the pensions are underfunded by $42 billion under the > most recent assumptions about payroll and investment returns but that could be as much as $64 billion if the state computes its returns using the corporate bond index. The most conservative estimate — using the 30-year U.S. Treasury Bond rate — puts the unfunded liability at $84 billion.
Bevin says he will call a special session this fall to enact changes to the pension systems. Originally, he said he wanted lawmakers to address tax reform — presumably to bring in more money — in the same session. But Republican legislative leaders apparently have persuaded Bevin to put that off for the time being, separating the two issues.
Without changes, Chilton said, other state funding will have to be cut 34 percent if such programs as Medicaid and public school funding, called SEEK, are exempted.
If SEEK is included in the cuts, the budget would still require a nearly 17 percent cut.
Such cuts, coming on top of successive annual cuts since 2008 which have reduced many state agencies’ budgets by nearly 40 percent, may be unpalatable to lawmakers. But so may some of the recommendations offered by PFM.
Michael Nadol of PFM told the board that pension fixes like the last one in 2013 represented “nibbling at the edges “of the problem and, “there are no quick fixes,” that it will probably take 30 years of “unpleasant and hard” decisions to fully shore up the plans.
Among the changes PFM is recommending are:
• Freeze existing accrued benefits;
• Basing employee and employer contributions on “hard dollar” calculations of payroll rather than assuming payroll growth;
• Ending the use of unused sick days or comp time days to calculate retirement benefits;
• Conversion of new employees to a 401-K style, defined contribution plan rather than the defined benefit plan guaranteed by the state;
• Placing newly hired teachers on Social Security and into 401-K plans; local school boards would pick up the employer costs of Social Security under the PFM recommendations;
• Increasing retirement ages for all employees — most, including teachers’ to 65 years of age;
• Offering current employees a buy-out option whereby they could roll over their accrued benefits into a 401-K plan;
• And eliminating cost of living adjustments accrued from 1996 through 2012 (the 2013 legislation froze COLAs from that point; PFM and its legal advisors contend the COLAs are not part of the so- called “inviolable contract,” a statutory promise to provide all earned benefits.
The hearing room was packed with public employees, many of them policemen in uniform, and the crowd spilled over into two overflow rooms where people watched by video feed.
Some lawmakers expressed concerns that many state employees are contemplating immediate retirement to avoid benefit cuts before they’re enacted. Chilton assured them Bevin has promised to provide a period of time for employees to evaluate how they may fare under changes before those changes become law.
But when Chilton told the oversight board, “I don’t think the changes being made will create a rush to the door,” many of the policemen laughed audibly. And outside the meeting room, Kentucky State Police officers who provided security were discussing among themselves early retirement.
Still, board Chair Sen. Joe Bowen, R-Owensboro, concluded the meeting by reminding everyone the recommendations are just that but ultimately “it will be up to us as policymakers to craft a fair and workable plan going forward.”
Stephanie Winkler, President of the Kentucky Education Association, seemed confident lawmakers will design less drastic solutions than those recommended by PFM.
“I think this group offered some suggestions that are pretty drastic but wouldn’t do much to help kids and keeping great educators in schools, but we know that legislators are also willing to work with us to create solutions that are sensible,” she said.
Jim Carroll, spokesman for a group of state retirees wasn’t so sanguine.
“We are shocked and disappointed that the PFM report failed to include even a superficial analysis of the contract rights of Kentucky Retirement Systems retirees,” Carroll said. “We will vigorously oppose any efforts to pass a bill that claws back cost-of-living adjustments already earned and already being paid to retiree members.”
Bevin released a statement after the meeting saying the PFM report “confirms the need for urgency” in solving the pension problems and promised to address the problem.