KENTUCKY (11/11/12) - With a vote on the state pensions task force’s final recommendations expected by the end of the year and possibly the end of this month, it is important to have an understanding of what the task force—of which I am a member—will be voting on.
I spent last week explaining the state pension system’s unfunded liabilities and the “five routes of reform” suggested by the task force’s consultants from the PEW Center on the States and the Laura and John Arnold Foundation. Along with those suggestions, the consultants provided the task force with three reform packages that we could consider, in all or in part, as we work to address the pension problem in the upcoming 2013 session and beyond. Each package includes combinations of the reform routes that I shared with you last week (changing the employer contribution schedule, suspending all COLAs, issuing bonds, changing employee contribution policies and taxing retirement benefits). Let’s start with Package #1.
The first package proposed by the consultants would require Kentucky to fully fund all plans by 2017 (with the state’s unfunded liability paid off by 2044), the issuance $780 million in bonds for the Kentucky Employees Retirement System non-hazardous plan, an increase in employees contributions in the non-hazardous plans to six percent (nine percent for hazardous plans), elimination of the automatic cost-of-living raise, elimination of double-dipping and spiking of some employee wages, and reduction of the retirement benefit tax exclusion from $41,110 to $25,000 (with public retirement benefits earned before 1998 subject to taxation), among other changes.
Package #2 would require full funding of the state’s actuarial contributions by 2019, issuance of $780 million in bonds for the KERS non-hazardous plan, the same increase as in Package #1 for non-hazardous and hazardous plan employee contributions, and the other recommendations proposed in the first package.
Package #3 would require all plans to pay their full actuarial contributions by 2014 with no bond issue required. It would totally eliminate the retirement benefit tax exclusion, although public retirement benefits earned before 1998 would remain untaxed. The other changes proposed in the other packages would stand.
The consultants from PEW and the Laura and John Arnold Foundation describe the packages as partial solutions to what is a “solvable problem” of managing that state’s pension costs and closing the funding gap. But no matter what package is selected, if any, the state has some hard choices to make. As the consultants told the task force, “...there will remain substantial pension costs that will need to be paid for; policy makers will need to raise additional revenue or find ways to cut costs.”
Doing nothing is not an option. The status quo is projected to require the state to set aside 41 percent of payroll for the KERS non-hazardous pension plan alone (the required employer contribution rates for the other Kentucky Retirement System plans are projected at 20 to 30 percent of payroll). As the consultants explained, “It is important that the task force either pick one of the packages we have laid out of identify a similarly impactful set of reforms for Kentucky to pursue.”
The final recommendation made by the consultants is Kentucky should consider restructuring its public employee retirement benefits into a cash balance plan or stacked hybrid plan. Both offer shared risk between the employee and employer, allow workers to take their benefits with them should they leave the retirement system during their working life and, as the consultants said, “put workers on a sustainable retirement path.” Kentucky’s pension plans are currently defined-benefit, which gives employees a formula-based monthly benefit rather than one based on investment returns. The plan has proven to be financially unsustainable with costs that the consultants say are “neither transparent nor predictable.”
“It is important that the task force either pick one of these plans or identify an alternative approach to ensure that benefits being offered to future workers can provide retirement security while remaining affordable to Kentucky taxpayers,” the consultants go on to say.
The task force is scheduled to meet on Nov. 20, the week of Thanksgiving, for further review and a possible vote on the recommendations. The final report is due by Dec. 7, as I mentioned last week, and I expect legislation will be drafted sometime between Dec. 7 and the start of session on Tuesday, Jan. 8. I will send out another report after the Nov. 20 meeting.
With Election Day behind us, I would like to take a moment to say I look forward to a new legislative term in Frankfort. Thank you for allowing me to serve as your State Representative for the 15th House District!
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