Public Pension Reform - March 29, 2018

On March 29, the General Assembly passed reform legislation which places Kentucky public pensions on a much stronger trajectory.  Unlike every prior legislature that put politics before policy, which many wanted us to do again, we did not leave the issue for another day as some of our pensions systems are nearing insolvency in the coming five (5) years.

 

The crisis of our Kentucky public pensions has been written about at length nationally, and for nearly twelve (12) years the three major credit rating agencies have continued to downgrade Kentucky due primarily to lack of resolve by the Legislature to undertake meaningful reform.  Kentucky has the worst funded public pension system in the country and one of the three lowest credit ratings.  Our trajectory downward could not be allowed to continue.

 

I support the reform legislation which will prevent a collapse of the various pension systems by establishing a fiscally sound funding formula, requiring from legislatures full funding of the systems annually, and making certain that all future public employees will receive retirement benefits through a hybrid plan.

 

The reform legislation makes no change to retirees and little change to existing teachers, and in this respect differs from every other prior proposal over the past six (6) months.  We removed proposed deceases to cost of living adjustments for teachers which will remain now at 1.5%.  We removed all provisions requiring teachers with less than 20 years of service to work longer in order to receive enhanced benefits.  We removed all proposed changes to factoring based on years of service; “high 3” and 3.0 factor remain.  No public employee is forced into a 401(k)-style plan.

 

The only change for current teachers is that sick days accumulated after December 31, 2018 cannot be used to enhance final retirement calculations; sick days accumulated prior can still be used.  This singular change to current teachers is taken directly from the Superintendents’ Shared Responsibility Plan — a measure supported by the Kentucky Education Association (KEA).  Also, at retirement teachers still can “cash-in” all sick days earned before and after December 31, 2018 and receive a check per the policy of local school boards.

 

Teachers hired after January 1, 2019 will have their retirement funded by a “hybrid cash balance plan” administered by the Kentucky Teachers Retirement System (KTRS or TRS), the same system that currently manages teachers’ retirements.  The plan is designed to provide new teachers with a retirement income equivalent to, or in excess of, the current system’s benefits, and new teachers’ retirement contributions will be invested by TRS in the exact same way current teachers’ contributions are invested.  The hybrid cash balance plan has a higher than normal contribution rate of eighteen percent (18%) and a no loss guarantee which means the plan allows participants to realize increases in the stock market, while not suffering from any market downturn.  Finally, unlike the current pension, the plan is portable with the participant and inheritable through the participant’s estate.

 

Benefits at death were modified beneficially.  Much is being made about the supposed $5,000 reduction in death benefits for beneficiaries of state employees.  This is a talking point for those who want to make political points but neglect to mention that the benefit is replaced with a $20,000 life insurance policy.  Still, the death benefit does not even change for those currently invested in the system. Moving forward, this change not only provides a higher benefit, but it also is not taxable income like the $5,000 benefit.

 

This is a well thought out plan that has been analyzed and scrutinized heavily.  It was not rushed, as this legislation has been in the public for weeks in the form of Senate Bill 1.  I would not have voted for anything that I had not read, and the committee substitute simply removed provisions from SB 1 for which I had advocated removal.  While it was not ideal for this legislation to be attached to another bill, this was the only way to proceed on saving the pension system this late in the legislative session.

 

I personally have been studying Kentucky public pensions since 2012 and made pension reform part of my campaign promises.  Meetings have taken place since April of 2017 to talk about the best way to approach this crisis. There have been public meetings since June discussing the steady decline in pension funding over time and solutions to growing liabilities.  Numerous emails, phone calls, town halls, and personal contacts have provided me with wide spectrum of feedback. 


I will continue to push for full pension and education funding in the budget, which we will be finalizing in the coming days.  It is an honor to serve you in Frankfort and a duty I take very seriously.  Below you will find helpful links to documents referenced above, as well as answers to common questions.

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Helpful Links:

SB 151  - Full Text

SB 151 - Summary

SB 151 - Section by Section Analysis

SB 151 - Actuarial Analysis

SB 151 - Death Benefits

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Questions and Answers:

  • Why did tax reform not happen first? 
    • Limited time. Structured debate on public pension reform began more than eight (8) months ago and is just now finishing.  Debate on tax reform has not concluded.  Passing pension reform first also puts pressure on legislators to vote for a tax plan to fund pensions and desired items in the budget that otherwise might not be funded.
  • Was there an actuarial analysis of the bill that was passed?
    • The Actuarial Analysis for this legislation is posted online, in the form of House Committee Substitute 1 to Senate Bill 151.  A link is provided above.
  • Why was the bill “snuck” through at the last minute?
    • It was not “snuck” through.  In fact, this legislation has had more debate and scrutiny than any other bill in the entire session.  The language of SB 151 was exactly like SB 1 but with several requested deletions.  The language had been public for over a month.  Some legislators complaining about not having seen the bill promptly gave lengthy floor speeches about provisions in the bill.
    • Timing was also a factor because only four (4) days remained in the session and it takes at an absolute minimum five (5) days to move a bill from start to finish.  SB 151 was further along procedurally and was used as a vehicle for the language discussed in SB 1 but with certain portions deleted.  New policy was not added via SB 151, but rather certain policies of SB 1 were removed.
  • Why were opponents no allowed to have their voices heard?
    • Opponents were heard, and objections sincerely received.  No other bill has been reported on and covered by the media like this one.  No other bill has undergone the substantial changes as a result of hearing and listening to voices of concern and opposition.
  • If new teachers no longer contribute to the plan, how can I expect the money to be there when I retire?
    • The bill requires far more funding from the Commonwealth than current law requires.   It stops the continual increase of unfunded liabilities and then requires future legislatures to designate substantially more money every time all as the liabilities continue to decrease which over times eases budget restraints.
  • Why no inviolable contract?
    • This is only for future hires.  Binding future legislatures in perpetuity to a contractual obligation when future fiscal and demographic conditions are unknown if bad policy.  This is part of the reason for the current situation.
  • How will this save money? 
    • The original bill was expected to save money with COLA reductions that have now been removed.  
    • This bill will not save nearly as much money as prior versions of the bill.  However, the issue is not just about saving money, it is stopping the growth of unfunded liabilities.  This bill saves some money and places the Commonwealth of a trajectory to decrease unfunded liabilities.
  • What about retiree health insurance for the gap between retirement and Medicare eligibility?
    • This “gap” insurance was restored for retirees by the House and Senate versions of the budget.  I anticipate that it will remain funded in the conference committee’s compromise budget document.
  • What about your legislative pension?
    • Upon taking office on January 3, 2017 I refused to join the legislative pension.  I opted instead to join the KERS (non-hazardous) which was and remains the least funded system at less than fourteen percent (14%) funding.
    • Also, SB 151 reduces the legislative benefit factor from 2.75% to 1.97% for each year of service accrued on or after Jan 1, 2019.
    • Also, SB 151 removes Salary Reciprocity for non-Legislative compensation earned on or after January 1, 2019.
 
 

(C)  2017.  All rights reserved.  Paid for by Jason Petrie Campaign Fund.