As legislators head to Frankfort for a special session this Friday, it’s important to be clear about the relative merits of proposals to provide relief from spiking pension costs to quasi-governmental organizations and to address challenges going forward. These “quasis” – health departments, community mental health centers and domestic violence shelters, for example – employ over 9,000 Kentuckians who provide vital services to our communities.
Simply put, BR 11, a new pension alternative from House Democrats, protects employees, quasis and the underfunded pension system in ways the governor’s legislation, BR 19, does not.
The governor’s proposal pressures quasis to leave the retirement system, and incentivizes them to freeze the pension benefits of employees hired before 2014. Thousands of frozen mid-career employees would lose the majority of their pensions and a new 401k-type plan would be of little value by the time they reach retirement age. Many would lose well over $100,000 in net lifetime income.
In contrast, BR 11 would keep quasi employees in the pension system and therefore fully protect their benefits. By respecting the inviolable contract, it would prevent the state from spending much-needed dollars on costly litigation. And by keeping future employees in the defined benefit system, it would help these agencies continue attracting and retaining qualified workers.
Another concern with BR 19 is that it is very expensive for quasis, jeopardizing their sustainability and therefore, their ability to continue providing services. Contribution levels for organizations that choose to stay in the retirement system would spike from 49% of employees’ pay to over 80% next year.
But even if quasis leave the system, which BR 19 encourages them to do, the options they face are unaffordable for many agencies. Organizations would see their initial payments range from an amount equal to 49% of employees’ pay to over 115%, depending on whether they choose to protect benefits for current employees. The dollar amount of those payments would then increase 1.5% each year thereafter for up to 30 years, or until their liability is paid.
In contrast, BR 11 would cap quasis’ contributions at 49% and continue at that percent of pay for only 23 years.
Additional costs for quasis under BR 19 are harmful and unnecessary. BR 11 is much more fiscally prudent and saves the KERS non-hazardous system $706 million compared to the governor’s legislation.
Both proposals cost the Kentucky Employees Retirement System (KERS) non-hazardous pension system $121 million by freezing the contribution level of quasi-governmental organizations for another year. However, the governor’s plan adds another expected $706 million in costs to KERS non-hazardous due to the terms under which quasi-governmental organizations leave the system (and based on how universities and other quasis are expected to respond). These additional costs under the governor’s plan further weaken what is already the poorest funded pension system in the United States.
BR 11 also avoids BR 19’s added risks to the pension system in the future. First, the governor’s plan turns Kentucky Retirement Systems into a creditor that must enforce collection of installment payments by agencies that are no longer part of the system. Second, it takes new employees out of the pension system – removing the payments into the plan they would otherwise make. Pension systems benefit from the cash contributions made from and on behalf of new and younger employees who won’t need their benefits for decades to come. Under BR 19, those quasi employees will instead be contributing to separate 401k-type plans.
By protecting current employee’s retirement security, avoiding costly litigation, maintaining job quality for public servants, keeping new employees in the system, protecting the health of the pension system and safeguarding quasis’ ability to provide vital services, BR 11 is clearly the option that is in the best interest of our commonwealth.
This column ran in the State Journal on July 18, 2019.
