A pension alternative sponsored by Rep. Joe Graviss protects employees, quasi-governmental organizations and the underfunded pension system in ways the governor’s proposed legislation does not. Here’s why the proposal, introduced as HB 2 in the special session, would work better than HB 1, the administration’s plan.
It fully protects the inviolable contract for over 6,000 current employees, and supports retirement security for future employees.
The governor’s proposal pressures quasi-governmental organizations to leave the retirement system, and incentivizes them to freeze the pension benefits of employees hired before 2014. There are over 6,000 such workers at these agencies. 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, HB 2 would keep quasi-governmental 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. In addition, by keeping future employees in the pension system it would allow these agencies to continue using the efficiencies of defined benefit pensions as a tool to attract and retain qualified workers.
It is more affordable for quasi-governmental organizations — thereby better safeguarding the vital services they provide.
Contribution levels for community mental health agencies, domestic violence shelters and other quasi-governmental organizations that choose to stay in the retirement system would spike from 49% of employees’ pay to over 80% next year under HB 1. The governor’s bill encourages them to leave the system, but with options that are also unaffordable for many of these 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.
HB 2, in contrast, would cap their contributions at 49% and continue at that percent of pay for only 23 years.
It costs the KERS non-hazardous system $706 million less than the governor’s plan and avoids added risk.
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). Adding more costs further weakens what is already the poorest funded pension system in the United States.
In addition, the governor’s plan adds more risk to the pension system in the future. First, it 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 adds risk by taking new employees of exiting agencies out of the system. Pension plans 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. Those quasi employees will instead be contributing to separate 401k-type plans under HB 1.
Updated July 19, 2019.