As introduced, the House Budget (HB 500) inserts new and unprecedented language that caps the state’s contributions to employee health insurance, shifting costs to current and former state and school employees. In letters sent to lawmakers and to the 310,000 members of the Kentucky Employees Health Plan (KEHP), the state Personnel Cabinet indicated this cap would create a shortfall in the program of $77 million in 2027 and $202 million in 2028. The Cabinet notes that “there are only two ways to make up the difference: increasing premiums on KEHP members and dependents or decreasing their benefits.”
The scale of cuts required “will have a devastating impact on all KEHP members and their dependents, resulting in a possible 78% increase in employee premiums over two years,” the Cabinet reports. As the letters outline, that includes the following cuts in health benefits:
- Teacher Rank III: -$486.04 per month
- School Bus Driver: -$535.18 per month
- Correctional Officer: -$425.88 per month
- Social Worker: -$425.92 per month
- State Trooper: -$394.34 per month
- State Legislator: -$277.20 per month
- Legislative Research Commission employee: -$239.78 per month
- Administrative Office of the Courts employee: -$477.64 per month
This proposed shift in costs to state and school employees and retirees would be the latest in a series of cuts to the wages and benefits of Kentucky public servants. If passed, it would push many into hardship and severely hinder Kentucky’s ability to attract and retain qualified public employees to deliver critical services. Lawmakers have indicated the budget is a starting point. This cap must be removed before it becomes law.
Many state workers and retirees already pay significant amounts for health care
Employee health insurance is a critical part of an overall compensation package, especially in the public sector where wages tend to be lower than comparable work in the private sector. Kentucky’s plans already require employees and retirees to make meaningful financial contributions. Premiums vary widely based on type of plan chosen, as shown in the graph below. While some workers pay premiums of less than $100 a month, a total of 24% of planholders and 43% of members (which includes spouses and dependents) are enrolled in plans with premiums of at least $337.68 per month. The average premium is approximately $174 per month.
Many of the 54,000 under-65 retirees in KEHP pay even more. A Teachers’ Retirement System (TRS) retiree with 20 or more years of experience pays $292.04 a month for a single LivingWell PPO plan (the most popular option among older planholders) and much more if they would like to cover family members. State government retirees, who are in Kentucky Public Pension Authority (KPPA) plans, pay premiums based on when they started paying into the system, hazardous duty status and years of service. Those who began participating before July 1, 2003 would pay no premium for a single plan if they had 20 or more years of service, but later retirees will pay much larger amounts. Under the existing formula (before applying any price hikes resulting from HB 500), a non-hazardous state retiree with 30 years of service would pay $660.04 a month in premiums for the LivingWell PPO single plan.
Employees, retirees and their families also pay out-of-pocket costs in the form of deductibles and co-insurance that currently average approximately $2,437 per planholder annually or $345 million for all members. Out-of-pocket maximums in the KEHP plans range from $3,150 for singles and $6,050 for families for in-network LivingWell CDHP and PPO plans to $8,300 for singles and $16,650 for in-network costs in the high-deductible plan.
Older and sicker Kentuckians use their benefits more and so incur more of these out-of-pocket costs. In 2023, claims costs per-member, per-month were 67% higher for retirees than for active employees.
KEHP is not an unusual or particularly generous set of plans. The system reports that their plans are cheaper overall than comparable public sector plans according to a benchmark report by Merative. KEHP is 10.6% less expensive on a per-employee, per-year basis than other public plans and 2.2% less expensive on a per-member per year basis (once family members also on the plan are included).
The legislature has taken over $1 billion from the KEHP to balance the state budget
As described above, the cap in HB 500 creates a $202 million shortfall in the KEHP by 2028. But lawmakers have already taken $1.017 billion from the KEHP in recent years to balance the state budget. That money could have been left in the plan to help cover claims and ease any cost increases. Instead, lawmakers are now looking to public employees and retirees to make additional sacrifices to balance the budget.
The practice of taking money out of the employees’ health fund has been regularly reported in news coverage of the budget. State law creates a “public employee health insurance trust fund” that receives employer and employee premiums and other income for the purpose of paying “medical claims and other costs associated with the administration” of the KEHP. As the General Assembly has struggled to balance its budget in recent years, lawmakers have transferred money out of the trust fund using language in the law that says the funds must be used for employee health care “unless authorized by the General Assembly.” If the legislature had not taken this money out to balance the state budget, it would have otherwise been required to stay in the fund to meet its identified purpose.
The health insurance cut is another pay cut in the context of stalled wages and pension cuts
The prospect of a huge cut in employee health benefits should be understood in the context of a lack of raises in recent years for state and school employees. For many years, teacher salaries have failed to keep up with inflation as state funding for public schools has eroded. The average district pay in 2008 for teachers was $46,417, which equals $72,196 in today’s dollars. But average district pay in 2026 is only $59,855, a decline of 17%. In the current school year, 40 school districts provided no raise at all and the majority of districts provided raises of 2% or less.
In addition, many classified school employees make very low wages and would be hit hard by this cut in health benefits. For example, in 2023 the median district paid bus drivers $15,364 a year, cooks/bakers $15,397 and custodians $23,813, according to KyPolicy analysis of Kentucky Department of Education data. Bus drivers would pay an enormous $6,422 more per-year in health insurance under HB 500.
State worker pay has also not kept up. State employees went without any raise for 10 of 12 years through 2021. Meaningful raises were again provided for the years 2022-2026, but not enough to catch up. Pay is also low. Governor Steve Beshear issued an executive order in 2015 raising the minimum wage for state employees and contractors to $10.10 an hour (subsequently repealed by Governor Bevin), but more than a decade later over 1,000 executive branch employees make below that inflation-adjusted level ($13.76 an hour). A full 30% of state hourly workers make less than $17 an-hour. The number of state employees has also declined by nearly one-third since 1991 despite a 23% increase in state population over that period, affecting employee workload and service delivery.
Along with cuts in pay, retirees have experienced cuts in pension benefits—making it that much more difficult to afford the health insurance cuts in HB 500, TRS retiree pensions have been falling in real value for several reasons:
- Pensions are based on the final average salary of teachers in the years before they retire. As salaries have failed to keep up, pension benefit levels have declined with them. New retirees in 2024 had 14% lower pensions on average than new 2016 retirees with the same years of service after taking inflation into account.
- The annual benefit increase given to retired teachers each year to keep up with the rising cost of living (known as a cost of living adjustment, or COLA) is significantly lower than recent rates of inflation, eroding the purchasing power of pensions even further. TRS retirees only receive a 1.5% COLA each year, and do not receive Social Security. A 2006 retiree has lost an estimated 16% of their pension’s purchasing power as a result.
- The value of pensions will decline even more in the future due to a series of reductions made by the legislature in how benefits are calculated. Teachers starting in later years are put in new tiers with lower-quality benefits.
A similar “tier” system of reduced benefits also applies to state workers and retirees, as does degraded benefits due to the impact of the lack of adequate raises on final average salary. And those retirees in the Kentucky Public Pension Authority have not received a cost-of-living adjustment since 2011. A worker retiring that year or earlier has seen their pension benefit lose 55% of its value as a result.
