Call to Order and Roll Call
Thesixth and final meeting of the Task Force on Kentucky Public Pensions was held on<Day> Tuesday, November 20, 2012, at 1:00 PM, in Room 154 of the Capitol Annex. Senator Damon Thayer, Chair, called the meeting to order, and the secretary called the roll.
Members:Senator Damon Thayer, Co-Chair; Representative Mike Cherry, Co-Chair; Senators Jimmy Higdon, Paul Hornback, Joey Pendleton, Dorsey Ridley, and Mike Wilson; Representatives Derrick Graham, Keith Hall, Brad Montell, Marie Rader, Rick Rand, and Brent Yonts.
Guests: Representatives Jim Gooch, Adam Koenig, and Arnold Simpson; David Draine, Pew Center on the States; William Thielen, Kentucky Retirement Systems; and Chris McDaniel.
Approval of Minutes
The minutes of the October 29, 2012, meeting were approved without objection, upon motion by Representative Yonts.
Senator Higdon introduced Senator-elect Chris McDaniel, who will represent Kenton County (Senate District 23) beginning in January 2013.
Proposals for Task Force Final Consideration
The co-chairs presented the package of proposed recommendations to be voted on by the members. A motion by Representative Cherry to formally place the proposals before the task force for consideration was seconded by Senator Hornback. Senator Thayer said that a vote whether to adopt the task force recommendations would be taken upon conclusion of discussion. He also reminded everyone that the task force did not focus on the Kentucky Teachers Retirement System.
The proposed changes, outlined in a matrix style document, apply to the systems administered by KRS (Kentucky Retirement Systems)—Kentucky Employees Retirement System (KERS), County Employees Retirement System (CERS), State Police Retirement System (SPRS)—and the Judicial Form Retirement System, which includes the Legislators Retirement Plan (LRP) and the Judicial Retirement Plan (JRP). Representative Cherry summarized the proposed changes and how they differ from what is currently in place. He was assisted by Brad Gross, LRC staff. The overview was accompanied by a slide presentation entitled “Funding and Plan Design Changes for Kentucky Retirement Systems.” Representative Cherry said that the recommendations were drafted with compromise, and that the final vote hopefully will reflect a bipartisan consensus on what members believe can be passed by the General Assembly in 2013.
Proposed changes to KRS:
· Begin paying the full actuarially required contribution (ARC) beginning in FY 2014-2015 for KERS and SPRS;
· Repeal cost-of-living adjustment (COLA) provisions;
· Reset the amortization period to 30 years for KERS, CERS, and SPRS;
· Reemployment after retirement option: Extend required break in employment to two years for retirees who are reemployed on or after July 1, 2013, except require only a one year break for full-time retired hazardous employees who are returning to full-time hazardous employment;
· Pension spiking: Require employers to pay any additional actuarial costs for salary increases greater than 10 percent during the last five years of employment;
· Transparency: Require KRS to establish a web page(s) with information that is easily available and understood by the public regarding its financial and actuarial condition;
· Increase KRS Board membership to 11 (currently nine members): five elected (two from KERS, two from CERS, one from SPRS); five appointed by the Governor (two must have 10 years of “investment experience” as defined by statute and cannot be participating or retired from KERS, CERS, or SPRS); one appointed from a list of three recommended by the Kentucky League of Cities; one appointed from a list of three recommended by the Kentucky Association of Counties; one from a list of three recommended by the Kentucky School Boards Association; and the Secretary of State Personnel Cabinet;
· New plan: Effective July 1, 2013, new hires in KERS, CERS, and SPRS would participate under a new hybrid cash balance plan.
Proposed changes to Judicial Form Retirement System:
· Repeal COLA provisions;
· New Hires: Close LRP and JRP to new participants. Effective July 1, 2013, new legislators and judges would participate in KERS under a new hybrid cash balance plan.
The slide presentation included charts showing the 20-year projected impact on employer contributions (in millions of dollars or percentage of payroll) by retaining the current phase-in schedule and continuing COLAs for KERS-nonhazardous; making the full ARC payment for KERS-nonhazardous with COLAs repealed; and by the continuation or repeal of COLAs in CERS. When explaining elements of the hybrid cash balance plan proposed for new hires, Representative Cherry said that accrued benefits would remain protected by the inviolable contract but that the General Assembly could change prospective benefits if fiscal circumstances call for it. Upon retirement, employees would be able to purchase an annuity based on the contents of their account.
David Draine, lead researcher on public sector retirement systems, Pew Center on the States (PEW), spoke next. Mr. Draine said the proposals reflect a real attempt by the task force to address the Commonwealth’s pension problems. They include commitment to pay the pension debt owed to Kentucky’s public employees and a new plan that would provide retirement security for workers and greater cost certainty for Kentucky taxpayers. Having the state start to pay the actuarially appropriate employer contribution in the next budget cycle is critical to getting Kentucky’s pensions well funded and closing the funding gap. Not providing employer-paid COLAs until the plans are well funded is key to ensuring that the gap does not widen. Extending the amortization period to 30 years will increase total cost over time but will provide much needed short term relief to cities and counties. Paying off the unfunded liability will require tough choices about finding new revenue or ways to reduce spending in other areas. Kentucky stakeholders have exhibited a willingness to hold policymakers accountable, and their vigilance will be needed when the next budget process commences to ensure that Kentucky adheres to the payment schedule. The proposed hybrid cash balance plan will offer advantages to both workers and taxpayers. Costs will be more predictable, funding crises will be less likely to happen as risks are reduced to more manageable levels, and it will be harder for policymakers to skip contributions. Because benefits will be more portable, retirement security for public workers will not depend on their staying in the same job for the bulk of their working lives. Overall, the task force proposals outline key steps to improve Kentucky’s fiscal footing, offer workers retirement security with a more portable benefit, and ensure that benefits being offered will be sustainable and affordable.
When Senator Higdon asked about the possible prefunding of COLAs in the proposed cash balance plan for new hires, Representative Cherry said it would be up to the legislature to decide whether to set aside funds for COLAs; however, the proposed recommendation is to not provide COLAs until the funding situation improves. Mr. Draine said that given the challenge of paying for the current unfunded liability and that contribution rates already burden state and local governments, it may not make sense to offer employer-paid colas. It might make sense for the legislature to consider an employee-provided cola if it can be offered in a fair and sustainable way. Electing to offer COLAs could be part of the design parameters of a cash balance plan. The co-chairs said that all new legislators and judges would be subject to the hybrid cash balance plan.
Responding to a question from Representative Rand, William Thielen, Kentucky Retirement Systems Executive Director, said that based on conversations he has had with the KRS actuary, it is anticipated that for the foreseeable future the current method of determining the ARC would remain in place. Representative Rand said that the assumptions used in the budget process are critical and that the ARC will significantly impact the budget. Paying 100 percent of the ARC will require a significant amount of growth in revenue—probably the vast majority that can be expected, at least in the short term. The Commonwealth’s budget process currently relies heavily on revenue forecasting provided by the nonpartisan Consensus Forecasting Group that works with the legislature and the executive branch. He suggested that the proposed changes to Kentucky’s pension system include use of an independent entity for determining the actuarial assumptions before they are presented for budgeting purposes. Mr. Draine noted that there is less risk and more certainty when making future projections under a hybrid cash balance design. The co-chairs agreed that Representative Rand’s suggestion has merit and should be considered.
Senator Thayer said he is having the task force recommendations drafted as legislation that he hopes to prefile. Representative Cherry said he would have an opportunity to sign on to the legislation before he leaves the General Assembly.
With respect to double dipping, Representative Montell asked whether consideration had been given to suspending the pension of retirees who return to work. Representative Cherry said it had been discussed, and no consensus could be reached. PEW and LJAF recommended requiring a two-year break in employment, but he would be open to the concept of temporarily suspending the pension.
Representative Montell said he supports the hybrid cash balance concept but has concern about the guaranteed return feature. He suggested capping the employer contribution—as the state of Utah did—at perhaps 10 percent of payroll. If the cost of the guarantee exceeded 10 percent of payroll, the guaranteed return could be reduced accordingly but not go below zero. This would guarantee against a loss and provide a cushion for the system. Representative Cherry said he understands the concern but feels the state is more likely to profit than lose under the hybrid cash balance plan, which is a compromise proposal designed to share risk between employee and employer. Mr. Draine said that if the plan is well funded, there should be thoughtful ways to ensure that employee accounts receive dividends for any excesses, without threatening solvency of the system; conversely, if funding is worse than expected, there should be thoughtful ways to ensure that taxpayers are not overly burdened and employee security is not impaired. Features of the hybrid cash balance plan that are not included in the protected benefit could be modified by the legislature. Senator Thayer said that he had proffered both of Representative Montell’s suggestions in negotiations, but there was no consensus.
Representative Yonts emphasized the need to address the huge unfunded liability and to consider the forthcoming recommendations of the Governor’s Blue Ribbon Commission on Tax Reform. Senator Thayer said the task force recommendation to pay 100 percent of the ARC is aimed at reducing the unfunded liability. He and Representative Cherry explained that a consensus could not be reached with respect to raising revenue through bonding, reducing or eliminating tax exemptions, or increasing employee contributions.
Representative Graham said he believes the proposed KRS board structure should be reexamined. He is concerned that CERS will be represented by four of the 11 KRS board members under the new structure and also feels that selection of board members should be more diverse regionally. Representative Cherry said those ideas are viable. He noted that language regarding the gubernatorial appointees that must have 10 years of investment experience will stipulate that those members come from nonemployer sources. Answering another concern of Representative Graham, he said that the legislation would include language to protect funds designated for pension reform.
Representative Graham said he views the recommendations as a guideline for pension reform and that voting for them today would not necessarily infer support as they proceed in the legislative process. He also stated that creation of the hybrid cash balance plan should include a program to educate employees about the annuity benefit before they near retirement age. Representative Cherry agreed and suggested that employees should be incentivized to choose the annuity option. Mr. Draine said that the annuity is core to the hybrid cash balance plan design but that other ways of withdrawing benefits could be decided by the legislature.
When Senator Wilson asked about pension spiking with respect to legislators who leave the General Assembly for jobs in state or local government, Senator Thayer said it is the task force’s recommendation that all new legislators and judges be required to participate in the new hybrid cash balance plan. However, this would not preclude consideration of separate legislation that might go beyond what the task force is recommending.
Vote of the Members
The task force voted to adopt the recommendations, as presented by Representative Cherry and outlined in the aforementioned matrix document, by a roll call vote of 11 yeas and one nay. As a nonvoting ex officio member of the task force, Representative Rand did not vote.
Explaining his yes vote, Representative Graham said he does not agree with all the recommendations but views them as a working document that can be improved during the legislative process. Some of his concerns relate to funding and KRS board membership.
Explaining his nay vote, Senator Pendleton said he understands that the recommendations are a work in progress, but he is concerned about eliminating retiree COLAs. If he were not leaving the General Assembly in January, he would probably vote to move the document on for further consideration. However, based on his concerns and input from his constituents, he feels he must vote no at this time.
Senator Ridley explained his yes vote. He said that pension reform is a complicated issue affecting many lives. The recommendations attempt to protect current retirees and employees, while also creating a hybrid cash balance plan for future hires. The task force report is a bold statement that addresses what he would term as Kentucky’s version of the “fiscal cliff.”
Explaining his vote, Representative Cherry said he had received many e-mails with the primary message being “protect my pension.” In his opinion, that is what his yes vote does, and he feels, without a doubt, that passage of the task force recommendations will protect the pensions of employees and retirees.
Senator Thayer explained his yes vote. He said this is a red letter day for Kentucky because the task force is taking action that has not been done before. He has received many messages from state employees and retirees and the taxpayers who fund public pensions. He believes there is general understanding that changes are necessary to prevent the system from becoming insolvent within the next four or five years. The recommendations do not go as far as he would like, but it is a consensus plan. It is the result of compromise, developed by the co-chairs with direct input from members of the task force. It is his fervent hope that there will be a serious attempt to implement the reforms in the 2013 regular session, without acrimony or divisiveness. It is imperative that pension reform be addressed without delay.
Senator Thayer expressed appreciation to the staff of PEW and LJAF for their continuing assistance and commended the task force staff. He thanked the individuals and organizations who testified, members of the task force, and also other members of the General Assembly who participated in the meetings. He thanked his co-chair and friend Mike Cherry for working in a bipartisan and consensus-building fashion and for his serious commitment to pension reform throughout his career as a legislator.
Senator Thayer said the adopted recommendations will be presented at the next meeting of the Kentucky Association of Counties and to the Interim Joint Committee on State Government and the Interim Joint Committee on Appropriations and Revenue.
Without objection, Senator Thayer declared that task force staff is authorized to include the recommendations in the final report of the task force, subject to review and approval by the co-chairs; and the co-chairs are authorized to sign off on the final report, to be published and delivered to the Legislative Research Commission by the mandated deadline of December 7.
With business concluded, the meeting adjourned at 2:48 p.m.