The financial crisis of the state workers pension fund was addressed during the spring session of the Kentucky General Assembly. Therefore, House Bill 358 was passed after several amendments - but was vetoed by Gov. Matt Bevin.
HB 358 originally provided that post-secondary education institutions could stop participation in the Kentucky Employees Retirement System (KERS) by paying the costs of stopping their contributions. That same bill also allowed mental heath facilities, health departments, domestic violence shelters, rape crisis centers, child advocacy centers, state supported universities and community colleges to also choose to continue or end their participation in the program. Those continuing in the program would contribute 49.47 percent of payroll for the fiscal year 2019-2020 (July 1, 2019 to June 30, 2020).
The bill was introduced in the House of Representatives on Feb. 13, then underwent a second reading on Feb. 21. On Feb. 28, the bill with some amendments was given to the Senate and had a second reading for approval on March 12. After two sessions the bill passed 26-11 in the House Free Conference Committee, then passed 58-39 on March 28.
The bill was delivered to Bevin on April 9, and was vetoed.
Revisions to the HB 358 included the first changes, proposing that only new hires to post-secondary education institutions could not participate in KERS.
The second amendment abolished the provision for post-secondary institutions to withdraw from KERS, and added that the Public Pension Oversight Board would study the quasi-government employers (health departments, mental health, crisis centers, etc.) and submit their findings by Nov. 27, 2019. It also allowed the 49.47 percent employer contribution rate to remain the same, rather than the proposed 84 percent of payroll. A Senate proposal to that section added rates to the terms to withdraw from KERS if those agencies paid off shall not be less than 3 percent if the quasi-government is paying by installments and 4.5 percent if made in a lump sum. Employers wishing to withdraw were also prohibited from participating in KERS after June 30, 2020 but be a part of a "defined contribution plan" by the employer. However, state workers would still be eligible to pay into the Kentucky Employees Health Plan (KEHP) through their employers.
Mark Hensley, director of the Laurel County Health Department, said agencies defined as "quasi-government" agencies had responded to the bill during the Kentucky Health Departments Association meeting in May.
"In essence, we acknowledged that KHDA as an organization supported the bill because it provides the reprieve that many of our members need plus the option to protect our Tier 1 and Tier 2 employees," Hensley said.
Hensley provided the following recommendations from that conference to address HB 358:
The Problem: Quasi-Pensions April 2019
● Pension contribution requirements have increased to the point that quasi-governmental agencies (other than the regional universities) will no longer be sustainable if required to pay the expected increase to 84% of payroll. The end result would be greatly reduced access to the needed service they provide. They can’t afford to stay in.
● Proposals thus far, including those found in 2019 Regular Session’s HB 358, that provide a way out of the retirement system for these agencies are so costly to pay the unfunded liability that it would cause the same effect. They can’t afford to get out.
● Quasi-governmental agencies provide legally mandated, critical services to the vulnerable citizens of the Commonwealth. Without these agencies, the responsibility to provide these mandated, critical services would fall back on state government. Most of these services would not be picked up by private providers. Kentucky can’t afford to lose them and their services.
1) Must be affordable to ensure continued access to needed services:
a) A one-year freeze in the required contribution rate at 49.47% of payroll starting July 1, 2019, to allow for implementation of this transition.
b) Sustain the line item appropriation in future budgets and allow Quasi-Governmental agencies to use the funds as a portion of the employer contribution if staying in the pension system or use the funds as a portion of the payments if getting out of the pension system.
2) Allow quasi-governmental agencies to:
a) Stay in the system: Allow Quasi-governmental agencies to pay the normal cost rate as outlined in the 2018 KRS Summary Annual Financial Report for the employer’s pension and insurance contribution (average rate of 10.46%). Allow agencies to utilize level dollar funding to pay off unfunded liability (based on each agency’s individual experience) over a 30-year term. OR
i) Maintain the current contribution rate of 49.47% for SFY ‘20. Involuntarily cease
participating in the system utilizing a level dollar funding model to pay their distinct unfunded liability based upon their actual experience over a 30-year period. OR
ii) Through attrition and retirements, gradually move all current employees out of KERS and into a defined contribution retirement plan over the next 5 state fiscal years. Pay the current contribution rate of 49.47% during SFY ‘20 (7/1/19 - 6/30/20). The employer contribution rate shall not increase by more than 1.5% of the previous payment amount per year during the remaining (4) state fiscal years. At that time, involuntarily cease participating in the system utilizing a level dollar funding model to pay their distinct unfunded liability based upon their actual experience over a 30-year period.
● Quasi-governmental agencies have very different business models, revenue sources, and statutory or contractual obligations than regional universities. Their respective solutions should reflect that.
● Solutions must be affordable. Paying roughly 50%+ of payroll just for retirement benefits is not sustainable. The norm in the private sector is a 3% or less contribution to a 401K or 403B plan.
● An additional one-year freeze is critical. Even with the current freeze Quasi-governmental agencies contributed roughly 135 million towards the unfunded liability in the past year.
● Solutions must protect the current retirees from any inviolable contract violations.
● Unfunded liability determinations:
— Must be based on the individual agency’s experience and not the last employer rule; and
— Must NOT include the unfunded liability costs associated with employees hired by
quasi-governmental agencies on behalf of the Cabinet for Health & Family Services or
any other agency in the Executive Branch.
● Solutions must protect Tier I & Tier II employees with long years of service. Any solution that
would force these employees to leave quasi-governmental agencies and work for state government in order to protect their retirement would cause significant harm to the workforce and the services that rely on that workforce.
● Revised timeline - allow Quasi-governmental agencies to make determination by June 30, 2020 and effective date of decision December 31, 2020.
● Quasi-governmental Agencies must have agency specific unfunded liability data prior to being required to make the decision to stay in or to exit the system.
● An exit plan that includes a 1.5%/year increase in payments on the unfunded liability is unaffordable.
● If the appropriation is reduced, then the unfunded liability payment is reduced on a dollar for dollar basis.
● Quasi-governmental agencies cannot put up collateral for the payoff of the unfunded liability. Operationally this would leave these agencies with zero ability to obtain any type of financing for any other project/item throughout the term of the pay off.
● Majority of funding of some Quasi-Governmental Agencies comes from state funds. There remains uncertainty regarding whether these funds can be used for pension liability if the Quasi-Governmental Agency exits the system.
● For Quasi-Governmental Agencies which receive grants that are or include federal funds, those funds can be used for an employee benefit (IE pensions), though there is some question about how much, but it cannot be used for a debt or a payment of a liability. This must be taken into consideration for agencies exiting the system but also for those staying in if the system moves to a level dollar funding mechanism.
Supported by the following organizations on behalf of the quasi-governmental agencies in Kentucky and the children, adults, and families they serve:
● Kentucky Health Departments Association
● Kentucky Health Resources Alliance (CMHC Association)
● Kentucky Association of Regional Providers (CMHC Association)
● Kentucky Coalition Against Domestic Violence
● Kentucky Association of Sexual Assault Programs
● Children's Advocacy Centers of Kentucky