Gov. Matt Bevin has released a much-anticipated draft of a bill that would make massive changes to the state’s pension systems, which are facing critical financial problems. The 505-page proposal was crafted with Republican leaders of the state legislature and aligns with a summary of recommended changes Bevin presented a little more than a week ago.
If implemented, over the coming decades the plan would mostly phase out the state’s use of a pension system that guarantees benefits to state retirees for life.
Instead, most future state workers — including teachers — would be enrolled in 401(k)-style plans where their retirement payments will depend on how much money they and the state contribute throughout their working years.
Thousands of current state workers hired in 2014 or later would also be transitioned into the 401(k)-style plans.
The governor’s office has released detailed summaries of his pension proposal, including a side-by-side comparison of current benefits to proposed ones for each system and a summary of each section of the 505-page bill.
But it’s a dense read. If you’re a state worker wondering how these changes will affect you — of if you aren’t, but pay taxes in Kentucky — read on.
First off, what’s a pension?
A pension is a retirement program. In Kentucky, the state currently promises to make monthly payments to most public employees from when they retire until they die. This is what’s called a “defined-benefit” plan.
There’s a caveat to that though. After changes made in 2013, new public employees (besides teachers) have been put into a less-generous model called a “cash-balance” plan. This is often called a “hybrid” 401(k) because the state no longer guarantees benefits for life, but promises that employee 401(k) plans will get a four percent return on investment every year — even if the stock market dips.
Under the retirement plans that Kentucky currently offers, all state and county workers and their employers make payments into massive pension systems managed by the state, and that money is invested in funds with the hopes of getting returns to help the funds grow and pay out retirement checks.
What’s the problem?
As it stands, the pension systems don’t have enough money to keep making the promised payments to workers who have retired or are already in the system.
The main fund for state employees — the Kentucky Employee Retirement Systems Non-Hazardous — only has about 14 percent of the money it needs to make future retirement payments.
Some funds are doing better. For example, the pension fund for former lawmakers has 85 percent of the money it needs, though it covers far fewer people. The teacher pension system is 54 percent funded.
Combined, Kentucky’s pension systems are among the worst-funded in the nation, if not the very worst.
This problem was created by a combination of factors, including years of budgets passed by legislatures and governors that didn’t put enough money towards the systems, the number of retirees outpacing growth of state employees and the recession, which lead to poor returns on investment in the system.
I’m not a state employee. Why should I care?
The financial turmoil in the state’s pension systems puts a massive strain on the state budget, meaning the state has less money to spend on other important things — education, healthcare, roads, economic development, you name it.
The snowballing debt has led credit agencies to downgrade Kentucky’s credit rating, making it harder and more expensive for the state to borrow money for big projects like bridges, stadiums or highways.
And money from all those retirees’ pension checks also goes into Kentucky’s local economy, affecting counties, cities, towns and businesses. Retired workers spend $3.4 billion of their public retirement earnings in-state according to the Kentucky Center for Economic Policy. If there’s less of that money going out in retirement checks, that means less money going to Kentucky businesses and less corresponding tax revenue for the state.
Pension benefits are attractive incentives for people thinking about a job in public service. For current employees, accumulating benefits encourages workers to stay longer and helps the state retain an experienced workforce. Advocates say that weaker pension benefits will lead to less qualified applicants and higher turnover in state government.
How are Kentucky workers currently divided among retirement plans?
Depending on their jobs, Kentucky employees are divided between eight different plans.
- Teacher Retirement Systems—includes about 50,000 retired public school teachers and state university retirees that get about $38,340 per year in pension benefits. There are about 70,000 active employees in the system.
- Kentucky Employee Retirement Systems Non-Hazardous— includes state workers who don’t have what the state considers a dangerous jobs…think highway engineers. There are about 40,000 retirees in this system, drawing an average pension of $20,633 per year, and about 40,000 active employees in the system.
- Kentucky Employee Retirement Systems-Hazardous—state workers with dangerous duties like active law enforcement and corrections employees. There are fewer than 3,000 members drawing an average yearly pension of $14,869 and about 4,000 current employees.
- County Retirement Systems Non-Hazardous—county and city workers in non-dangerous jobs, like someone who works in a county clerk’s office. There are about 50,000 retirees drawing an average $11,000 per year in pension benefits and more than 80,000 active employees.
- County Retirement Systems Hazardous—county and city workers with conventionally dangerous duties, like police officers or fire fighters. There are fewer than 7,000 current retirees drawing an average pension of $25,143 and 9,000 current employees.
- State Police Retirement Systems—includes about 1,300 retired state troopers who draw an average yearly pension of $37,393 and 900 active employees.
- Kentucky Judicial Retirement—includes 330 retired and 237 currently employed judges.
- Kentucky Legislative Retirement—includes 200 retired and 101 active state legislators.
What does Bevin’s proposal do?
The main thrust of Bevin’s proposal would be felt by future employees and thousands of “non-hazardous” employees hired in 2014 or later. The state would no longer guarantee lifetime retirement payments or guarantee investment returns to this group (the notable exception to this is “hazardous duty” employees like police and firefighters…more on this later).
Instead, some current and most future employees would be enrolled in a plan that requires them and their employers to contribute a portion of their paycheck to an investment fund that they manage individually. Benefits would be doled out based on how much an individual has in their account and the state wouldn’t be responsible for paying benefits during retirement.
This is called a 401(a) plan, which is similar to the 401(k) retirement plans used by private-sector workers.
Current teachers and most state workers would be required to transition into the 401(a) plans once they reach 27 years of service and their conventional pension plans would be capped.
Also, all state employees would also be required to contribute three percent of their salaries to go toward a retirement health program.
There’s a lot more in the proposal. Here’s a summary of the changes for each of the above-mentioned pension plans.
- Teachers
- New hires would be put into 401(a) plans. They would be required to contribute nine percent of their salaries to the plan, with the option of an additional three percent. The state would contribute four percent and their local school district two percent.
- Current teachers would keep their conventional pensions with guaranteed benefits for life. But once they’ve worked for 27 years, their benefits would be capped and they would be moved into the 401(a) plan with the above contribution rates.
- Those who have already worked 27 years or are at least 60 years old would be required to move into a 401(a) plan within three years.
- For those still in the conventional pension program, the amount of money they receive in retirement would be based on the years they made the most money as a teacher. For those retiring before June 30, 2023 it would be the average of their top three salaries. After June 30, 2023, it would be the top five salaries.
- Currently, retired teachers receive a 1.5 percent cost of living adjustment every year. Those increases would be suspended for five years under Bevin’s plan. Future retirees would not receive cost of living adjustments for the first five years of retirement.
- For retirees still in the conventional pension program, their pension payments would be suspended if they decide to work more than 100 hours per month in the public sector. Benefits would resume once they aren’t full-time.
- State workers, County/local workers (Non-hazardous)
- New hires and those hired after 2013 would be put into a 401(a) plan. Employees would contribute a portion of their paychecks toward the plan and the state would match.
- After 27 years of service or age 65, current employees’ pensions would be capped and they would have to enroll in a 401(a) plan.
- Currently, employees are allowed to accumulate comp time in order to get better pension benefits. This wouldn’t be allowed for those retiring after June 30, 2023.
- If retirees decide to work in the public sector again, their pensions would be suspended while they have that job.
- State workers, County/local workers, State police (Hazardous)
- Those workers considered to have “hazardous” duties hired before 2014 would continue to receive a conventional pension that guarantees benefits for life.
- Those hired in 2014 or later would continue to receive “cash-balance” plans. These are like 401(a) plans because they require the employee and state to put money into a worker’s retirement fund. But they’re a little sweeter because the state guarantees that the fund will bring in at least a four percent return on investment every year — even when the stock market is down.
- Those hired on or after Sept. 1, 2008 would not be able to use accrued comp time to get better benefits when they retire.
- Judges
- New hires and those hired after 2013 would be put into a 401(a) plan. Employees would contribute a portion of their paychecks toward the plan and the state would match.
- After 27 years of service or age 65, current employees’ pensions would be capped and they would have to enroll in a 401(a) plan.
- Legislators
- Retired, current and future legislators would no longer receive lifetime benefits, instead being moved into a 401(a) plan.
- Those who are already retired would have their benefits recalculated to be based on their final legislative salary. Currently, lawmakers can spike their pension benefits if they get higher-paying jobs in state government.
Is the bill the same as the plan Bevin announced a week ago?
Though Bevin’s bill tracks the list of proposed changes he announced a little more than a week ago, the legislation provides concrete details about his proposal that haven’t yet been discussed in public.
First of all, the legislation clearly states that benefits provided to new state workers and those moved into 401(a) plans are not protected by an “inviolable contract.”
That so-called “inviolable contract” is what state worker groups have long cited as an argument against diminishing pension benefits for current employees: that doing so would violate the state’s promise to honor retirement benefits for current and retired workers.
Additionally, the draft bill gives a name to the 401(k)-style plan that would be used by new employees and some current ones: the Public Employees Retirement System.
The new agency would be managed by an 11-member board that includes the secretaries of the Finance Cabinet, the Personnel Cabinet, the state controller and eight people appointed by the governor.
What’s next?
Gov. Bevin has promised to call a special legislative session for lawmakers to consider his proposal. That could happen as soon as next week or as late as next month. Lawmakers are scheduled to return to Frankfort for a regular legislative session in early January to put together the next state budget and Bevin is hoping to have pension changes passed by then.
Bevin and Republican leaders in the legislature say they won’t let any changes take effect immediately and that any adjustments would begin July 1, 2018.
