The day after Gov. Steve Beshear told a joint session of the Kentucky General Assembly he won’t support pension reform without reforming the tax code to provide more money for education, the Republican-controlled Senate passed a bill to try to rein in pension costs.
The bill, sponsored by majority leader Damon Thayer, R-Georgetown, would end cost-of-living increases for pensioners, move new hires into a hybrid, cash-balance plan; and states the legislature’s “intent” to fully fund annually required contributions to the funds.
Kentucky maintains multiple pension plans — for state and county employees, for teachers, and for Kentucky State Police. Additionally, some quasi-government agency employees are allowed to participate. In total, the plans face a $30 billion unfunded liability.
Thayer’s bill and its provisions are based on the recommendations of a bi-partisan Senate and House task force that studied the issue and recommended the changes. It addresses the Kentucky Employees Retirement System (KERS) that has an $18 billion unfunded liability but does not affect the teachers’ plan.
Several factors over a couple of decades led to the problem. In flush times during the 1990s, lawmakers enriched retiree benefits and then, in tight times, lawmakers deferred making the annual payments in order to fund other services.
During that time the plans also suffered investment losses during two recessions as well.
That makes the recommendation to begin fully funding the system beginning with next year’s budget critical. Next year’s cost is estimated to be about $327 million, though not all of that will have to come from the General Fund. Some funds will be paid from the road fund and federal funds for employees paid by those sources.
But the Democratic-controlled House and Speaker Greg Stumbo, D-Prestonsburg, are hesitant to approve the changes without a predetermined plan to fund the ARC.
And Beshear wants lawmakers to pass some form of tax reform to generate more revenues before taking on pension reform. So even though the measure passed the Senate 33-5 with four Democrats and one Republican voting no, it faces an uncertain future in the House.
Those were reasons given for no votes by Sen. Tom Buford, R-Nicholasville, and two of the Democrats, Walter Blevins, Morehead, and Robin Webb of Grayson.
“You’ve got to show how you’re going to pay for this,” Buford said on the floor. “You’ve got to show a little backbone.”
Buford reminded his colleagues that Beshear, on Wednesday night during the annual State of the Commonwealth Speech, wants pension reform and tax reform to be linked. The governor also vowed not to allow education to go further underfunded to pay for a pension fix.
“We should do the funding at the same time to show the will to do it,” Blevins said after the vote.
Webb recalled for colleagues that she was once a $16,000 a year attorney for the state and that employees “work hard and they’ve earned their benefits.” She conceded her vote was largely “a symbolic one.”
Even supporters of the measure expressed reservations about not coming up with the money.
“We’re not directly dealing with the underfunded portion of our system for us to truly succeed at this task before us,” said minority leader R.J. Palmer, D-Winchester, said during a floor speech, although he voted for the bill. “But it’s a very positive first step and it’s worthy of our support today.”
Thayer said he and some Republicans would’ve liked to go farther — moving new hires into a 401-K style plan — but he said “politics is the art of the possible and it is possible for the General Assembly to pass this bill.”
He said lawmakers have put off action on the problem for too long already and pointed out the plan does not change benefits for current employees or retirees.
“We must do something and act now,” Thayer said. Otherwise the state faces “fiscal calamity.”
Jim Carroll, spokesperson for a state employee retiree group, said the group is “bitterly disappointed” the Senate passed the bill.
He said the bill’s call for implementation of the cash-balance plan by July 1 is impractical and the bill “utterly fails to address the massive unfunded liability.”
Carroll endorsed Stumbo’s idea of a dedicated funding source.