Kentucky Politics Distilled: Pension Reform Edition

Feb 23, 2018

Credit State Capitols Online

This week at the state legislature, a new bill overhauling the public pension system was finally filed and it’s a lot different from the proposal made by Gov. Matt Bevin last fall. But, it still reduces benefits to many current and most future state employees while promising massive infusions of cash into the pension systems. 
Bevin’s plan to overhaul the pension system would have moved most future and some current state employees onto 401k-style retirement plans. 
That meant the state would’ve still made contributions to employees’ retirement accounts that would grow with the stock market, but it wouldn’t be on the hook for paying out monthly payments from when workers retire until they die. 
But Republican leaders of the legislature said Bevin’s 401k plan would have been too costly, especially when the state’s already considering big budget cuts. 
House Speaker Pro Tem David Osborne said  “it was just more costly. There were some people who felt very strongly from an ideological standpoint that we needed to transition to a defined contribution plan. But when the data came back, it just didn’t support financially our ability to do that. “ 
By moving almost all future workers into 401ks, there would be no new employees to make their own payments into the state retirement system—a very important source of funds for the pensions of people who are already retired or in the system. 
So instead lawmakers have proposed moving most future workers into what’s called “hybrid cash-balance” retirement plans. 
These are like 401ks, in that the state and employees contribute a little bit every month towards retirement. The state would manage a retirement fund that’s invested in stocks and bonds. And when an employee retires, they’d have a lump sum of money that could be divided into monthly payments. 

“It does offer that stability. It offers guarantees, " said Osborne, "it offers the ability for upside in good markets, protects it during down-markets.” 
The thing is, the state already offers a cash-balance plan. Most state employees hired since 2014 have been put into it. And this new version is less generous than that. 
Under the current system, the state guarantees that employees will get a 4 percent return on their retirement investments. Under the proposed one, the state will only guarantee that employees won’t lose money. 
And this new plan is way less generous for future teachers, who would no longer receive a defined benefit pension plan that guarantees payments until death. 
Jason Bailey from the Kentucky Center for Economic Policy said it is a lesser benefit "for sure", 
“It’s a lesser benefit for sure. One of the big issues is just the predictability and security of knowing what you’re going to get at the end of the day, which is what they have now. This is more dependent on the markets.” 
Cost of living adjustments for teachers who have already retired would be cut in half for the next 12 years. For future retirees, the cost of living adjustments would be cut in half for the first 12 years of their retirements. 
Employees would no longer be able to accumulate sick days to help them retire early. 
And future teachers’ pensions would no longer be subject to the so-called “inviolable contract,” meaning lawmakers could vote to reduce benefits at any time. 
Sen. Joe Bowen, a Republican from Owensboro, said he thought state workers would support the new bill. 
“I can’t imagine there being a lot of pushback on this. We made, I don’t want to call them concessions, because they’re sound decisions we made. They’re fiscally responsible decisions. They’re not concessions, they’re the right decisions.” 
Lawmakers estimate the proposal would save the state $4.8 billion and pay off the state’s pension debt in 30 years. 
It would require the state to set aside massive contributions to the system and lawmakers are still non-committal about reforming the tax code so the state can bring in more money.