Pension Proposal Rejected, Deadline Looms

House and Senate leaders will attempt a last-minute compromise to reform Kentucky’s beleaguered public pension system during the session’s final day Tuesday. Negotiations on the pension issue, arguably the largest unresolved item on the General Assembly’s agenda, lasted throughout the day Monday. Gov. Steve Beshear met with House and Senate leadership, and House Democrats discussed proposals for several hours.

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Beshear originally proposed a funding mechanism based on raising the standard tax deduction by $125, eliminating a $20 personal tax credit, and closing various tax loopholes, according to documents obtained by The State Journal. The increase would be offset by taking 2 cents less on future motor fuel tax increases starting in 2014.

Combined with federal tax law changes, the plan was estimated to generate $110 million in fiscal year 2015 and $114 million in fiscal year 2016 for the Kentucky Retirement Systems, which faces more than $18 billion in unfunded liabilities.

“Obviously on a big issue like this, you’re never going to get everything you like,” Beshear said when he exited the first House Democratic caucus meeting. “That’s just not possible, so you’ve got to be able to try to give and take and come up with something that everybody can live with, and that’s still an ongoing process, but I remain hopeful that by tomorrow that we’ll get there.”

House Speaker Greg Stumbo said House Democrats rejected Beshear’s proposal because of concerns regarding its impact on the Road Fund. The motor fuel tax reduction would cut about $61 million in anticipated revenue for the fund, according to documents.

House Democrats countered with a proposal to reduce future motor fuel taxes by a penny, offer a trade-in credit for new car purchases and close various tax loopholes, said Stumbo, D-Prestonsburg. That would generate about $110 million annually, with roughly $10 million transferred to the Road Fund, he said.

Senate Majority Leader Damon Thayer, R-Georgetown, declined to comment on the latest House proposal, saying Senate leaders had not had time to review the plan. Those at the negotiating table believed they had an agreement with Beshear’s plan, he said.

“It’s very difficult at the last minute to consider changes to a very complex issue, and that would be Gov. Beshear’s (actuarially required contribution) financing plan,” Thayer said. “… We were ready to pass it.”

Systematic changes to Kentucky’s public pensions for state and municipal workers appear imminent with the midnight Tuesday deadline approaching.

Beshear’s proposal, according to documents, would move new state and municipal workers to a proposed hybrid cash balance pension plan Jan. 1. Retirement plans for legislators and judges would remain open and cost-of-living raises for retirees would be pre-funded rather than repealed entirely, among other items under the proposal.

Stumbo said the House Democratic caucus did not take a position on the proposed changes. Some, he noted, oppose the hybrid plan.

“The members will vote as they choose to vote,” Stumbo said.

The House and Senate have offered vastly different proposals for pension reform, though the two chambers agree the state should start making full contributions to KRS, expected to cost roughly $100 million more in General Fund dollars.

The Senate, based on recommendations from a bipartisan legislative task force, offered a hybrid cash balance plan, which would establish individual accounts for future state and municipal employees, judges and legislators with benefits based on contributions and investment returns, with a minimum 4 percent annual return guaranteed.

The House amended the legislation to maintain the current defined benefit pension program and give the state flexibility to tweak contribution rates, benefit factors and eligibility requirements.

Beshear and lawmakers have said if the public pension issue remains unresolved, a special legislative session is likely.