Pension Reform Legislation
Kentucky Gov. Steve Beshear signed pension reform legislation HB 1 on June 27, 2008 after a special five day session of the Kentucky General Assembly. The Kentucky Retirement Systems and the Kentucky Teacher’s Retirement Systems have an estimated $26 billion in total unfunded liabilities. The reforms require new state employees to have higher combined years of service and age to retire, and would prohibit retired workers who are rehired in state government from collecting a second pension.
The bill passed the state Senate on a 35-1 and it cleared the House by a 98-0.
Some of the highlights of HB 1 include the following:
- Rule of 87 – the earliest age of unreduced retirement is age 57 with 30 years of service
- To retire early, a new employee will need to be at least 60 yrs, with 10 years of services (60/10), previously, 55/5 or 25 years, regardless of age would do
- The benefit accrual factor has been either 1.97% or 2.0% for non-hazardous KRS employees. For new employees, it is now 1.75% at full retirement and grades down if employment terminates with less than 26 years of service
- For final compensation, the averaging period was lengthened and terminal pay will no longer be included in the conclusion
- These changes will lower the amount of pension benefits for future employees v. current employees, and by encourage late retirement. Participants will be paying into the system for a longer period of time and drawing benefits for a shorter period of time – this becomes more important as life expectancy continues to repel
- A reduction in standard COLA annual benefit increase from 3% to 1.5% per year. At the rate that retirement payments are growing, this change is expected to save KRS as a whole over $400 million in the five year period ending June 30, 2014. Because of the compounding nature of the COLA and the aging of the KRS population, the cash flow ‘savings’ will grow exponentially in years beyond 2014
- Under the old system, employees paid the majority of the normal cost. Under pension reform, a new employee will pay more than 80% of the normal cost of the benefit. Since employees are paying the majority of the normal cost, any structural change which took part of that money out of KRS would be a loss as far as funds available to fund toward the ARC
The Governor contended that this is a giant step toward placing pension systems on a sound financial basis by reducing out-of-control costs and setting target dates for the state to fully fund its share of the pension system.
With this legislation, it is expected that counties, cities and school districts are expected to realize immediate savings of approximately $56 million and the unfunded state liability to the pension system will be decreased by billions of dollars over the next few decades, according to the press release from the Governor's office.
Gov. Beshear has also put into place a working group (The Kentucky Public Pension Working Group [KPPWG]) that is already meeting to address other issues on pension reform that require more study. The group has been directed by the Governor to provide him with recommendations that would be considered in the 2009 legislative session. The working group established five subcommittees to study investments; securities litigation; the County Employees Retirement System reorganization; state funding of the retirement systems; defined contributions; and healthcare.
KPPWG is charged with reviewing the experiences of other state public pension systems that have employed defined contribution (DC) or annuity-type plans for their employees and analyzing the effectiveness of their employment in KY. The report is a compilation of testimonies and interviews from national experts on public pension plans, current and former pension plan administrators outside the Commonwealth, economists and actuaries with extensive experience in both public and private plans, and a participant in DC plan that failed in West Virginia. The committee found that:
- DB plans provide states with certain economic efficiencies that reduce employer costs for career employees and lessen the annually required contributions (ARC) that the state has to make
- A DC plan of any design will not reduce or eliminate the unfunded liability that has already accrued, nor will it significantly reduce the growth of future unfunded liabilities
- KY has an outstanding DC plan through the existing deferred compensation program. Utilization in KY is 23% and strategies should be developed to increased participation, while maintaining the voluntary aspects of the program
- Kentucky Teacher’s Retirement Systems
- Kentucky Retirement Systems
- Kentucky General Assembly
- Defined Benefit v. Defined Contribution
- Inviolable Contract