Pension benefit changes to current and future state workers recommended in audit of systems

In a presentation on the final phase of an audit of the state’s pension systems, the PFM consulting group, hired by the Bevin administration, proposed recommendations to save the state money which include changes to benefits of current employees and retirees, as well as moving all future state employees and teachers to a 401k system.

At a meeting of the Public Pension Oversight Board (PPOB) Monday, the PFM group presented the final phase of their audit of the state’s pension systems. At the meeting, consultants and State Budget Director John Chilton stressed that without reforms, more than $1 billion a year will have to be found by the state to put into the pension systems and huge cuts will have to be made across all areas of government.

Future hires

Moving all future state workers into a 401k system, including Kentucky teachers, was a common theme throughout the report. The group suggested that a new defined-contribution plan for the systems would have a mandatory 3 percent employee contribution and a guaranteed employer (state) contribution of 2 percent of salary. The state’s contribution would be a maximum of 5 percent if the employee contributes 6 percent of their salary.

These recommendations include moving Kentucky Retirement System (KRS) employees who were hired after the 2013 pension reforms where a hybrid system was created into the new defined contribution system as well.

In order to put future teachers in a 401k-style system, Kentucky will need to put those educators in the Social Security system. According to the report, paying into Social Security for those future teachers will cost the state $11 million in the first year with an additional $10 million per year in each of the following years.  The report states that this Social Security cost for new hires “could be picked up by local school boards.”

The “normal” retirement age is increased across all systems in the plan, with teachers retirement age increasing in order to receive full benefits to 65, along with those in KERS non-hazardous, CERS non-hazardous, and the judicial plans which includes the legislators pensions. Others, including police and fire employees, would see a hazardous duty retirement age of 60 under these recommendations.

Other changes for future hires include removing the accrued sick leave and other forms of leave from the final pension benefit.

A full summary of recommended changes to future hire benefits can be seen in the graph below:

Current plan participants (employees and retirees)

Ahead of describing recommended changes for current participants, the PFM consultant stated that the group understands that it is difficult to make changes to people currently in the system but “the problem with stopping digging and doing no more is you are still in the hole,” pointing to the lack of immediate savings that come from changing benefits for future hires.

The consultant stated the “only way to start chipping away” at the problem faced by the Commonwealth is to look at the benefits of these individuals currently in the system.

In terms of recommended changes to benefits of current government employees and retirees in many of the KRS plans, normal retirement age would be raised to 65, no conversion of leave going toward benefit payments, and—most notably—an optional buyout for those in the current Tier 1 and Tier 2 defined benefit plan participants.

According to the report’s recommendation, the system would provide an optional buyout for the actuarial value of an employee’s earned benefit with the equivalent cash value of those benefits into the new 401k style plan (described above).

A freeze on accrued benefits under the first two tiers (who receive pure pensions) is recommended for all employees with future service earning under the similar 401k-style model with the 3 percent employee contribution and a maximum employer (state) contribution of 5 percent of salary. Put simply, even if an employee does not choose the buyout option and move themselves into a new retirement plan, benefits for all will reflect a 401k-style model moving forward.

Another notable recommendation deals with the elimination of any COLAs (cost of living adjustments) granted from 1996 to 2012. If adopted, this recommendation would mean that current retirement checks would see a cut. (COLAs were eliminated moving forward for KRS and the judicial pension system during reforms in 2013. This recommendation would retroactively take back any increase in benefits already received by beneficiaries.)

The recommendations also state that Kentucky Teachers Retirement System (KTRS) will also suspend all future COLAs until the system reaches a minimum of 90 percent funded.

See a summary of recommendation options below:

Other change recommendation

The PFM group also recommends “aggregating all TRS and KRS assets” by pooling the administration of the investments and other fees, stating that the state could see a potential annual savings of $5 million and additional negotiating leverage for the systems.

The group included much more in their recommendations. You can find the all three phases of the PFM report, the presentation given to the PPOB, and much more information here.

Reactions

In reaction to the report released Monday, many have weighed in on the recommendations provided by the group.

Kentucky House Speaker Jeff Hoover told The Bottom Line the legislature is working with the governor to find reasonable solutions to the persistent pension woes the state faces.

“The recommendations we have received from PFM are just that…recommendations. We will continue to work hard in effort to meet our legal obligations and at least develop the structure for long term solutions for our pension systems,” Hoover told The Bottom Line.

Kentucky Chamber President and CEO Dave Adkisson highlighted the Chamber’s work on the issue and stressed the need for responsible reforms to the system in order to help move the state forward.

“For several years, the Kentucky Chamber called for an independent review of the Kentucky Retirement System. Now that the third phase of PFM’s report is public, we look forward to working with Governor Bevin and the General Assembly to craft a responsible pension reform package,” Adkisson said. “We in Kentucky don’t have the luxury of simply being for or against pension reform. We’re in a downward spiral. If we don’t reform our pension systems to reflect modern reality, we will be forced to take more money away from our schools, our universities, our economic development efforts, the state police – from all of the important services we citizens expect from state government.  We’ve got a huge challenge on our hands and as Kentuckians, we have to face up to it.”

Kentucky Gov. Matt Bevin also issued a statement following Monday’s meeting saying changes have to be made and “we will not kick the can down the road any longer.”

“This latest report from PFM further confirms the need for urgency as we resolve Kentucky’s pension crisis. Change is necessary. Time is not our ally—we must act now to get our financial house in order. There is no other viable option. I am convinced we can get this done and am committed to doing so. For those now retired, for those still working and for those yet to come: we will save the public retirement systems,” Bevin said. 

Moving forward

The PFM report does not represent a final plan that will be considered by the legislature. Gov. Matt Bevin is expected to call members of the General Assembly back this fall, likely October, for a special session to tackle these issues. 

The administration and legislators have both stated publicly that no official plan exists and they will work on that in the coming months.