In an exclusive sit down interview with The Bottom Line Tuesday, Kentucky Gov. Matt Bevin discussed the details of the pension reform plan released last week and addressed some of the concerns expressed about the framework laid out to shore up the state’s severely underfunded retirement systems.
Bevin and legislative leaders recently released the “Keeping the Promise” framework plan for pension reform that moves all future state employees, including teachers but excluding hazardous employees such as police and fire, into a 401k-style system seen in the private sector, while also maintaining pension benefits that have been promised to current and retired state workers.
The governor said he is confident the plan will shore up the systems and put the state on more financially stable ground.
“Here’s what’s important to understand, if we don’t make structural changes to future employees’ benefit plans, then in reality we’re lying to those retired, those working and those future folks because none of it will be affordable if we don’t make changes,” Bevin said.
One main point of the discussion surrounding pension reforms has been the fact that teachers do not receive social security and moving them out of a defined benefit pension plan into a defined contribution plan would be unfair. Bevin said through negotiations it became clear to policymakers that teacher groups actually did not want future hires to be placed in social security.
“We are, at their request, not going to include them in social security, but in exchange for that, they will have a more generous match as part of their retirement plan. They will have more moneys contributed on behalf of the state, the state contributing more toward them, than if they were a part of social security,” Bevin said (discussion starting at 1:30 in the video). “When you talk about folks having the ability to put in as much and or to have dollars matched to get them at 18% of what they gross, that’s a pretty healthy contribution, on an annual basis. You do that over 30 years, you’re going to have a pretty substantial sum of money set aside.”
Bevin said the move to a defined contribution plan will help attract hires to state government as younger generation workers tend to move around more in their careers and a 401k-style system will give them portability and flexibility.
A point in the plan causing a lot of buzz since its release has been the fact that 3% of all employee salaries will be going to retiree healthcare program. Bevin said as the cost of healthcare continues to rise, state employees—including himself—are going to have to contribute more to the government-funded healthcare they will receive. And the governor added those new contributions will go directly into the healthcare program and not to be used to fund the retirement system. Bevin also stated when the dollar figures attached to the unfunded liability of the systems are discussed, “those do not take into consideration the fact that health care to retirees has come at no cost to them.” (Discussion starting at 5:00 in the video).
Bevin also discussed the new 2% that will be asked of local school districts in order to pay for the teachers’ retirement system and stated this is a small amount needed to give teachers a good retirement benefit and added the cost to the local school boards will be delayed for a year and then feathered in over the coming years (discussion at 7:00).
When asked about how the plan will impact that state’s credit rating and how Kentucky will find the money needed to shore up the systems, the governor again reiterated that the pension crisis is a huge cost to the state and tax modernization will have to be on the table in order to find needed revenue and stated “we are going to have tax reform in Kentucky in 2018” (discussion at 13:00).
“People say ‘are you confident this will pass?’ There is no alternative. If we don’t pass this, I can’t even imagine what the next budget session will look like. It’s already going to be very tough. So, I’m debating whether I will submit two budgets, one with tax reform in it and one without, to give people the option. For those who believe there will not be a modernization of our tax code, they’re not paying attention,” Bevin said. “The credit rating agencies are wise to wonder how it gets paid for because the cost of this is going to be north of 20% of our annual budget. You can’t cut your way into everything. You can’t. We’ve already cut a lot of the fat out of government. Is there more fat to cut? There is, sadly. But will it be enough for everything? No. We’re going to have to look at everything, and we will.”
Bevin said there is “no question” the cost of the pension systems will continue to grow in the short term, especially as the state moves toward the level-dollar funding method called for in this plan which will help the state pay down its debt but require more money in each budget.
“If you are a retiree, or someone working toward retirement, if you actually want confidence your retirement will be there for you, you should applaud this. Most states in America have done nothing like this I don’t know of any that have. To go to level dollar funding to mandate by law that we put the funding in there, this will prevent what happened in the past where it didn’t always get put in. This guarantees we will come out of the tunnel at the end having solved this problem,” Bevin said (starting at 8:30).
The governor said he does expect legal challenges to the bill as there are provisions including cutting back on the pensions of former legislators who are receiving large benefits from the system and potential other areas of the plan, but Bevin said he believes the reforms will be upheld. Bevin also said “if you ask 100 out of 100 Kentuckians, do they think a legislator should work for $30,000 a year and then retire for the rest of their lives making $100,000 in retirement because they happen to get appointed to a job for a couple years…I think 100 out of 100 would say no.” (Bevin discusses legislative pensions and other potential legal challenges at the 11:00 mark.)
In closing, the governor said there is not much room for negotiation on this plan between now and the special session unless there are suggestions to improve it or make clarifications.
Watch the full interview to hear Bevin’s take on these issues and others including misconceptions surrounding the plan and more.