Bill allowing Kentucky universities and other agencies to exit the pension system passes Senate committee

As growing pension costs continue to cause a huge strain on the budget of many entities across the state, a bill to allow Kentucky’s regional universities and now quasi-governmental agencies to move new employees of their institutions into a new plan, more like a 401k, to ensure pension costs do not continue to hinder their budgets and freeze current contribution rates, passed through the Senate State and Local Government Committee on Monday.

House Bill 358, sponsored by Rep. James Allen Tipton, would place all new hires into a university-sponsored defined contribution system rather than the pension plan, freezes contribution rates for the next year so costs don’t continue to rise, and gives universities a way out of the system and a mechanism to pay off their unfunded liabilities within the system over a set number of years.

The legislation comes as a result of work by the presidents of the regional universities as increasing pension costs are becoming a huge budget issue.

A committee substitute was presented and passed with the bill that added language to also quasi-governmental agencies to leave the system and start their own 401k-style system as well as freezing their current contribution rates.

Senate Appropriations and Revenue Committee Chair Chris McDaniel presented the bill in front of committee where he explained freezing the contribution rates for universities and quasi-governmental agencies will cost the state money as they are not paying in the full employer rate. He added the full fiscal impact will not be known until universities decide whether or not they would like to opt-out of the system but he said this type of legislation is necessary for some of these institutions to move forward under these difficult circumstances.

David McFaddin, executive director of government relations at Eastern Kentucky University, told lawmakers addressing the pension issue is priority number one for the state’s regional universities to provide certainty and stability at their institutions.

Under the bill, the regional universities would see:

  • All new hires into the system moved into a defined contribution plan sponsored by the entity
  • A one-time window for existing Kentucky Retirement System (KRS) employees to opt-out of their current plan and go into the more portable university-sponsored plan
  • A study showing the unfunded liabilities for each regional university and quasi-governmental agency based on active, inactive, and retired employees
  • An option to get out of the system completely and a set number of years to pay off their unfunded liabilities with a 5.25% interest rate for the universities, lower for the quasis
  • A freeze to the current 49% contribution rate over the next year and extend it while the actuarial analysis is being conducted so they don’t see their rates rise to 84% that other employers in the system are currently paying

House Bill 358 passed through the Senate State and Local Government Committee and now heads to the full Senate for a vote on the floor. Because the bill only has one reading, the earliest it could be heard is Wednesday of this week. There are four legislative days remaining

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