Kentucky Legislature Passes Cash-Balance Hybrid Pension Overhaul

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By Alex Ebert

The Kentucky House and Senate voted to switch new state employees to a cash-balance system and limit sick-leave benefits in a hotly contested pension bill aimed at saving the state’s retirement systems from insolvency.

The bill, passed mostly on party lines March 29, phases in state “level-dollar funding” and front-loads payments to shore up Kentucky’s pension system, which is ranked worst in the nation with roughly $60 billion in unfunded liabilities. Republicans say the bill would mandate $3 billion annual state payments in the short-term but would bring all of the systems to 90 percent funded within 20 years.

While stricter versions of the bill were floated and killed throughout the legislative session, House Republicans settled on a hybrid cash-balance plan similar to those recently adopted in Pennsylvania and Rhode Island, eliminating few employee benefits while also switching to a system Republicans say transfers some risk from taxpayers to workers. However, House Democrats criticized the Republicans for introducing and voting on the bill in the last day of the legislative session without filing an actuarial analysis or nonpartisan fiscal report.

Bill sponsor Rep. John Carney (R) said now is the time to act. “We can put blinders on, but I would argue that it’s very irresponsible and very unreasonable,” he said. “Because if we do that, we’re neglecting the children of Kentucky because they will not have teachers and they will not have bus drivers.”

But Democrats characterized the bill as a cut to benefits and a shot at public workers.

“These people have willingly sacrificed,” Rep. James Kay (D) said, pointing to state workers sitting in the House gallery. “It’s unbelievable. It will be more expensive, it will cost us more money upfront and we don’t know how much.”

Compromise Bill, Legality Questioned

Republicans testifying in support of the bill said it was a product of compromise, reached after months of meetings with public employee groups.

Gov. Matt Bevin’s (R) initial proposal in October would have placed new employees in a 401(k)-style defined contribution plan. But that proposal received push-back from state workers, concerned about the lack of benefit dependability, especially for teachers who don’t receive Social Security.

In the past two months, Republicans introduced and then pared back the current cash-balance hybrid plan, which would provide workers more security in economic downturns but would function more like a defined contribution plan than a pension.

Originally, the bill also featured cuts to teacher cost-of-living adjustments and other benefits that would have saved Kentucky $4.8 billion over the next 30 years. But a Kentucky attorney general’s analysis said that bill was illegal in at least 21 ways, because its cuts would have violated a state law making retiree benefits an “inviolable contract.” That precipitated another round of changes.

“There’s a lot of hyperbole out there about what this bill does and doesn’t do. After the fourth change, the cost-of-living adjustment is back to 1.5 percent, despite the fact that this is a big cost-driver in our bill—$125 million each year,” Sen. Damon Thayer (R) said. “And there’s no debate those two issues are outside the inviolable contract.”

The bill could reduce the number of legal challenges to preserve benefits in the future. That’s because the bill eliminates the state’s “inviolable contract” for new hires, which means the Legislature could have wider latitude to amend benefits for future workers.

However, the bill itself likely will see a legal challenge if Bevin signs it. Rep. Jim Wayne (D) said the House vote violated a Kentucky law mandating the filing of an actuarial analysis before a committee or floor vote. Others said the bill still breaks the statutory inviolable contract and wouldn’t survive a legal challenge.

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