Gov. Matt Bevin issued a veto on Thursday for House Bill 362, which would allow local governments and school boards to phase in increased employer pension costs over a 10-year period, in addition to the option of letting employers withdraw from the Kentucky Retirement Systems (KRS) with a buyout.
Mayor Greg Fischer of Louisville was one of many local government officials lobbying for the legislation — originally housed in Senate Bill 66 — arguing that a 50 percent increase in employer pension costs next year would create large budget deficits. Capping such employer costs for local workers in the County Employee Retirement System (CERS) at 12 percent over the next 10 years would save Louisville as much as $50 million in its coming budget, according to Fischer.
In his veto message, Bevin stated that he actually supports the phase-in provisions for local employers and hopes that legislators reenact that in a bill during the last two days of the 2018 legislative session next week. However, he believed that the buyout provisions are “very problematic” and a risk to the solvency of the public pension plans within KRS, which “will lead to cash flow issues and shift even more of the pension burden to future taxpayers.”
Bevin stated that employers ceasing participation in KRS plans with a buyout could receive a potential subsidy of $1.7 billion, resulting in a 6 percent to 8 percent increase in the actuarially required contributions for remaining employers, like the state and cities. He added that there would be increased risk to the pension plans if those employers opting out become financially troubled or cease to exist before they have completed their installed payments to the plans in future years.
“I am concerned that the buyout provisions will be viewed as ‘credit negative’ by ratings agencies if not changed,” said Bevin. “According to the actuarial analysis of the bill, requiring KRS to finance the ceasing employers’ annual installments with a 0% interest rate is a significant benefit to those withdrawing employers and could potentially be a $2.0 billion subsidy that must be financed by the remaining participating employers in the systems.”
Noting that the KRS actuaries suggested changing the installment period to 10 years — whereas, the buyout payments would remain constant over a 30-to-40-year period in the bill — Bevin suggested that the legislature “should implement recommendations that will help protect the remaining employers from unnecessary and inappropriate financial burdens and the high likelihood of increased in their ARC payments.”
HB 362 passed with a near majority of both chambers of the General Assembly on Monday, and Bevin’s veto could be overridden with just a majority vote in the House and Senate on the final two days of the session on April 13 and 14.
If legislators attempt to pass new legislation on those days that includes the annual cap on local government pension costs or buyout provisions to withdraw from a KRS plan, Bevin would be able to veto it and the General Assembly would not be allowed to override the legislation.
At an event in Louisville last week, Bevin told Insider Louisville — while standing next to Fischer — that SB 66 was “a bad bill” that should not pass. That echoed earlier statements from the governor that he “would never sign that bill,” as it is “nothing but a kick down the road.”
After the veto, Fischer issued a statement to Insider encouraging the General Assembly to re-enact phase-in language during the final two days of the session, as without it, “Louisville Metro, like cities, school districts and other entities across the state, are facing a devastating hit.”
“In our city, it means an unprecedented $38 million increase that grows to a budget deficit of at least $50 million when you factor in other likely pension-related state budget cuts,” stated Fischer. “And when you add in other Jefferson County entities, the impact on our community climbs to nearly $80 million. And that will mean potentially crippling cuts to services and programs that residents depend on – including in public safety, job creation efforts, parks, community centers and libraries.”
Bryanna Carroll, the government affairs manager for the Kentucky League of Cities that pushed for the phase-in provisions, told Insider in a statement that “it is frustrating that cities are once again hanging in the balance on such an important issue.”
“CERS employer contribution rates will increase more than 50 percent on July 1 without a phase-in, threatening the stability and livability of local communities,” stated Carroll. “Members of the legislature had promised an override if the governor vetoed the bill. We hope to see that or the phase-in language included in a separate bill when they reconvene on Friday, April 13.”
Carroll added that the opt-out provision resulting in Bevin’s veto was added at the request of some employers in the Kentucky Employees Retirement System — the worst-funded public pension plan in the country that is also housed within KRS — which “highlights the need for CERS to be separated so the employers and members are not impacted by the state’s systems.”
Louisville Metro Council was one of many local governments around the state to pass a resolution last year supporting the KLC-backed movement for CERS to separate from KRS and become independent, though this policy was not supported by the Bevin administration and did not make it into the comprehensive pension bill passed last week.
This story has been updated to include the reaction of Mayor Fischer and KLC.