A consulting group contracted by the state recommended drastic changes to the pension benefits of current and future public workers in Kentucky on Monday, saying that these tough choices are needed to save the state’s troubled public pension plans from collapsing.
While not fully endorsing every aspect of the much-anticipated recommendations from the PFM Consulting Group, Gov. Matt Bevin pitched much of the group’s findings in a live video on his Facebook page Monday evening, saying that promises to workers and retirees will be kept in whatever legislation is passed in a special session of the Kentucky General Assembly that the governor is expected to convene this fall.
Though prominent Republicans and conservative groups praised the PFM report as a long-overdue dose of reality for the state’s notoriously underfunded pension plans, they cautioned that these were only the recommendations of a consultant group and that legislators would have to fully debate and discuss the merits of each specific policy change.
However, groups representing public sector workers criticized what those recommendations would mean for retirees, local school districts and teachers, as well as comments made by Bevin on his Facebook video suggesting that any teacher who retires now to protect their current benefits doesn’t belong in a classroom anyway.
Officials with PFM presented their findings and recommendations to the Public Pension Oversight Board in Frankfort on Monday, along with state budget director John Chilton, who said that “painful” changes to benefits are needed to prevent unsustainable state spending to keep those plans afloat.
PFM called for shifting nearly all new public workers across all of the plans into a defined employer contribution system like a 401(k) — instead of defined benefits or the hybrid cash balance plan of many new workers since 2014. These plans would require employees to contribute 3 percent of their salary, while the employer would contribute 2 percent of their salary and the state would provide a 50 percent match on the next 6 percent of income the employee contributes.
The group also recommended raising the retirement age of current workers and new hires and eliminating their ability to apply unused leave time and sick days toward their pension benefit.
PFM also called for eliminating any pension benefit payments for current retirees that resulted from cost of living adjustments (COLAs) granted between 1996 and 2012 — estimating that this could decrease the benefits of those who retired in 2000 by roughly 25 percent. All future COLAs would be suspended for teachers in the Kentucky Teachers’ Retirement System (KTRS) until that plan reached a funding level of 90 percent, while new teachers would now be eligible for Social Security along with a 401(k)-style plan, while no longer having a defined benefit.
Local and state workers in hazardous jobs, along with state police would be able to keep their defined benefit plans, but instead of being able to retire after 25 years of service, they could only retire once they reach 60 years old without having that benefit cut significantly.
State and local government workers with the Kentucky Employees Retirement System (KERS) and the County Employees Retirement System (CERS) would be allowed to take a voluntary buyout of their accrued benefits, with PFM arguing that this would remove the liability from the system, improve its funded ratio and reduce risks. The group estimated that 30 percent of these workers would take the buyout offer.
PFM noted that while their recommendation is for teachers to now be eligible for Social Security, enrolling those new hires would cost local school boards $11 million statewide in the first year those reforms were implemented, increasing by roughly $10 million each year afterward. However, the report said that such new costs would be offset by new savings on retiree medical expenses.
While some Democratic legislators in recent years have floated the idea of the state issuing pension obligation bonds to shore up the assets of plans that are in jeopardy — like KTRS and KERS — the PFM report shot down this possibility, saying that it is too risky. The report also recommended against another idea that has picked up steam in recent weeks: the call by local governments and agencies to separate CERS from the Kentucky Retirement Systems that it is housed under and allow it to be independently managed. PFM said that such a move would create additional administrative costs with no apparent benefit, instead suggesting that the plans consider administratively consolidating to save such costs.
Michael Nadol of PFM told the committee that modifying benefits for future hires “only helps you stop the hole from getting deeper,” but making the “unpleasant and hard” choices affecting current workers and retirees is ultimately what will help the state “climb up and out,” noting that “it’s going to take at least 30 years to satisfy these obligations and it is going to be painful in the interim.”
State budget director Chilton said that without the recommended changes, an extra $1 billion would be needed in the next fiscal year to make employer pension contributions, which would mean that the state agencies cuts by 9 percent in the current two-year budget ending next summer would have to be cut by 34.4 percent in the next two-year budget passed next year. If the state chose to also cut funding for K-12 education, those other agencies would only be cut by 16 percent.
However, Chilton cited the PFM report to assert that making all of the changes to pensions that the group recommended would actually reduce the recommended employer contribution by 13 percent compared to current assumptions on what this amount would be in the next fiscal year, and decreasing by a larger percentage in each subsequent year.
While some argue that CERS and KTRS are on sound financial footing and its members are not in need of having their pension benefits dramatically changed — as each have a asset-to-liability funding ratio in the range of 54 to 60 percent — Chilton dismissed that notion, saying they are only in sound health when compared to KERS, which is 16 percent funded. He added that if CERS and KTRS were private pensions, the IRS would freeze its benefits.
Chilton added that changes to the pension benefits of active and retired workers might lead to legal challenges over whether these constitute a violation of the “inviolable contract” they were promised when hired.
Asked by Rep. James Kay, D-Versailles, if such legislative changes would lead to a flood of public sector workers retiring before they went into effect — fearing that the changes would hurt the quality of their benefits — Chilton said his personal opinion is that “the changes that are being proposed, in and of themselves, aren’t going to create a rush for the door.” That answer was met with laughs by the state workers — including many state troopers — who filled the committee room, with Chilton adding: “My personal opinion. There’s going to be a sufficient amount of time for people to make their own judgments about what they should do.”
Reaction varies to PFM recommendations
Before the pensions meeting concluded on Monday, Republican Party of Kentucky Chairman Mac Brown issued a statement on the PFM report blasting Democrats — specifically former Gov. Steve Beshear — for denying that the state’s public pension system was at a breaking point, whereas, Gov. Bevin and Republicans now leading the General Assembly “understand the depth of the crisis and are willing to make the difficult decisions necessary to bring long-term solvency to the system while avoiding the potential of massive cuts to education, public safety and infrastructure spending. We applaud their efforts to swiftly enact fiscally responsible solutions to this crisis.”
That statement did not directly endorse the PFM recommendations, nor did the statement released soon afterward by Republican House Speaker Jeff Hoover. Calling Kentucky’s pension crisis “dire” and saying the state “simply cannot financially sustain the current system,” Hoover thanked PFM for its report, but added, “please note that these are only recommendations.”
“Changes need to be made, but what those changes are, or how we address them, right now we are not sure,” said Hoover. “We are committed to meeting our legal obligations with regard to our pension system. I promise you we will continue to work hard, listen, gather facts, and make the best decision possible. I know that is what is expected and deserved and that is what we will do.”
A statement by Greater Louisville Inc.’s chief operating officer, Sarah Davasher-Wisdom, called the state of public pension unsustainable and in need of immediate action to reverse the state’s downgraded bond rating, saying they are “reviewing all of the findings and recommendations in the PFM Report and evaluating the path forward to ensure pension obligations are met, restructured in a sustainable way, and that the Commonwealth’s credit rating is improved. GLI looks forward to working with the Bevin administration and the General Assembly to ensure these reforms will have a positive impact on Greater Louisville’s business community.”
Louisville Mayor Greg Fischer — who says he supports separating CERS from KRS, though he has not weighed in on a bipartisan Metro Council resolution calling for such a move — had no immediate reaction to the PFM recommendations, with his spokesman Chris Poynter telling IL that “there’s a lot to digest” in it and “our team will be reviewing the report in the coming days.”
However, groups representing state workers and retirees jumped on the PFM recommendations as a one-sided attack on public sector workers’ benefits that dismissed other options such as tax reform that would increase revenue. The Kentucky Public Pension Coalition — made up of public sector unions — said the PFM report only served “to promote Governor Bevin’s political agenda,” saying that putting new hires into a 401(k) “will do nothing to address the unfunded liability of our pension systems,” while hurting “the recruitment and retention of the best public servants and threaten the safety of our communities.” The group — which argues that much of the state’s pension system is not actually in “crisis” — also argued that eliminating the ability of hazardous workers to retire after 25 years “will force some, who are just months away from retirement, to work an additional 10, 12, even 15 additional years, without any increase in benefits.”
While Bevin has repeatedly stated that he will not break the promise of what benefits were owed to current retirees, citing a “moral and legal obligation,” Jim Carroll of Kentucky Government Retirees stated that he was “shocked and disappointed that the PFM report failed to include even a superficial analysis of the contract rights of Kentucky Retirement Systems retirees.”
“We will vigorously oppose any efforts to pass a bill that claws back cost-of-living adjustments already earned and already being paid to retiree members,” said Carroll. “Such a reduction in earned benefits is an overt betrayal of the pension promise and a clear violation of the inviolable contract.”
Brad Bowman, the spokesman for the Kentucky Democratic Party, stated that tax reform must be coupled with any serious attempt at pension reform, as “cutting education and shifting costs to the local level excuses the state from its responsibilities while forcing state workers to seek employment elsewhere.”
Chris Brady, the chairman of the Jefferson County Board of Education, told IL that the recommendations of the PFM would only make it more difficult for local school boards around the state to address teacher shortages, hurting their ability to recruit quality teachers and prevent an exodus of retirees. Brady said that teachers and personnel “already are retiring at the mere thought that this administration is going to open up a special session.”
Brady said that local school districts would have to find the funds needed to set up teachers for Social Security, on top of soon losing funds from new charter schools. He also says that the Bevin administration is talking about new legislation that would give tax benefits to private schools, which would also affect schools at a time when SEEK funding for Jefferson County Public School keeps decreasing.
“It’s an ongoing assault on public education,” said Brady. “And it’s one thing to say we need to cut meat off the bone, but now we’re down to the marrow, and I’m not sure how we can cut any further. We keep talking about wanting to have a world-class education, but that’s all it is, is talk. Nobody wants to fund it. And it seems like the first opportunity they get to screw over teachers, that’s what they’re going to go do… Prayer walks and painted rocks aren’t going to get the job done for what they’re trying to solve, much less education.”
Bevin pitches pension changes on Facebook forum, jabs at teachers who opt for early retirement
For over an hour on Monday evening, Bevin answered selected questions about pension reform in a live Facebook video, stating that the state’s overall retirement system is now the worst in history. While Bevin praised the PFM report as revealing hard and ignored truths about the depths of the pension crisis, he noted that all of its recommendations would probably not be passed or pursued by the Kentucky General Assembly in the special session he is expected to convene in October.
Asked if he would support tax increases to raise additional revenue for pensions, Bevin answer “not if I can help it,” saying this would be the “easy fix” of raising taxes “on people today to fix problems that were made by folks in the past.” While stating that the pension crisis was not created by people in power being “nefarious,” he did state that board leadership of certain pension plans were “criminally negligent” in how their assets were managed — echoing his recent claim that former KRS executive director Bill Thielen “should be in jail.”
Bevin appeared to agree with PFM in soundly rejecting the call to allow CERS to separate from KRS, saying that CERS was only about 50 percent funded and was in dire shape even if it was independent, as was every other pension plan in the state. As for concerns over whether benefit changes would break retirees inviolable contract, Bevin said “nobody fully knows” what that means, but that definition would likely be settled in court.
The governor cautioned that whatever legislation is passed in the special session on pension benefits, there would not be an emergency clause to any bill that put it into effect immediately — meaning workers could wait to decide what to do in response to any changes. Bevin estimated that such legislation would probably go into effect by “the top of the year,” or the start of the next fiscal year beginning next July.
Asked whether pension legislation would cause a mass exodus of workers such as teachers retiring to maintain their current benefits before changes were made, Bevin said that wouldn’t help the pension system, “but it wouldn’t hurt either.” Noting that he did not think the legislature would pass any legislation that caused a worker to wish they had retired early, Bevin took aim at any teacher that did make such a move, saying they don’t belong in a classroom in the first place.
“If you happen to be a teacher who would walk out on your classroom — in order to serve what’s in your own personal best interest at the expense of your children — you probably should retire,” said Bevin. “I’m being completely serious. If that’s truly where you are at this stage in your career, I wouldn’t suggest that being in a classroom is probably the best use of your time. Yet, I know for fact that almost all of you teachers that are watching this don’t think that way.”
Brent McKim, the president of the Jefferson County Teachers Association, told IL that this comment by Bevin about retiring teachers was “unfortunate.”
“All the teachers I know care deeply about their students, but they also have families, personal health care expenses, and other financial obligations they have to weigh as they consider the very personal issue of when to retire,” said McKim.
McKim said that he has spoken directly with the governor on pension reform and “I know he does not want a mass exodus of teachers,” adding that PFM’s recommendations are not the final recommendations of Bevin or the General Assembly. Noting that some of PFM’s recommendations “are probably not even legal” under the state constitution, he emphasized that “no teacher needs to make any retirement decisions based on the PFM report or the unfortunate wording of the governor during a live Facebook chat.”
Almost 5,000 people were viewing Bevin’s live Facebook video, which received a very mixed reaction of praise and scorn in its comments.
The full state House is meeting Tuesday afternoon in Frankfort to discuss potential pension reform legislation, though this discussion is happening in private due to Speaker Hoover calling for a closed session to prevent “grandstanding” on the issue.
A copy of PFM’s report and their powerpoint presentation to the Public Pension Oversight Board on Monday can be read below: